[livinincali]

[quote=FlyerInHi]I don’t know…. people have told me that back in the 1970s and 1980s there was no need for AC in San Diego. Even upscale houses in La Jolla didn’t have AC.[/quote]

Looks like it was hotter on average back in 1970’s and 1980’s. Carry with the anecdotal evidence though.

[livinincali]

I honestly don’t know don’t know how much if any man induced climate change is occurring. I do know that the proposed solution of carbon tax credits is just another scam by the financial industry looking to trade and skim money from the transaction of those credits. I also know it will increase our energy bills. I do think thorium nuclear from coal is the best energy solution until we figure out fusion. Unfortunately it looks like we’re intent on covering a significant portion of the mohave desert with solar thermal. It will work, I just don’t think it’s optimal.

[livinincali]

[quote=SK in CV] They may have screwed up early on, but the fed has been masterful the last 3 years.[/quote]

The only thing the fed is masterful of is creating asset price bubbles. During the time when those bubbles are created it feels pretty good and looks pretty good but somewhere down the road it all comes crashing down. Then we wish the fed had never created the bubble in the first place. This time around it will be the same thing. Another asset price crash. Another round of nobody saw it coming. Another day of tears because this time it was different.

[livinincali]

[quote=AN][quote=livinincali][quote=spdrun]
2000-1 dot.com bubble crash started under Clinton.
2007-1 property crash started under Bush.
[/quote]

2014[/quote]
Less than 4 months left.[/quote]

Only problem is nobody recognized 2000 or 2007 as the starting point until a year or two later. Most people were of the belief that it was just a another minor correction when those events started.

[livinincali]

[quote=spdrun]
2000-1 dot.com bubble crash started under Clinton.
2007-1 property crash started under Bush.
[/quote]

2014

[livinincali]

Alibaba IPO mania, just like 1999-2000. We’re getting really close to seeing this stock market bubble blow up. It would be ironic if today marked the market top. Don’t think we’re there yet but it’s getting closer.

[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

[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.

[livinincali]

[quote=CA renter]
When you suggest that public sector employees should have their vested benefits reduced, you are saying that their compensation should be reduced. Defined benefit pensions are a form of deferred compensation. You should know that since you claim to be a financial expert.
[/quote]

I would consider reduced deferred compensation as a cut in total compensation, but I realize that’s the inevitable outcome. The math says it’s pretty much impossible for that deferred compensation to be paid in full. Whether you want to blame wall street, politicians, unions, tax payers, the fed, demographics or whatever it doesn’t change the mathematical equation.

Essentially it’s just far to risky to offer guaranteed deferred compensation that will be paid out 40, 50 60 years after a person starts working based on events that are unknown. When that police officer started 30 years ago making $20K and 30 year treasury rates where over 10% did the actuaries have any idea that the officer was going to work a ton of overtime those last couple of years earn $150K/year and get a defined benefit of $100K year with 30 year interest rates at 3.5%. People couldn’t believe 30 years interest rates would get to to 4% 5 years ago, let alone 30 years ago.

The one benefit of defined benefit contribution plans, retention, isn’t worth the risks, the frauds, the vote buying, and everything else it enables. That’s the bottom line. The rewards (reduced training costs retention, etc.) don’t outweigh the risks and therefore they should be scrapped. They were lies to the employees receiving them. The private sector came to this conclusion a long time ago. Private sector pension plans went bust all the time. The benefits were renegotiated all the time. Most businesses don’t last 50-60 years, even fewer grow and thrive for 50-60 years.

There was a very small period in history where defined benefit retirement plans were offered and many of them failed to deliver. Public sector plans are no different, they will fail to deliver as promised even with laws and implied tax payer backstops. The money isn’t there.

[livinincali]

[quote=CA renter]
And that teacher going into another profession where s/he can make the same or better compensation? Lots of them do exactly that. Again, look at the attrition rate for teachers. Many teachers also come from the private sector where they were making more money, but they change for lifestyle or other factors (often to get hours that match their children’s hours). But since you’ve asked the question, how many professional athletes can leave the profession and make more money in another field? How many CEOs can leave that position and make anywhere near the same amount in another position? How about investment bankers? And how about the techies? Think they can leave tech and make more money elsewhere? Obviously, people tend to gravitate toward positions that give them the best of what they’re looking for with respect to job satisfaction, freedom, lifestyle, compensation, etc. That goes for everybody, not just teachers and other public servants.[/quote]

But your argument was that we need defined benefit pension plans to keep people yet you say people stay and leave for other reasons. Just like how they do in the private sector. If that’s you argument than don’t you have to give up the argument that you NEED to offer guaranteed benefit contribution plans in order to make people stay.

[livinincali]

[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.

[livinincali]

[quote=poorgradstudent]The Big Complexes have definitely raised their rent rates lately, at least in “desirable” areas (CV, UTC). The big complexes tend to compile data on their properties and how many empty units they are sitting on and adjust accordinly.

I’m not sure how much of that is seasonal. In the UTC area supply definitely dips as college students figure out where they want to live. Some of those students will graduate or drop out by the Spring.

Private landlords are definitely a bit lower than complexes.[/quote]

The biggest problem with the big complexes is the listed rates are pretty negotiable. They’ll let you get a better deal if you push for it. Of course if you’re a college student that’s taking student loans or mom and dad are paying for it maybe you really don’t care that they jacked your rent up by 10%. Oh well I don’t have to worry about it I’m going to get great job later.

[livinincali]

One 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.

[livinincali]

I think rents are up somewhat at a macro level. Probably 10-15% from the bottom of the recession in 2008-2009 but that was 5-6 years ago. 2% per year isn’t crazy inflationary pressure. Rents certainly aren’t keeping up with home prices and I’m seeing properties that push hard on the rent are sitting vacant for longer. Rents are going to go with the local economy. For the time being investors have decided to accept crappy cap rates and pushed the prices of real estate up much faster than the rents.

[livinincali]

While most people believe modest appreciation going forward, I’m not sure how likely that is. Every kind of valuation chart that has had this large quick run up hasn’t resulted in us staying at those levels or generally going up from those levels. Usually those valuations have fallen pretty substantially after the peak.

Improving per capita income, lower interest rates, and comparable rent rates going up help, but how likely are those 3 things acting in unison going forward. If incomes and rental rates are increasing then you’ll have a significant headwind of higher rates most likely. Certainly we might have modest appreciation in the short term, but the inevitable recession, the likely hood of higher rates create a lot of headwinds for housing appreciation over the longer term, especially when Rich’s valuation index is already at the highest level other than the bubble peak.

[Author]

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