Home › Forums › Financial Markets/Economics › How will unfunded “pensions” affect the local economy?
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phaster.
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September 1, 2014 at 7:48 AM #21232September 2, 2014 at 1:52 AM #777760
CA renter
ParticipantYes, the pension funds were once well-managed by staid, boring pension managers, most of whom were in-house.
Over the years, Wall Street has corrupted the public pension funds, and more and more of the pension money is being placed at greater and greater risk in more “financially innovative” investments. We have Wall Street and the Federal Reserve to blame for this. The Fed’s insistence on keeping rates at ~0% are exacerbating the problems.
As for how it will affect the bond market, I believe that most people who work in these markets understand the risks…at least, I sure hope so.
It’s important to note, though, that public employees have been the ones to take the biggest hits, so far. They’ve been moving more employees, especially the newer ones, into hybrid retirement plans, and most employees with most municipal agencies haven’t been getting retiree healthcare for decades — they’ve been phasing it out since the early/mid 90s. Also, PEPRA has made quite a few changes regarding pensionable compensation, benefit caps, and increased pension contributions from employees.
The above information is related mostly to changes in California, though I know that other states and municipalities are moving in the same direction.
September 2, 2014 at 12:35 PM #777766livinincali
ParticipantOne way or another somebody is going to have less money spend. Whether it’s the pensioners that take a haircut or the tax payers are forced to pay more in taxes. In general it’s another headwind for continued price appreciation in real estate, but it might not be the biggest or even that significant.
I suppose it could trigger some movement in people. Pensioners facing a big haircut might move to a lower cost of living state. Huge tax increases might encourage businesses and individuals to leave the state/city.
I don’t think the pension crisis is going to do anything good for the economy. Essentially it’s a big debt and economic impact of that debt doesn’t clear until the debt is paid off or you default on it.
September 2, 2014 at 2:02 PM #777768bearishgurl
Participant[quote=CA renter]Yes, the pension funds were once well-managed by staid, boring pension managers, most of whom were in-house.
Over the years, Wall Street has corrupted the public pension funds, and more and more of the pension money is being placed at greater and greater risk in more “financially innovative” investments. We have Wall Street and the Federal Reserve to blame for this. The Fed’s insistence on keeping rates at ~0% are exacerbating the problems.
As for how it will affect the bond market, I believe that most people who work in these markets understand the risks…at least, I sure hope so.
It’s important to note, though, that public employees have been the ones to take the biggest hits, so far. They’ve been moving more employees, especially the newer ones, into hybrid retirement plans, and most employees with most municipal agencies haven’t been getting retiree healthcare for decades — they’ve been phasing it out since the early/mid 90s. Also, PEPRA has made quite a few changes regarding pensionable compensation, benefit caps, and increased pension contributions from employees.
The above information is related mostly to changes in California, though I know that other states and municipalities are moving in the same direction.[/quote]
Good point, CAR. In fact, SDCERA (mentioned in the OP’s article) has substantially reduced their “Supplemental Benefit Allowance” (intended to help pay healthplan premiums, if not covered by someone else) in recent years for 99% of the workers who retired (or took “deferred retirement”) after March 29, 2002 (Tier “A”):
http://www.sdcera.org/PDF/Supplemental_Benefit_Allowance_FS.pdf
This probability and also the fact that the SBA was could be withdrawn at any time was known to all active employees at the time of signing up for the plan (March 2002) but the vast majority elected to be folded into Tier “A” (from Tier I/II) at the time due to their future monthly retirement annuity being calculated upon a full percentage point higher of their highest annual salary. The caveat is that they would be required to contribute 7.5% of their salaries towards the (Tier “A”) plan where Tier I/II employees were not. Fortunately, for taxpayers, a very large portion of Tier I/II retirees are now deceased, and, in any case, the portion still living (all folded into Tier I) have much smaller pensions than those in Tier “A” which are based upon a much less generous calculation and smaller highest-year salaries.
In addition, SDCERA has implemented Tier “B”, a “defined contribution” plan or “hybrid plan,” (as discussed above) offered to all employees who were first hired between 8/28/09 and 12/1/12:
http://www.sdcera.org/PDF/Tier-B_booklet.pdf
… and Tier “C”, an even scantier “defined-contribution” plan” offered to all employees who were first hired after 12/1/12:
http://www.sdcera.org/PDF/retirement_plan_Tier-C_booklet.pdf
Here is an overview page of the 3 retirement tiers now administered by SDCERA which still have active employees:
http://www.sdcera.org/active_retirement_benefit.htm
[quote=phaster]To show why the current SD county pension “operations” is a bad idea, google “buying stocks on margin” and check out the first search result.
The math is pretty simple to understand (just add “000,000” to the following $ figures):
A Buying Power Example
Let’s say that you deposit $10,000 in your margin account. Because you put up 50% of the purchase price, this means you have $20,000 worth of buying power.http://www.investopedia.com/university/margin/margin1.asp
Returning to our example of exaggerated profits, say that instead of rocketing up 25%, our shares fell 25%. Now your investment would be worth $15,000 (200 shares x $75). You sell the stock, pay back your broker the $10,000, and end up with $5,000. That’s a 50% loss, plus commissions and interest, which otherwise would have been a loss of only 25%.
Think a 50% loss is bad? It can get much worse. Buying on margin is the only stock-based investment where you stand to lose more money than you invested. A dive of 50% or more will cause you to lose more than 100%, with interest and commissions on top of that.
[snip][/quote]
Uh, well, I don’t think our fact-skimming newbie, Phaster, had a chance to see this recent piece from the UT (hint: google SDCERA and it comes up first :)):
…. For the past decade, San Diego County and its employees paid 100 percent or more of their annually required contribution to the SDCERA retirement fund. Consistent employee and employer contributions over the years have laid a foundation for investment gains and asset growth. SDCERA’s investment strategy helps the employer’s budgeting process and stabilizes employer costs by reducing the volatility of returns and steadily achieving the rate of return needed to fund the benefit.
At $10 billion, the SDCERA fund is able to pursue certain investment strategies that larger plans like CalPERS cannot access and smaller plans do not have the resources to deploy. SDCERA’s investment strategy is purposely designed to be no riskier than traditional pension fund asset allocation strategies. Risk-parity and trend strategies, which utilize leverage, are limited to 25 percent of the SDCERA portfolio, not the entire set of portfolio assets. The other 75 percent of the portfolio is managed using traditional asset allocation and rebalancing approaches…
http://www.utsandiego.com/news/2014/aug/15/sdcera-pension-investment-strategy/
see also: http://sdcera.com/investments.htm
September 2, 2014 at 2:17 PM #777769Participant[quote=livinincali] . . . I suppose it could trigger some movement in people. Pensioners facing a big haircut might move to a lower cost of living state. Huge tax increases might encourage businesses and individuals to leave the state/city. . . . [/quote]
Well, I’m representative of the typical local Suzy Q. Gubment-Pensioner with a fairly low income. But every time I look at listings the places I WOULD be interested in fleeing to (wine country and mtns, in and out of state), I’m finding the home prices to be just as much or higher than where I currently live … and utilities higher or much higher. And I don’t owe very much on my current home … relative to its value …. and could pay it off anytime I so choose to. And I have a running vehicle and know how to get on the interstate ….
So there you have it …. the “real” dilemma facing state and local gubment pensioners who are native San Diegans or have resided in SD County nearly all of their lives.
Sorry, but I just don’t see a “mass exodus” of SD County retirees, even if Tier “A” loses their (minuscule) Supplemental Benefit Allowance (this was supposed to happen 6/30/14 but SDCERA must have found a way to “patch the hole” for FY 14/15).
September 3, 2014 at 7:29 AM #777772Anonymous
Guest“Wall Street” is an abstraction.
“Wall Street” does not manage any investments.
Pension funds in California are managed by public employees. Real agencies. Real people.
The public pension system has evolved into a complex and arcane bureaucracy over the decades as it was influenced by public sector employee unions, which are some of the best-funded political lobbying organizations in the nation:
https://www.opensecrets.org/orgs/list.php
Government exists to provide services to the public.
Government agencies hire employees to provide the service.
Pensions are simply a component of compensation for these employees.
Like any government activity, policy should seek to provide the service at the least cost.
Much of the complexity of the public sector pension systems simply does not need to exist. The bureaucracy is complex, by design, to allow the true cost of pension benefits to be hidden from the public and to allow politicians to defer costs.
The pension system is a useful tool for budget shenanigans.
And it is all totally unnecessary.
It is entirely possible to provide all government services without the overhead of the complex public pension system.
The solution is simple: End defined-benefit pension programs for government employees. Compensate public employees fairly and provide them with defined-contribution retirement benefits, just like the majority of the population and workforce.
September 3, 2014 at 11:55 PM #777796phaster
Participant[quote=CA renter]
The Fed’s insistence on keeping rates at ~0% are exacerbating the problems.As for how it will affect the bond market, I believe that most people who work in these markets understand the risks…at least, I sure hope so.
[/quote]The fed is keeping interest rates near “0” because historically that is how economic activity was kickstarted.
The mechanism by which the fed directed interest rates, was by printing money and lending it out to credit worth institutions, who in turn lent it out to credit worth people… (see the problem?)
Few institutions have their books in order, same goes for people (fewer people have the capacity to take on more debt), yet since 2008 the fed has created something like 4 TRILLION dollars in an attempt to try and get the economy going (but most of the printed credit “money” is just sitting on ledger sheets at the fed and big banks)
As I see it we’re in twilight zone of global “mild stagflation” waiting for something to give…
I say that is because if ya think the US FED printing 4 TRILLION or so is a big number, consider the mind-blowing 15+ TRILLION the bank of china has printed since 2008.
I’d bet that most people who work in the “bond” market don’t ponder such things, and only see a limited picture of stuff around them and not the BIG “crazy” picture.
It is this narrow world view, that caused 99% of “financial experts” to miss seeing the bubble in housing, systemic problems caused by CDOs, etc. last time around.
Perhaps, I might be fooling my self looking at all the data trying to grasp the big picture, but feel the next implosion is going to be government debt at the city and state level.
Unlike the federal level which can print money and have deficit spending, there is no similar pressure relief valve “mechanism” at the city and state level AND the unfunded “pension” debt is a huge value – in the billions or tens of billions for large cities, and “collectively” hundreds of billions at the state level.
Muni bonds are based on the faith, that the city and states will pay back bondholders, so when I read that new account rule about public pension debts being required to be placed on the balance sheet (I kinda think that a “debt” tidal wave seemingly appearing out of nowhere is something to be concerned about, because somehow its going to affect bond ratings, investors perceptions and in time the outlook of joe six pack walking down main street)
Its going to be interesting in years ahead, cause somehow something BIG has to give with all the mismanagement…
September 4, 2014 at 1:25 AM #777799Participant[quote=phaster][quote=CA renter]
The Fed’s insistence on keeping rates at ~0% are exacerbating the problems.As for how it will affect the bond market, I believe that most people who work in these markets understand the risks…at least, I sure hope so.
[/quote]The fed is keeping interest rates near “0” because historically that is how economic activity was kickstarted.
The mechanism by which the fed directed interest rates, was by printing money and lending it out to credit worth institutions, who in turn lent it out to credit worth people… (see the problem?)
Few institutions have their books in order, same goes for people (fewer people have the capacity to take on more debt), yet since 2008 the fed has created something like 4 TRILLION dollars in an attempt to try and get the economy going (but most of the printed credit “money” is just sitting on ledger sheets at the fed and big banks)
As I see it we’re in twilight zone of global “mild stagflation” waiting for something to give…
I say that is because if ya think the US FED printing 4 TRILLION or so is a big number, consider the mind-blowing 15+ TRILLION the bank of china has printed since 2008.
I’d bet that most people who work in the “bond” market don’t ponder such things, and only see a limited picture of stuff around them and not the BIG “crazy” picture.
It is this narrow world view, that caused 99% of “financial experts” to miss seeing the bubble in housing, systemic problems caused by CDOs, etc. last time around.
Perhaps, I might be fooling my self looking at all the data trying to grasp the big picture, but feel the next implosion is going to be government debt at the city and state level.
Unlike the federal level which can print money and have deficit spending, there is no similar pressure relief valve “mechanism” at the city and state level AND the unfunded “pension” debt is a huge value – in the billions or tens of billions for large cities, and “collectively” hundreds of billions at the state level.
Muni bonds are based on the faith, that the city and states will pay back bondholders, so when I read that new account rule about public pension debts being required to be placed on the balance sheet (I kinda think that a “debt” tidal wave seemingly appearing out of nowhere is something to be concerned about, because somehow its going to affect bond ratings, investors perceptions and in time the outlook of joe six pack walking down main street)
Its going to be interesting in years ahead, cause somehow something BIG has to give with all the mismanagement…[/quote]
The Fed cannot kick-start an economic recovery as much as it can unleash a speculative wave of misallocated money…rushing around the globe in search of yield. I, for one, have long been staunchly opposed to the Fed’s responses to recessions and the corrections of these monetary misallocations.
As to the rest, the government debt implosion has already happened. It’s been on the radar for many years, now. If someone isn’t aware of it, they certainly have no business in the financial markets.
But to think that these debt problems are solely due to public pensions is to ignore all of the other deficit spending done during the monetary free-for-all. Pensions are only one piece of the puzzle, and they’re not even the major piece in many cases. ALL stakeholders need to come to the table in order to fix this mess — taxpayers (many of whom have been getting tax subsidies, like Prop 13, that we have no business giving away, especially for real estate that isn’t a primary residence), bondholders, public employees, government contractors, (illegal) immigration advocates, and VOTERS who’ve voted in every election to spend money that we do not have.
September 4, 2014 at 1:52 AM #777798Participant[quote=harvey]”Wall Street” is an abstraction.
“Wall Street” does not manage any investments.
Pension funds in California are managed by public employees. Real agencies. Real people.
The public pension system has evolved into a complex and arcane bureaucracy over the decades as it was influenced by public sector employee unions, which are some of the best-funded political lobbying organizations in the nation:
https://www.opensecrets.org/orgs/list.php
Government exists to provide services to the public.
Government agencies hire employees to provide the service.
Pensions are simply a component of compensation for these employees.
Like any government activity, policy should seek to provide the service at the least cost.
Much of the complexity of the public sector pension systems simply does not need to exist. The bureaucracy is complex, by design, to allow the true cost of pension benefits to be hidden from the public and to allow politicians to defer costs.
The pension system is a useful tool for budget shenanigans.
And it is all totally unnecessary.
It is entirely possible to provide all government services without the overhead of the complex public pension system.
The solution is simple: End defined-benefit pension programs for government employees. Compensate public employees fairly and provide them with defined-contribution retirement benefits, just like the majority of the population and workforce.[/quote]
Once again, you’re proving how totally ignorant and uninformed you are. Nothing new here. Wall Street firms (and other outside money management firms) are absolutely managing public pension money, and they’ve been doing so for quite awhile.
Just a couple of examples of what happens when Wall Street corrupts public pension funds:
Former CalPERS CEO Pleads Guilty to Bribery, Fraud, Including Taking Cash in Paper Bags
http://www.businessweek.com/magazine/content/09_46/b4155036786606.htm
What once was the boring business of in-house investment managers buying very safe Treasuries and highly-rated municipal bonds, with a smattering of very highly-rated corporate bonds, has become an insidiously corrupt casino where “pay to play” is an expected part of the investment dance. It is unacceptable.
September 4, 2014 at 7:00 AM #777800Guest[quote=CA renter]Once again, you’re proving how totally ignorant and uninformed you are. Nothing new here. Wall Street firms (and other outside money management firms) are absolutely managing public pension money, and they’ve been doing so for quite awhile.[/quote]
Thanks for the links. For those that need a summary:
– Frank Buenrostro was the CEO of CalPERS.
– Frame Buenrostro made the investment decisions, including which funds to use.
– Frank Buenrostro was a public employee when he committed fraud.
The State of California exists to provide services to the people of California.
Why is the State of California in the investment business — why does the state manage the largest investment fund in the country, a fund that only serves a small fraction of the population?
Why do we have this massive, opaque bureaucracy riddled with unnecessary financial risk? (thanks for the example.)
Why do government jobs need such ridiculously complex compensation rules?
http://reason.com/archives/2014/08/29/california-embraces-pension-spiking-bona
Under the current public pay system, clerical employees get extra cash for typing and taking dictation — activities that seem like basic parts of the job description. Likewise, police officers who attend physical-fitness programs get paid extra. Librarians get extra payments if they routinely help library patrons find books and resources.
Why can’t CalTrans engineers, CHP officers, librarians, fireighters, and park rangers be compensated with a base salary and defined contribution plan, like everyone almost everyone else in the workforce?
Would park rangers be less effective if there were no CalPERS?
September 4, 2014 at 7:19 AM #777801ParticipantYes, Wall Street has corrupted the pension plans. That’s exactly what I had said in my previous post.
Yes, public employees would be less effective without these benefits, and turnover rates would be much higher. These jobs value experience, because that’s the ONLY way you’re going to know how to do your job in many of these positions. The costs to recruit, train, and equip many of these employees are extremely high, so turnover is a huge cost to public employers.
Defined benefit plans encourage the most experienced and valuable employees to stay, and this reduces costs for the public employers, while also ensuring that they have the highest-qualified workforce.
And the “state of California” isn’t in the investment business. The pension funds most certainly are, as they should be.
Once again, private sector workers have Social Security AND defined contribution plans. In many cases, this costs almost as much as a DB plan (most public employees who’ve worked long enough to get the full defined benefit do not get Social Security).
And not “everyone else in the workforce” has a DC pension plan. Many have defined benefits, and DB plans were the norm a few decades ago…you know, when the middle class and the economy were at their strongest. Corporate greed has caused the demise of the middle class; not unions, and not DB pension plans.
It’s amazing how the right-wing propagandists have managed to fool so many people into working against their own interests.
September 4, 2014 at 7:25 AM #777802Participant[quote=harvey]
The public pension system has evolved into a complex and arcane bureaucracy over the decades as it was influenced by public sector employee unions, which are some of the best-funded political lobbying organizations in the nation:
https://www.opensecrets.org/orgs/list.php
[/quote]
And this goofy claim of yours needs to be clarified, as well. From your link:
——-
Heavy Hitters: Top All-Time Donors, 1989-2014
This list includes the organizations that have historically qualified as “heavy hitters” — groups that lobby and spend big, with large sums sent to candidates, parties and leadership PACs. Individuals and organizations have been able to make extremely large donations to outside spending groups in the last few years. While contributions to outside groups like super PACs do not factor into an organization’s designation as a “heavy hitter” (a listing of about 150 groups), those numbers are included for the roster below.
For example, this list does not include casino magnate Sheldon Adelson. He and his wife Miriam donated nearly $93 million in 2012 alone to conservative super PACs — enough to put him at No. 2 on this list. Similarly, the list excludes former New York City mayor Michael Bloomberg, who has donated more than $19 million in the past two years, largely to groups that support gun control. Neither Adelson nor Bloomberg — or the organizations they report as their employers — qualifies as a “heavy hitter” under our current definition. It’s also important to note that we aren’t including donations to politically active dark money groups, like Americans for Prosperity, a group linked to the Koch brothers, or the liberal group Patriot Majority — because these groups hide their donors; see a list of top donors that we’ve been able to identify to such groups. We are working to revise this list to take into account the new realities of campaign finance created by the Citizens United decision, but as it currently stands, there are significant omissions.
It is also worth noting that certain organizations, such as ActBlue and Club for Growth, are included although they function for the most part as pass-through entities: individual donors give to them with the contributions earmarked for specific candidates.
September 4, 2014 at 7:30 AM #777803ParticipantLet’s look at where the real money is coming from, and whether it’s supporting labor or capital, shall we?
[formatting issues, but click on the link]
Grand Total Democrats Republicans Dem % Repub %
Business $698,136,635 $295,238,284 $398,886,016 43% 57%Labor $284,017 $272,187 $8,855 97% 3%
————
The broadest classification of political donors separates them into business, labor, or ideological interests. Whatever slice you look at, business interests dominate, with an overall advantage over organized labor of about 15-to-1.
Even among PACs – the favored means of delivering funds by labor unions – business has a more than 3-to-1 fundraising advantage. In soft money, the ratio is nearly 17-to-1.
An important caveat must be added to these figures: “business” contributions from individuals are based on the donor’s occupation/employer. Since nearly everyone works for someone, and since union affiliation is not listed on FEC reports, totals for business are somewhat overstated, while labor is understated. Still, the base of large individual donors is predominantly made up of business executives and professionals. Contributions under $200 are not included in these numbers, as they are not itemized.
September 4, 2014 at 8:03 AM #777804Participant[quote=CA renter]
Yes, public employees would be less effective without these benefits, and turnover rates would be much higher. These jobs value experience, because that’s the ONLY way you’re going to know how to do your job in many of these positions. The costs to recruit, train, and equip many of these employees are extremely high, so turnover is a huge cost to public employers.Defined benefit plans encourage the most experienced and valuable employees to stay, and this reduces costs for the public employers, while also ensuring that they have the highest-qualified workforce.
[/quote]It also encourages the worst and most disgruntled to stay as well. Once you get 10-12 years into city employment the benefit to stay on even though you hate doing what you’re doing is too high. Why do we want to lock down the best and the brightest shouldn’t they have freedom to pursue other opportunities like the rest of us. If you have someone that is truly great and want to keep them throw out the silly bucket pay scales and pay them what they are worth on the free market. Seriously where is the 10-15 year teacher making $60K in pay, $15K in medical benefits and probably another $10K in pension benefit going to go in the private sector and make a comparable amount.
September 4, 2014 at 10:29 AM #777811EconProf
Participant[quote=CA renter]Let’s look at where the real money is coming from, and whether it’s supporting labor or capital, shall we?
[formatting issues, but click on the link]
Grand Total Democrats Republicans Dem % Repub %
Business $698,136,635 $295,238,284 $398,886,016 43% 57%Labor $284,017 $272,187 $8,855 97% 3%
————
The broadest classification of political donors separates them into business, labor, or ideological interests. Whatever slice you look at, business interests dominate, with an overall advantage over organized labor of about 15-to-1.
Even among PACs – the favored means of delivering funds by labor unions – business has a more than 3-to-1 fundraising advantage. In soft money, the ratio is nearly 17-to-1.
An important caveat must be added to these figures: “business” contributions from individuals are based on the donor’s occupation/employer. Since nearly everyone works for someone, and since union affiliation is not listed on FEC reports, totals for business are somewhat overstated, while labor is understated. Still, the base of large individual donors is predominantly made up of business executives and professionals. Contributions under $200 are not included in these numbers, as they are not itemized.
https://www.opensecrets.org/overview/blio.php%5B/quote%5D
CAR: You report how business donations far outweigh labor donations. But don’t a lot of businesses support liberal causes? Solyndra comes to mind. With crony capitalism under Obama, big business is “persuaded” to help out the existing administration, whether Democrat or Republican. Let’s remember that true conservatives do not automatically support big business.
I recall media reports that in present House and Senage races, the Republicans are being outspent by Democrats, even with the troubled economy and foreign policy.
I don’t know if this funding difference is true or not, so perhaps you can look it up. Your research seems to be thorough, so I tend to trust what you will reveal to us. -
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