How will unfunded “pensions” affect the local economy?

[livinincali]

[quote=CA renter]
Many of those private pension funds went bust because of reasons completely unrelated to the pension funds’ ability to pay out the promised benefits. Funds were mismanaged and used as piggy-banks for corporations, bloated executive pensions, and the way they intermingled funds between the funds of regular employees and executives blew many of them out of the water. UCGal has recommended a book a few times here:
[/quote]

Just like politician used those funds as piggy banks for various project. That’s the problem. It’s the risk factor for people to misuse those funds. When you have a big pot of money over there that isn’t needed for 20 years into the future it’s very tempting to borrow from it especially when you won’t be on the hook when it goes bust.

Retention might in an issue in some areas of the city work force but clearly a defined benefit pension (the police still have one) isn’t solving the problem is it. If that was the solution then we wouldn’t be having retention issues.

The problem is that if you saved 10% of you income over the past 30 years and invested it safely i.e. treasuries and then relied on income from an annuity you would have nothing close to the defined benefit that public sector employees currently receive. People love defined benefit contribution plans because they are too good to be true.

[CA renter]

[quote=livinincali]

Just like politician used those funds as piggy banks for various project. That’s the problem. It’s the risk factor for people to misuse those funds. When you have a big pot of money over there that isn’t needed for 20 years into the future it’s very tempting to borrow from it especially when you won’t be on the hook when it goes bust.

Retention might in an issue in some areas of the city work force but clearly a defined benefit pension (the police still have one) isn’t solving the problem is it. If that was the solution then we wouldn’t be having retention issues.

The problem is that if you saved 10% of you income over the past 30 years and invested it safely i.e. treasuries and then relied on income from an annuity you would have nothing close to the defined benefit that public sector employees currently receive. People love defined benefit contribution plans because they are too good to be true.[/quote]

Agree with your first paragraph. And most public pension funds cannot be accessed by politicians. Of course, you can have problems with these funds, like when politicians used the money that *should have been going toward pension fund contributions* for other purposes…based on what they were told by the “financial experts” from Wall Street and their lackeys who worked for the public pension funds.

Retention is still an issue here because the total compensation package is poor compared to other agencies. Without DB pensions, it would be far worse.

The employees pay around 9% of their income toward their pensions, and the employer covers another part that is determined periodically by actuaries (usually updated every 1 to 3 years, depending on the agency and benefit formula offered, along with investment returns, etc.). The majority of the money used for benefit payments comes from investments. I agree that pension funds should be much more conservatively invested, and that contribution amounts and benefit formulas should be adjusted accordingly. Unfortunately, I am not in charge of these decisions.

[Anonymous]

[quote=CA renter]The majority of the money used for benefit payments comes from investments.[/quote]

So the majority of pension funds come from Wall Street?

The hero and the villain change with every paragraph…

The cause and effect is completely backwards in CAR’s arguments.

In the early part of the 20th century, pension benefits were very modest and retirement ages were high so that they typically only had to be paid out a few years. This was the original intent of pensions – as protection against poverty for the elderly. The system had little risk and it worked.

In the 1960s, the unions began to gain power and retirement benefits grew substantially. Over the years as private sector retirement ages increased to reflect demographic realities, public sector retirement ages decreased. By the late 1990s, pension benefits were astronomical, amounting to a seven-dight jackpot for a large number of employees who could retire in their mid-early fifties.

http://www.city-journal.org/2013/23_1_calpers.html

As benefits increased, so did pressure to pay for them by boosting CalPERS’s investment returns. The shift started in 1966 when voters approved Proposition 1, a measure, promoted by CalPERS, that let it invest up to 25 percent of its portfolio in stocks. The timing wasn’t ideal, since the long economic stagnation of the late sixties and seventies had left equity markets struggling for gains. But by the early eighties, markets were roaring again, and CalPERS asked for permission to invest up to 60 percent of its portfolio in stocks. Voters rejected that ballot initiative but approved another, Proposition 21, in 1984, which likewise let CalPERS expand its investments —and didn’t specify a percentage limit. Instead, Prop. 21 supposedly protected taxpayers with a clause that held CalPERS board members personally responsible if they didn’t act prudently. The proposition received the enthusiastic backing of government unions and CalPERS board president Robert Carlson, former head of the powerful California State Employees Association. CalPERS’s conservative investment approach, Carlson and other supporters argued, was shortchanging the state’s taxpayers. After all, the better the investment returns were, the less state and local governments would need to pay into the pension fund.

It was the unions and CalPERS that championed the shift in investment strategy.

And why not? If the more aggressive portfolio doesn’t work out, the taxpayers will have to make up the difference.

When it’s defined benefit you are gambling with someone else’s money.

Solution?

So simple: Switch to defined contribution plans.

No need to change anyone’s compensation. Paychecks are the same. Retirement contributions, whether form employee or employer are the same. Just eliminate the unrealistic promise of guaranteed payouts decades later.

[quote=CA renter]Unfortunately, I am not in charge of these decisions.[/quote]

If you had a 401K, you would be!

[CA renter]

Wall Street was behind those changes, Pri. That’s what was going on behind the curtain. Just as they were behind the changeover to defined contribution plans instead of more conservative DB pension plans for private sector workers. Just as they’re behind the push to privatize Social Security. Notice who the *real* winners are behind these changes. It’s not govt retirees (who are being scapegoated for Wall Street’s excesses, and the politicians who’ve enabled them), and it’s not the private sector workers who’ve been shafted by Wall Street in their private retirement portfolios. It’s the financial sector that has benefited most from all of these changes.

Also, read the first paragraph in by above response to livinincali for my perspective on risky investments and how I believe pension funds *should* be managed.

[CA renter]

[quote=harvey]Good research CAR! Some hard “facts” from Carol Kim!

Yes, the Carol Kim!

Uh … who is Carol Kim?

She’s a city council candidate endorsed by – surprise – public sector unions!

http://www.carolkimd6.com/endorsements

And what about her budget numbers?

[…] these statements are misleading.

We fact checked the union’s claim that each new officer requires a $190,000 investment last March. The association relied on the Police Department’s cost analysis for that number, as did Kim’s campaign. Cate’s campaign couldn’t be reached for comment.

A Questionable Price Tag for Departing Cops

Yup, an independent fact check concluded the numbers were “Misleading”:

Keeping Cops on the Job: Mega Fact Check

But the fact checking above is just an article from the Voice of San Diego … what do those guys know about the economy?

http://voiceofsandiego.org/author/richtoscano/

The real problem here is that we have politicians who are so cozy with the people they pay. It’s an incestuous relationship that encourages the downward spiral: Unions support politicians, politicians get elected, politicians give union members raises (hiding the true cost in the form of deferred benefits) and the unions have more money to support politicians.

Carol Kim has chosen to play right along, using the police department’s propaganda word-for-word in her platform.

CAR, you need to step out of the echo chamber, or just admit you’re just a shill for the unions.

(BTW, we are still waiting for an example where I said public-sector compensation should be reduced … or at least the name of one socialist country in Europe!)[/quote]

Perhaps you didn’t read the information from your own links…or perhaps you’re still struggling with that reading comprehension problem, as noted in your constant requests for information about socialism in Europe (already gave that to you, in spades).

http://piggington.com/2012_edition_what039s_your_raise_this_year?page=2

…

The information in your own VOSD link breaks down the costs.

• Pre-employment vetting: $4,200-$4,300

This covers testing, a background check by the San Diego Police Department and psychological and medical evaluations.

• Salary and benefits: $93,600

This includes both salary, benefits and pension costs. The officer’s total compensation during the six-month academy is $39,600. For the remainder of the year it’s $44,000. Police also add an estimated $10,000 in overtime to reach the $93,600 total. Zimmerman said the overtime is based on the average amount of extra work expected for critical incidents or court hearings on days off.

• Equipment and Academy Tuition: $14,500

This includes an officer’s duty pistol, laptop, radio, protective vest and other supplies. In most cases, officers must return these items if they leave the department. This cost also covers tuition at the San Diego Regional Public Safety Training Institute at Miramar College.

• Instruction: $25,385

This covers academy instruction costs, as well as management of the department’s shooting range and training provided by the Police Department.

• Training in the field: $54,000

After an officer graduates from the police academy, he’s assigned to a series of veteran officers who evaluate his performance and provide on-the-job training. At least four senior officers assist each newcomer for a one-month period and those officers receive additional pay for their efforts. Those additional amounts, as well as a portion of the officer’s regular salary, are incorporated into the estimated investment cost.

Two of those categories are problematic. Both the rookie and veteran officers still patrol city streets and make arrests during on-the-job training. And the more experienced officers would collect a paycheck even if they weren’t offering guidance to new officers.

…

I agree that the new officer’s regular salary should not be included in the cost to recruit, hire, train, and equip a new officer because the city is getting a service in return for this cost. OTOH, I disagree with the VOSD regarding the extra money paid to the mentor officer, as that pay is over and above his/her regular pay and the only reason for that cost is the training of the new officer. The portion of that officer’s regular pay that is used in this calculation probably should not be included, IMO.

They don’t break down the mentor’s pay to detail how much is strictly a result of the mentoring vs the portion of his/her regular pay that is applied to this number…I’m assuming that the portion of regular pay is significantly less than the portion fully dedicated to mentoring, so am leaving that cost in my number. If you back out the new officer’s pay of $93,600, you still end up with a cost of $93,885 for a new recruit.

Now, if you consider the fact that a more senior officer costs more, the cost of turnover (hiring a string of new recruits) is reduced a bit. A more senior patrol officer makes around $72,924 vs. $46,356 for a new patrol officer. If we reduce the cost of a new recruit by that amount, we get a cost of $67,317 to recruit, hire, equip, and train a new recruit. Not $190,000, but still a very high cost which the employers would prefer to avoid. Also, a high turnover rate negatively affects morale and the operations of the department.

———-

And your assertion that politicians have a “cozy relationship” with unions is completely ignorant of the facts, as always. Politicians can be pro-labor, anti-labor, or somewhere in between. In general, the number of anti-labor politicians over the past ~15-20+ years (depending on region being represented) has been greater than pro-labor politicians, as is evidenced by the changes in tax, trade, and labor laws that have gone into effect over that time. Just look at the campaign contribution numbers that were included in your very own link from an earlier post.

[Anonymous]

Bottom line:

The pension debate is not about total compensation. It’s about the folly of defined benefit plans.

The compensation question is a separate debate. That debate is necessary also, but today’s compensation is so obfuscated by deferred benefits that nobody even knows what the final numbers will be.

Pensions are such a huge and unknown component of state and municipal budgets that we don’t even know what our public services really cost.

Today’s pubic sector defined benefit plans are a gamble as big and as dangerous as anything “Wall Street” has ever dreamed up. All for no good reason.

Defined benefit plans are not necessary for retention. They are not necessary, period.

There are other ways to compensate and retain that do not involve decades of extreme risks to our communities.

[livinincali]

[quote=CA renter]
The employees pay around 9% of their income toward their pensions, and the employer covers another part that is determined periodically by actuaries (usually updated every 1 to 3 years, depending on the agency and benefit formula offered, along with investment returns, etc.). The majority of the money used for benefit payments comes from investments. I agree that pension funds should be much more conservatively invested, and that contribution amounts and benefit formulas should be adjusted accordingly. Unfortunately, I am not in charge of these decisions.[/quote]

Here’s a table of the math. I made the following assumptions. You currently make 80K after 30 years of service. You started back in 1985 at just about $20K. I think those reasonable for some average worker. We could changes the starting and ending number but it won’t make much difference because defined benefits typically use the last year or last couple of years of compensation as a benchmark and usually 30 years of service is going to get you at lease 50% of that amount maybe 60 or 70% spending on the position.

Lets assume this hypothetical employee gets $48K in defined benefit compensation (60% of 80K). That’s probably reasonable. Let’s also assume that we save 10% of this employees pay every year and put it into a conservative investment portfolio. We’ll do the most conservative 30 year treasuries. I’ll give you the benefit of compounding that interest rate too. So you buy a 10% year bond back in 1985 I’m going to go ahead an let you reinvest dividends at that same rate because I don’t want to complicate the math.

So what do you end up with after 30 years. I came up with $360K or so. For the private sector you take that $360K buy an annuity because you want to be secure in retirement. Guess what that gets you just about $21K per year for a 6% annuity excluding fees. Even if you were to draw down some of that money each year it doesn’t get you anywhere close to the defined benefit. You want to be conservative and offer a defined benefit retirement plan, then for an $80K year salary it needs to be much closer to $20-30K per year. Not close to $50K or even higher in some cases.

Year Salary 10% Savings 30 year Interest Rate Total (Compound Interest)
1985 $19,436 $1,944 11.21 $42,342
1986 $20,407 $2,041 9.34 $24,866
1987 $21,428 $2,143 7.48 $15,025
1988 $22,499 $2,250 8.42 $18,408
1989 $23,624 $2,362 8.84 $19,637
1990 $24,805 $2,481 8.46 $17,419
1991 $26,046 $2,605 8.21 $15,991
1992 $27,348 $2,735 7.77 $14,187
1993 $28,715 $2,872 7.21 $12,390
1994 $30,151 $3,015 6.22 $10,079
1995 $31,659 $3,166 7.69 $12,937
1996 $33,242 $3,324 6.02 $9,521
1997 $34,904 $3,490 6.8 $10,680
1998 $36,649 $3,665 5.8 $9,033
1999 $38,481 $3,848 5.09 $8,103
2000 $40,405 $4,041 6.49 $9,745
2001 $42,426 $4,243 5.54 $8,552
2002 $44,547 $4,455 5.43 $8,402
2003 $46,774 $4,677 4.85 $7,875
2004 $49,113 $4,911 4.97 $7,977
2005 $51,569 $5,157 4.59 $7,723
2006 $54,147 $5,415 4.68 $7,807
2007 $56,855 $5,685 4.93 $7,963
2008 $59,697 $5,970 4.35 $7,707
2009 $62,682 $6,268 3.6 $7,481
2010 $65,816 $6,582 4.51 $7,852
2011 $69,107 $6,911 4.57 $7,902
2012 $72,562 $7,256 2.93 $7,688
2013 $76,190 $7,619 3.17 $7,861
2014 $80,000 $8,000 3.62 $8,000
$361,152
6% annunity $21,669.12

[CA renter]

Livinincali,

Yes, I understand the math. You’re forgetting about the employer-paid portion of the pension contributions (much like Social Security or a 401k plan). Right now, the employer contributions can run anywhere from 100% of the employee portion to about 200%. Again, it depends on the particular financial situation of the employing agency, and their benefit formulas.

And, yes, the benefit amount would be somewhat less than what it is today in most cases. I have no problem with that as long as everyone knows about it up front.

What I have a problem with is the claim that we should retroactively change an employee’s compensation — long after they have earned it, and after everyone agreed to the terms of the agreement.

[CA renter]

[quote=harvey]Bottom line:

The pension debate is not about total compensation. It’s about the folly of defined benefit plans.

The compensation question is a separate debate. That debate is necessary also, but today’s compensation is so obfuscated by deferred benefits that nobody even knows what the final numbers will be.

Pensions are such a huge and unknown component of state and municipal budgets that we don’t even know what our public services really cost.

Today’s pubic sector defined benefit plans are a gamble as big and as dangerous as anything “Wall Street” has ever dreamed up. All for no good reason.

Defined benefit plans are not necessary for retention. They are not necessary, period.

There are other ways to compensate and retain that do not involve decades of extreme risks to our communities.[/quote]

Pri, not long ago, you didn’t even know how these pensions worked — not a clue about how the formulas worked or how the plans were funded. You have no experience with public employment. You’ve never been involved with contract negotiations between politicians and public unions. You’re clueless about the costs and about the transparency of public employee compensation (it is all public record, BTW). And yet, you claim to be an expert about these things, and will argue incessantly with people who do have knowledge about and experience with these issues.

I’ll just leave it at that.

[Anonymous]

[quote=CA renter]You’re clueless about the costs and about the transparency of public employee compensation (it is all public record, BTW).[/quote]

Yes, I am clueless.

Everyone is clueless. That’s the problem.

Simple question:

How much will San Diego’s police services cost this fiscal year?

How do we know?

When will will we know?

Answer:

We won’t know for decades. Only after the officers starting on the force today are retired – even later – when they’ve passed away (and perhaps even their spouses have passed away.) … after the shortfalls and surpluses and lawsuits and debates over the endless complexities of the compensation formulas.

Only when the last dollar of the pensions of every officer on the force is paid will we really know how much it costs today to have a police force. That will be decades from now.

We won’t know the fiscal 2014 cost until … maybe 2050 or so. Most of us will be dead. Let’s hope our children can afford to pay for the services we are receiving today.

How do I know this is true? Because of all the evidence both sides have posted here. Because of all the conflicting data about how much pensions are costing us today – for services that were provided decades ago.

No one should need to be an “expert” at anything to answer my question. Yet there is wide disparity among even those who are experts as to what the answer is.

So tell us, “expert” – since the information is all public record, this should be easy enough:

How much will San Diego’s police services cost this year?

How long before the 2014 books are truly reconciled?

[no_such_reality]

http://transparentcalifornia.com/pensions/search/?q=police+captain&y=

I find the publishing of the names to be tacky. Unfortuately, it’s probably the easiest way for people to relate it to what they know and experience.

The amount of non-compliance in reporting by the government agencies is insulting.

Overall it’s enlightening. The majority are just taking a straight up retirement, a well compensated retirement, but clearly weren’t ‘gaming’ the system. A sizable component though aren’t.

The lump sum payments are stunning.

I like some of the notes like on #3 from LAPD. Pension includes one time payment of $652,269.93

I’m assuming #1, from San Deigo has something similar in getting over $785K in a single year.

[SK in CV]

[quote=no_such_reality]The lump sum payments are stunning.

[/quote]

I suspect much of these “one time payments” are their own money they’re getting back. My brother retired after 33 years with the SDPD last year, and would have been 4th on the list if the search criteria would have been different. But more than 2/3 of what he got was his money that he elected to defer. More than 90% was eligible for rollover. His ongoing pension, while healthy isn’t astronomical, and is much less than he earned while working.

Edited to add: I DID change the search criteria, and sure enough, he came up with a huge pension payout. Not quite as much as I thought, but I know to the penny what he got, and for some reason it doesn’t include everything. But it does include both his DROP payment and most but not all, of his deferred comp.

[bearishgurl]

[quote=SK in CV][quote=no_such_reality]The lump sum payments are stunning.

[/quote]

I suspect much of these “one time payments” are their own money they’re getting back. My brother retired after 33 years with the SDPD last year, and would have been 4th on the list if the search criteria would have been different. But more than 2/3 of what he got was his money that he elected to defer. More than 90% was eligible for rollover. His ongoing pension, while healthy isn’t astronomical, and is much less than he earned while working.

Edited to add: I DID change the search criteria, and sure enough, he came up with a huge pension payout. Not quite as much as I thought, but I know to the penny what he got, and for some reason it doesn’t include everything. But it does include both his DROP payment and most but not all, of his deferred comp.[/quote]

Once again, thanks for pointing out the nitty gritty, here, SK. The general public really does not understand the concept of a public employee funding part of their own retirement. The truth is often not as glamorous-sounding as no_such_reality’s carefully-worded soundbyte.

I personally know of several former members of local law enforcement agencies (incl SDPD) who retired in the last five years and have already died (age 57-63). None of these deaths were due to being out of shape or an alcoholic … far from it. They were all due to heart disease exacerbated partly from uncontrolled or unknown high blood pressure and stroke danger. Some who met the fate of an early demise couldn’t get out fast enough. That’s what constant stress of being in the force will do to you. So I don’t think all this worry about the perceived drain on taxpayers of future “Class C” (law enforcement) pensions is warranted. Not only does the typical CA law enforcement officer work 8+ years longer than the year which they are able to retire, a portion of them don’t last very long after retirement. Not ALL are still married at the time of retirement and some never married so not ALL elected to have survivor benefits upon retirement. In any case, their very costly survivor benefit premium is deducted from their monthly retirement check. their survivor benefit amounts to 1/4 to 1/2 of their pension check for their beneficiary, should they die first.

There’s a lot of misconception out there about what a public pension award actually consists of (actual % of employee contributions + % of employer contributions + investment proceeds + possible deferred comp) such a the DROP program which SK mentioned. Note that SK’s brother worked 33 years before retiring. There is absolutely no financial incentive to work past 30 years in any level of government. I would venture that 99-100% of SD employees who participated in DROP did so only because they were begged by their superiors to stay beyond their retirement age for a fixed number of years and the DROP program was used to sweeten the pot at the time (the program doesn’t exist anymore). I have a neighbor who was offered DROP to stay with City of SD past 30 years (back in the late 90’s) and he told them to pack sand …. he was retiring (he’s still alive, btw). The DROP incentive didn’t always work to keep all of an agencies’ valuable intellectual property (in the form of longtime employees) from walking out the door.

[phaster]

[quote=bearishgurl]
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%5B/quote%5D

I’m just a knuckle head that is honest enough to admit that I’m not a “investment expert.”

Since I am not an “investment expert” I won’t buy into the latest investment fad hype (such as “risk parity”) without pondering the downside.

Nor do I pretend to understand all the details about Tier “a” employees vs Tier I/II employees, or care about employees that say they paid their annual required contribution, because basically my goal is to try to understand general trends.

To that end, the wall street journal article as I understand it has three key facts:

1) SD county has “currently” about 10 billion in its pension fund account

2) there is some kind of pension short fall (i.e. underfunding issue)

3) to make up for the “unfunded” pension obligations, the pension board adopted a strategy to use “leverage” on the order of 100% (in other words taking out a loan equal to the amount the pension board has in its account or a total of about 20 billion bucks and playing the markets)

Next I know if I go to a broker, I can place money for “investing” in one of three general types of account(s):

1) a “cash” account

(www.scottrade.com/investment-products/stocks.html)

2) a “margin” account

(www.scottrade.com/investment-products/interest-margin-rates.html)

3) an “options” account

(www.scottrade.com/investment-products/options-trading.html)

Perhaps its just me but after reading the “definitions” from the “investopedia DOT com” website, and “skimming” a typical broker website, the reported decision to borrow 10 billion against the 10 billion the SD pension board has in its account – sure looks like the definition of a “margin” account (with its associated risks)

One reason I’m guessing the SD pension board emphasize they are investing using “risk parity” in a “press release,” is its a marketing/spin/propaganda ploy.

Basically they (the SD pension board) are selling the idea to the joe/jane taxpayer, that the “derivatives” strategy involves little or no risk (something akin to why the name “credit default swap” was given to what is essentially “insurance on a bond”).

FYI while trying to understand why the economy imploded a few years ago, I read if the term “insurance” was used instead of the term “CDS” (credit default swap), then an inconvenient rule about the level of capital reserves required by regulators to back traditional insurance policies would apply. BTW guess what exotic financial instrument had a big hand in taking down the economy last time…

Back to the matter at hand, the only conclusion I can draw (translating all the B$ terms and given all the data), is that the SD pension board is seeing the handwriting on the wall with the “change in accounting rules, which requires pension obligations be placed on the balance sheet” and is borrowing an amount equal to what they currently have in the bank and “investing” the whole pile of cash (20 billion) hoping to grow the “value” of the pool of assets and makeup for the short fall.

Like any investor, they (the pension board) are looking for some kind of investment “vehicle” (like: stocks, put options, call options, bonds, credit default swaps which is a fancy name for insurance on bonds that they might or might not own, commodities, derivatives, real estate, etc.) that increases in value.

Given that a “margined account” consists of a pool of money which has to be invested in some kind of investment “vehicle,” it does not matter what the exact asset mix is, because the market “value” for the pool of assets can be looked at as, ending up in one of three states:

1) going down over time

If the “assets” w/in the pension portfolio go down overall, this would be considered a “loss,” on top of which there also would be some kind of “rent” payment paid to the broker (over the life of the “margin” loan)

In absolute terms if all the “assets” were sold off and the loan from the broker paid back, there would be a lot less money in the pension account (than at the beginning).

Perhaps as described in the “risk” section describing a “margin account,” the pension board might owe the broker more money than they initially bet, BUT it won’t matter to them because no matter what happens the taxpayer picks up the tab.

2) holding more or less, “constant” over time

If the “assets” w/in the pension portfolio are constant over time, the fact of the matter is this too would be considered a “loss” because some kind of “rent” payment will have to be paid to the broker (over the life of the “margin” loan).

In absolute terms if all the “assets” were sold off and the loan to the broker paid back, there would be less money in the pension account (than at the beginning).

Again in this case, any pension shortfall would be backstopped by the tax payers.

3) going up over time

If the various “assets” w/in the pension portfolio go up overall, this “might be considered a win” BUT like in the two cases above, one also has to consider the drag of servicing the “margin” loan (and also thrown away costs of “unused” expired options, etc., which is also a consideration in the two cases above).

But for sake of simplicity, lets ignore debit service payments, etc. and just say the PortfolioValue(final) > PortfolioValue(initial), then this would considered a “win!”

In this case “hopefully” the pension pool assets grow in value fast enough to satisfy the promises made by past political leaders to public employees (i.e public employee union members), and the tax payer is off the hook. Basically this is the la la land, “Hollywood” fairy tail happy ending!!

So (at best) I basically see the simple odds being 1/3 “successful” vs 2/3 “unsuccessful” (and a very “deadly” downside) with the reported SD pension “derivative” portfolio strategy

Knowing there are three basic “endgame” states, I guess I could write a fancy monte carlo computer simulation, and forecast the exact date of the SD pension fund implosion and $uckness for all parties involves (i.e. exact doller values).

But such a forecast would only be a “guesstimate” because its impossible write an equation that accurately describes the psychological pain of all players in the system, along with their responses.

It is this impossibility to write an exact math equation which describes all the variables and gives exact predictive answers, which is why “economics” is called “the dismal science”

http://en.wikipedia.org/wiki/The_dismal_science

I know it is impossible to remove all risk from a portfolio, yet get the feeling the SD pension board thinks otherwise (and is tying to sell their idea to the financially illiterate public/taxpayers)

Just hope my worst fears don’t come true, cause from what I’ve read and understand about markets, the derivate strategy for managing what should be boring and safe “retirement” portfolio, could economically implode in a spectacular fashion.

[phaster]

[quote=CA renter][quote=phaster]

[quote=CA renter]The worst employees tend to leave before benefits vest to any large extent. That doesn’t mean that some dead wood isn’t hanging around after too many years — and I absolutely support making it easier to fire truly bad employees.[/quote]

could not agree more, and think this concept should be extended to entrenched politicians (both on the left and right) because it seem they enable lots of the problems:

http://patrick.net/forum/?p=1247288&c=1114955#comment-1114955%5B/quote%5D

You are totally wrong about politicians and unions being on the same side of the table. Nothing could be further from the truth. Some politicians are labor-friendly, and others have a vitriolic hatred for unions. I have personal experience with contract negotiations, and there is NO truth to your statement that politicians automatically pander to unions.

Unions are no different from any other group that supports politicians who will further their particular interests.[/quote]

There is a perception (which I happen to share) that public unions have a great deal of control over the careers of their negotiating counterparties (i.e. politicians). Said another way its an old boys club, same as what happens in wall street, where the basic instinct is to protect their own. Bottom line is, politicians and public employees are part of a club, the “public at large” isn’t part of.

You most likely have lots of stories you know and want to share about $hit that happens on wall $t, but the same thing happens between public employee union members and politicians.

Recall the before SD made the national news headlines that we had a groper for a mayor (who was forced to resign), there was a similar pervert problem w/in the SDPD. Seem there is an “old boys club” attitude, because the reporter from the “reader” stated:

It was surprising to see the lengths that the City Attorney’s office went to try and get this case dismissed.

http://www.sandiegoreader.com/weblogs/news-ticker/2012/nov/09/city-to-pay-675000-to-victim-of-sexual-assault-by-/#

I have my own sad example when I encountered the “old boys club,”, that is kinda how I stumbled onto the issue of public “pensions,” basically I followed the money motive trail…

http://TinyURL.com/EnronByTheSea

I have a feeling there is something akin to a watergate type mentality w/ local politician (goldsmith and gloria) who are being sued for wanting to delete eMails from both their personal and official city accounts.

http://www.utsandiego.com/news/2014/aug/01/tp-sd-oks-outside-lawyer-use/

I think these officials are trying to hide public employee sins of the past that have something to do with software that allows building permit fraud and tax dodges possible with properties labeled as “historic”

Jim Mills, a former state senator from San Diego who pushed for the law’s creation in 1972, said he is surprised by how the financially strapped city has embraced the program during a time when it has had to close swimming pools, reduce library hours and delay sewer and water projects.

“I have to admit what I had in mind was significant buildings and houses, and I now see houses being covered by the Mills Act that were not what I had in mind,” Mills said.

http://www.utsandiego.com/uniontrib/20080127/news_1n27mills.html

Imagine you’re a developer with a pal who handles permits for the city of San Diego. And say you thought the permitting fees were a little too high. Not to worry, your pal says, and he knocks down the price for you.

http://www.kpbs.org/news/2012/jul/03/citys-development-system-major-fraud-risk-says-aud/

Another “moral/ethical” reason if I were king, I would eliminate public employee unions is, because I read they:

PUBLIC EMPLOYEE UNIONS “hurt the overall interests of the working poor.”

http://www.thedailybeast.com/articles/2014/07/11/why-progressives-shouldn-t-support-public-workers-unions.html

I’d guessing if there were some kind of public vote, I’d bet a majority of people would have to wonder if the “public employee economic self interest” more often than not is biased inward toward “the old boys club” rather than to the public at large.

[quote=CA renter]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.[/quote]

Ya don’t seem to understand basic cause and effect, like when I pointed out the reason DB pensions came to be associated with so called “middle class” jobs in the USA is because of unique global economic conditions that existed in the 1950’s and 60’s.

Anyway I’d further argue the big deal made about “middle class” in the USA, was done as part of an “unofficial” cold war hearts and minds propaganda effort directed toward those in the USSR.

For example in high school I was told the USA included adding the words “in god we trust” to the US dollar bill in the late 50’s (to show those “godless” communists, we in the west have freedom of religions),

Then there was the “nixon” kitchen debate, to show those “poor” communists, the capitalist economic system can make guns as well as butter….

http://teachingamericanhistory.org/library/document/the-kitchen-debate/

[quote=CA renter]I don’t get distracted by non-economic issues where politics are concerned. That’s not to say that these issues are unimportant, but that they pale in comparison to economics.[/quote]

If you’re just starting off on your own journey to think like an “economist,” perhaps you might consider its a good thing to have low corporate taxes (because that is where jobs are). Like when I first did experiments and the associated math in quantum mechanics, thinking like an economist has its own counterintuitive to normal everyday life logic one has ponder just a bit before things make sense.

Eliminate the corporate income tax. Completely. If companies reinvest the money into their businesses, that’s good. Don’t tax companies in an effort to tax rich people.

http://www.npr.org/blogs/money/2012/07/19/157047211/six-policies-economists-love-and-politicians-hate

As to why labor participation rates are low, consider “thinking like an economist” and you might see it might be due to the fact that technology lessens the demand for those with just “brawn” to offer the market, combined with the fact that with population growth there is a “skills” mis-match.

http://www.cbsnews.com/videos/are-robots-hurting-job-growth-50138922/

It might not feel right that conditions change, but fact is, things in life do change…

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