March 17, 2011
— Monty I haven't given California a good rhetorical kick in the nuts for a while, and it's past time.
A little while ago, CalPERS (California's giant pension system) was pondering reducing their "expected rate of return" calculation from a ludicrous 7.75% to a merely ridiculous 7.5%. This was ostensibly to bring future funding rates into closer contact with reality. (Not much closer, though; the actual rate of return considered "safe" is around 4%.)
Well, apparently this twenty-five basis point reduction caused the blood of several municipalities to run cold, because it would have meant millions of dollars in additional contributions would be required this year. So CalPERS decided to leave their ludicrous rate-of-return expectations alone for the time being. Pull quote:
A decrease in the Calpers rate of return to 7.5% would have bumped up what local California governments pay on behalf of government workers by 1.5% to 3% of payroll costs each year and 3% to 5% of what they pay on behalf of police officers, firefighters and other public-safety officers, a Calpers spokeswoman said.Also, a decrease in the rate, also referred to by public pension plans as the discount rate, drives down the funded status of a pension plan, or the difference between its assets and long-term liabilities. Calpers is about 70% funded, it says.
Now, here's the thing...everyone involved knows that the 7.75% return rate is probably bullshit. CalPERS knows it, the municipalities know it, and the actuaries know it. The great bull market of the 1980-2000 period is long gone, so 20-year averages are going to be skewed by the outsized rates of return of the 1990's. If you only count the 10-year averages, things don't look so rosy; and they look even worse going into the next decade. But if the states actually had to honestly account for their pension obligations, they'd immediately go into a fiscal crisis due to the huge amount of contributions needed to bring their pensions to "fully funded" status (about 80%).
So a 7.75% rate of return is only possible if CalPERS (and the other broke states) take some pretty huge risks with their capital. The exact same kind of risks that burned them during the 2008 crash. (Which exacerbated, but did not cause, their pension problems, by the way. States have been shorting their pension funds for years and years.) But admitting the truth is not only politically unpalatable, but would also mean jacking up contributions to completely ruinous levels.
Illinois is in the same boat, as is New Jersey and many other states. Chronic underfunding of pension plans is how many city councils balance the books every year. Need an extra ten mil for some project or other? Just bump the rate-of-return on your pension fund twenty-five basis points or so, and then pay ten million less into your pension plan! Presto! The actuaries will play along because they can't prove you're wrong; full of shit, maybe, but not completely insane. It's possible that the market might turn around and generate those returns. Maybe.
Then years go by and the economy turns as it is wont to do. You have too many retirees and too few taxpayers and all your costs have skyrocketed and it's all of a sudden costing you half or more of your city's general fund just to cover pension costs because the investment return rates didn't quite pan out the way you'd hoped. This means tax hikes, service cuts, bond issues (debt), and/or personnel cuts in the public service. It's a shit-sandwich that no mayor or governor ever wants to eat, yet they prepared the meal themselves years earlier as city councilmen and selectmen when they approved these ludicrous pension scenarios.
There is an old saying that figures don't lie, but liars can figure. Much of the calamity now facing the cities and states in this nation is a direct result of the truth of that statement.
California: boned. Illinois: boned. New Jersey: boned. In fact, there are probably 30 to 35 states that are facing fiscal Armageddon at some point due to out-of-control public-employee pension and healthcare costs. The number of municipalities in distress probably runs into the thousands.
The Loyal Order of the Terminally Boned (LOTB) grows apace.
Hobo cat wants to know if you can spare some change:
Posted by: Monty at
05:12 AM
| Comments (78)
Post contains 733 words, total size 5 kb.
Posted by: maddogg at March 17, 2011 05:26 AM (OlN4e)
Posted by: BlackOrchid at March 17, 2011 05:26 AM (SB0V2)
Posted by: maddogg at March 17, 2011 05:27 AM (OlN4e)
Posted by: maddogg at March 17, 2011 05:30 AM (OlN4e)
Posted by: Truman North at March 17, 2011 05:30 AM (8ay4x)
Posted by: eman: Japanese Babe Rescue Team at March 17, 2011 05:31 AM (G8NKv)
Look at the Euro and what's going on over there. Now amplify that the world over.
Posted by: EC at March 17, 2011 05:32 AM (GQ8sn)
Posted by: Truman North at March 17, 2011 05:32 AM (8ay4x)
It would mean the end of America's dominance. That alone would cause leftists to get all tingly, as things would now be "fair" (so they think).
Posted by: Kratos (Ghost of Sparta) at March 17, 2011 05:33 AM (9hSKh)
Bah... real bums drink Cisco Red. Try it, it will F your S up, stat.
Posted by: Todd Bridges, first to go bad, last to go down at March 17, 2011 05:34 AM (qL20/)
Posted by: Monty at March 17, 2011 05:37 AM (4Pleu)
Posted by: eman: Japanese Babe Rescue Team at March 17, 2011 05:38 AM (G8NKv)
But Monty, the historical stock market annual rate of return is something like 11%, and that goes back 2 centuries. Why is 7.5% so ridiculous in your view?
Posted by: chemjeff at March 17, 2011 05:40 AM (riAeC)
My prediction also based on what I have seen from these CRs going down is that House Republicans will roll over.
Posted by: Vic at March 17, 2011 05:40 AM (M9Ie6)
He who has the space laser to do so wins! He who has the most failed launches can also win.
It's a two-fer! We got this one in the bag, baby! USA! USA! USA!
Posted by: turdbowl timmuh! at March 17, 2011 05:42 AM (hsLUJ)
Posted by: Jean at March 17, 2011 05:42 AM (WkuV6)
Posted by: maddogg at March 17, 2011 05:42 AM (OlN4e)
Posted by: Ratman at March 17, 2011 05:44 AM (Q5+Og)
Instead of the negative waves, can we list the states and cities that were responsible, and thus are less boned?
Posted by: Jean at March 17, 2011 09:42 AM (WkuV6)
I read an article last night that suggests that North Dakota is on this alternate list.
Of course it's Spring, and the Red River of the North may have something to say about that.
Posted by: ya2daup at March 17, 2011 05:46 AM (hsLUJ)
Posted by: Chuckit at March 17, 2011 05:46 AM (hE1Uw)
Okay- it seems the MSM has discovered the Japanese physicist from the Science Channel, Dr Michio Kaku
he will be on all your telescreens from now on
Posted by: BDJ at March 17, 2011 05:48 AM (cUNcx)
Posted by: maddogg at March 17, 2011 05:48 AM (OlN4e)
Okay- it seems the MSM has discovered the Japanese physicist from the Science Channel, Dr Michio Kaku
he will be on all your telescreens from now on
Posted by: BDJ at March 17, 2011 09:48 AM (cUNcx)
I don't get it: who died and made him the go-to guy?
Posted by: ya2daup at March 17, 2011 05:55 AM (hsLUJ)
I haven't given California a good rhetorical kick in the nuts for a while, and it's past time
Every other day (last CA post on Tuesday) is a "while"?
Heh.
Posted by: Jess at March 17, 2011 05:57 AM (cNHhh)
So, would you hit it or hit it?
Posted by: momma at March 17, 2011 05:59 AM (penCf)
Posted by: Microphone Pop Filters at March 17, 2011 05:59 AM (sssdq)
when he reached down to feed the kitteh... another one stole his wallet.
Make no eye contact with them. evil.
Posted by: a guy who knows of hobo kitteh's at March 17, 2011 06:00 AM (ph9vn)
Okay- it seems the MSM has discovered the Japanese physicist from the Science Channel, Dr Michio Kaku
he will be on all your telescreens from now on
Bill Nye was on Fox the other weekend. Ugh.
I don't get it: who died and made him the go-to guy?
Michio's cute, speaks well, and he's Japanese which is sort of like having your own pet Ewok. What's not to love?
Posted by: Truman North at March 17, 2011 06:00 AM (8ay4x)
Have no fear the MFM keeps telling us that we're in a recovery
March 17 (Bloomberg) -- Consumer confidence plunged last week to the lowest level since August as rising gasoline prices made Americans more pessimistic about the economic outlook and their finances.
“Consumers across different income and demographic groups are feeling the pain of rising prices at the pump,” said Joseph Brusuelas, a senior economist at Bloomberg LP in New York. “It’s even biting those making more than $100,000, and they’re the ones who’ve been a primary driver of the recovery. It’s likely to restrain growth this quarter.”
Oh dear, this most magnificent robust steaming pile of recovery is in trouble.
Posted by: TheQuietMan at March 17, 2011 06:00 AM (1Jaio)
Posted by: chemjeff at March 17, 2011 06:04 AM (riAeC)
Posted by: toby928™ at March 17, 2011 06:05 AM (GTbGH)
Posted by: Jean at March 17, 2011 06:11 AM (WkuV6)
I don't think anyone BUT the unions have defined benefit plans anymore. My old company went to cash balance long ago and about 3 years before I retired they changed the rules so that new hires get no medical at all on retirement. The rest of us had the benefit capped.
Posted by: Vic at March 17, 2011 06:13 AM (M9Ie6)
So, would you hit it or hit it?
Posted by: momma at March 17, 2011 09:59 AM (penCf)
It looks like she went all in to win the "Look Like a Muppet" contest. I won't say which one, 'cause I'm a cinnamon, ... er ... vitamin ... no ... gentileman ... dammit ... nice guy.
Posted by: ya2daup at March 17, 2011 06:15 AM (hsLUJ)
Ha!
Illinois' declared rate of return is 8%.
Wasn't Bernie Madoff's rate of return something like 10%-12%? And we see how well that ended.
Posted by: Boots at March 17, 2011 06:19 AM (neKzn)
Posted by: 7 Chinese Spammers at March 17, 2011 06:19 AM (xaCZY)
In response, we ought to set up a National Trade A Gun Day.
Pick a day when everyone participating will privately & legally transfer a firearm to another gun owner or new gun owner.
Purpose? To make their stupid lists completely useless.
Posted by: 7 Chinese Spammers at March 17, 2011 06:25 AM (xaCZY)
Posted by: joncelli at March 17, 2011 06:27 AM (RD7QR)
Posted by: Jean at March 17, 2011 10:11 AM (WkuV6)
See post #171 in Top Headlines post. BO Admin (Ken Jennings) is making schools monitor students' twitter, facebook, etc. activities.
Posted by: momma at March 17, 2011 06:28 AM (penCf)
Posted by: toby928™ at March 17, 2011 06:32 AM (GTbGH)
Posted by: joncelli at March 17, 2011 06:37 AM (RD7QR)
Posted by: BuddyPC at March 17, 2011 06:39 AM (i7C9N)
Posted by: momma at March 17, 2011 06:52 AM (penCf)
7.75% nominal assumed - 3% past US inflation = 4.75% real return before expenses. Pension funds can have fairly low expenses, so maybe 4.5% after expenses. And 4.5% is about what a 60% US stock, 40% US bond portfolio would have earned on average after inflation over the past 100 years.
Current valuations suggest a somewhat lower return going forward, maybe more like 3.5% real fram a 60/40 portfolio with minimal expenses. But that's just my opinion.
Posted by: rmark at March 17, 2011 07:18 AM (wgNcw)
Hobo cat doesn't want to bullshit you. Hobo cat's had a tough life. Hobo cat's mom died. Hobo cat had a rough childhood.
Hobo cat accepts responsibility for where his life is. Hobo cat accepts his lot in life. Hobo cat knows everybody looks down on him. Hobo cat wishes he'd made better decisions.
Hobo cat is trying to be straight up with you. Hobo cat needs some cash. Cause Hobo cat needs a sandwich and a coke and, as previously mentioned, some hooch.
Posted by: Clubber Lang at March 17, 2011 07:33 AM (QcFbt)
Posted by: Jean at March 17, 2011 07:49 AM (WkuV6)
Posted by: Jerry Brown at March 17, 2011 07:57 AM (lH6z9)
First of all, it's something considerably less than 11%. Second, you can't use returns from two centuries ago as reliable indicators of anything - much smaller, more concentrated markets and pervasive manipulation. Third, and more importantly, every stock market on the planet has suffered, at least once in its history, a drawdown in excess of 75%. You don't just bounce right back from something like that. Look at Japan - the Nikkei peaked at 40,000 in 1990, more than 20 years later and that market is at 9,000. The NASDAQ peaked eleven years ago at 5000. Today it's at 2650. Look at Iceland, down 95% from the peak. Look at Italy's 0% return for the entire 20th century.
You know that disclaimer that says "past performance does not guarantee future returns?" It's actually true. The risk of massive drawdown is why investors, including pension plans, diversify their risk by investing in bonds, real assets, absolute return strategies, private equity, etc. The Yale University endowment has been far more successful than CALPERS and even they limit their spending policy to a 6% annual rate.
Posted by: Ted Kennedy's Gristle Encased Head at March 17, 2011 08:01 AM (+lsX1)
Politicians have been squawking about the expected rate of return forever, even Pete Wilson in this 1991 article, because of how it affects contributions by the government.
"Even with the "solar flares" of the 1950s and 1980s, the portfolio's annualized return for the full 60 years was just 8.06%."
http://tinyurl.com/4douafc
Historically, Calpers has done that well. Let's hope they continue.
Posted by: PJ at March 17, 2011 08:06 AM (4Tc6B)
Posted by: Minnie Rodent at March 17, 2011 08:06 AM (iNfj/)
Carl Sagan.
Neil DeGrasse Tyson is the best TV-ready physics-talkin' guy, but he doesn't sell science as secular-religious hippie shit like Sagan and Kaku do, so he's not at the top of the call list when God Nature Smites Man.
Posted by: oblig. at March 17, 2011 08:06 AM (xvZW9)
Posted by: Minnie Rodent at March 17, 2011 08:11 AM (iNfj/)
Employee contributions make up 15% of the pot, investments 80%, and government contributions 20%, as far as I can tell. Go to calpers.gov and you will see that they invest in every type of investment imaginable all over the globe.
Yes, I'm sure there is some graft, but it's the most successful pension fund in the world.
Posted by: PJ at March 17, 2011 08:26 AM (4Tc6B)
Posted by: HankF at March 17, 2011 08:34 AM (sXiOv)
Posted by: momma at March 17, 2011 09:59 AM (penCf)
Well momma, you know the old saying: Desperate times call for a baseball bat shileighley (I modded it slightly for St.Paddy's Day).
Posted by: Bill H at March 17, 2011 08:49 AM (q8CmE)
And this is why Daniels and Christie are POTUS roadkill. Williamson at NRO rates theirs as 3rd and 1st worst. Daniels says "Right-to-Work needs to be shelved." Of course, he hopes to return, at worst, to a nice DC pill-lobbyist payday.
Hoosiers boned. Garden State eviscerated, immolated, nuclear-winterized.
Posted by: gary gulrud at March 17, 2011 08:56 AM (/g2vP)
Posted by: Sparky at March 17, 2011 08:59 AM (NjXSJ)
It's obvious nonsense but that's exactly what CALPERS did with a big chunk of their real estate allocation. In 2005, the trustees sanctioned a change in policy that allowed them to lever up their investments in undeveloped land. They ended up losing well over 100% in their residential real estate portfolio when the bottom fell out of the housing market.
Posted by: Ted Kennedy's Gristle Encased Head at March 17, 2011 09:04 AM (+lsX1)
California resident: I'll take "Think like a Democrat for $100", Alex
Alex: "This was the solution to the budget problems of California municipalities in 2011."
California resident: "What is raising the Calpers rate of return to 10%?"
Posted by: Math Challenged at March 17, 2011 09:11 AM (RykTt)
Neil DeGrasse Tyson is the best TV-ready physics-talkin' guy, but he doesn't sell science as secular-religious hippie shit like Sagan and Kaku do, so he's not at the top of the call list when God Nature Smites Man.
Posted by: oblig. at March 17, 2011 12:06 PM (xvZW9)
Yeah, him! I couldn't recall his name, but every time I've seen him in a show I've been impressed.
Speaking of impressed, I'll put in a plug one more time for folks to watch the video in the Science vs "Science" piece by Jonah Goldberg in the side bar to see a superb public smackdown of the "hide the decline" conspirators.
Posted by: ya2daup at March 17, 2011 09:28 AM (Wqfrr)
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Can someone explain the logic behind this? {Update:I got fooled by Drudge, this article is 2 years old} [Ben]
Destroyers are not content to bring down the US only. With a world currency, they can bring down the world.
But then again, bring down the US and you do bring down the world.
I would have to sum it up in one word: Consistency.
Traitors, all of them.
Posted by: sTevo at March 17, 2011 05:23 AM (nPn42)