I was interested to read this week about the city of Denver.
It’s booming. The city government is trying to divvy up surpluses. Even cannabis has started turning a civic profit – more than covering what it costs to regulate.
The city of San Diego isn’t there.
Next year the city will face tough decisions.
Haunting the city still is its employee pension fund. We are living through what alarmists worried about more than decade ago. Despite all the reforms – and in part because of them – the bill has come due. In 2016, the city sent the pension system $261 million.
That’s not much less than the entire amount of money the city collected in sales taxes – $275 million.
We Stand Up for You. Will You Stand Up for Us?
Voting to reduce the projected future earnings estimate, which increases the city's projected contributions, while at the same time putting off the time when the city has to make those contributions, sounds a lot like the actions the city and the retirement board took earlier, which ended up with the city being labeled "Enron by the Sea". Those who refuse to learn from history are likely to repeat it. Whether or not the city is flush enough to give pay raises to some of its employees isn't the kind of metric the pension board should be basing its decisions on.
As you noted, there are three sources of funding for public pensions: Employees, Government, and the market.
The Public Employees Pension Reform Act (PEPRA) made it so that this year, public employees must now contribute half of the initial funding, with government providing the other half. This is in effect serving to make pension adjustments unaffordable for employees where costs before were more easily absorbed by governments with larger budgets than individual employees.
However, the fact that governments have larger budgets alone is not to say that it is necessarily fair that Governments should absorb market changes. It's important to protect public funds from market problems.
So what's changed from the days when pensions were the norm and had fewer problems? The market has changed. Today's market is more disconnected from actual physical industry and development, and relies more on risky derivatives and business models that change more quickly than they used to.
Even so, the market is still returning around 7% for these plans, with notable exceptions. A few years ago, the County hired a pension manager and paid him $10 million a year. He created an unprecedented risky portfolio. The years he was responsible for (before he was promptly fired within a couple years) lost more than was typical. The returns were around 3%. As such, the last actuarial review for the County looked pretty dire. As usual, the public focus was on unfunded liability. This is a snapshot and doesn't necessarily show a current trajectory for a fund.
There was a whistleblower lawsuit filed due to the $10 million man's hiring and tenure. The County has joined on. So I think the moral of this story is that the major threats to government (or any) pensions is a changing market and corruption just remember that unions are not the only groups capable of corruption. Government and business requires just as much vigilance. In fact, they have an actual interest in the failure of pensions, whereas unions have an interest in keeping them healthy.
Any discussion of the pension fund's assumed discount rate is incomplete without including two other assumed rates: inflation and pay. A 7% discount rate with 4% inflation -- real returns of 3% -- had been the assumption for far too long. (Inflation hasn't seen 4% annually since 1991.) Pay too is assumed to generally track with inflation. SDCERS had used a 3.75% pay inflation rate until it was lowered to 3.25% a few years ago. The former is the rate Prop B hawkers used in coming up with their $1B savings estimate. (That is to say, they assumed that absent Prop B, city pay would have increased at 3.75%/yr from 2011-2016. Inflation for that time turned out to be about 1.7%/yr. More than zero, but closer to zero than to 3.75%.) Anyway, lowering the discount rate is a recognition that inflation is low and will stay low, which is also to say that pay increases are low and will stay low -- and that it's appropriate, then, that that assumption be likewise updated in pension payment calculations. So far, it hasn't. Doing so would lower City and employee payments substantially.
Did I miss something or does the CA Supreme Court revisit Prop B the end of next year. You know, Jerry standing in front of the podium promoting success.
Back in 1999, CalPERs and Union Bureaucrats made up Fake News to say there was so much money in the fund,it was growing so well, state could increase pensions at "No Cost To Taxpayers." Fact is it was all a lie. Gov Davis actually believed this line of shibai, and signed SB 400 into law. His financial incompetence has gone on to cost state taxpayers billions and billions of wasted money.
Under the bill, "More than 200,000 civil servants became eligible to retire at 55 — and in many cases collect more than half their highest salary for life. California Highway Patrol officers could retire at 50 and receive as much as 90% of their peak pay for as long as they lived."
Taxpayers need to understand this is what unions do. Publish Fake News every time they can. Never, ever, ever, ever, trust anything from unions or union lapdogs until vetted by outside, impartial financial experts.
Thanks to Gov Davis the state's pension money pit will continue to be a growing leech on taxpayers. San Diego needs to continue moving new hires to the 401k Retirement Plan. Can't be spiked, can't be raided. A Win - Win for government workers. Feds use the TSP/401k plan for the majority of their pension requirements. A huge savings to taxpayers. Sad to say our state and city haven't got a clue.
Mr. Allen: Governor Pete Wilson was the first California governor to propose raiding CALPERS. He wasn't motivated by unions. He was motivated by the false assumption that a fully funded pension system meant that the state could reduce its annual payments and let the market take up the slack. That opened the door to later deals aimed at reducing pension contributions and expanding benefits (at the same time). It proved to be unwise, but it is inaccurate to place the blame on unions. There were many contributors to this decision, which is why it is best to keep pensions below 100% funding. http://www.sandiegouniontribune.com/opinion/commentary/sd-utbg-public-pensions-funding-20170914-story.html
Public employee pensions, not just in this city, are a huge financial drain and opportunity cost. But it is not just us. This state and other states with defined benefit systems they are in trouble. The reason is over promising and underfunding. Calpers is also adjusting their discount rate.
Just look at Illinois to see where California is headed. The systems are unsustainable
. The retirement in the private sector comes no where near the over generous public sector retirement. It is a huge imbalance. Prop "B" was a move in the right direction to correct that imbalance and also shift some risk from taxpayers.
San Diegans were right to pass prop "B" as it creates a turn around point in which the payments will drop. A couple years back that was supposed to be 2025. Appears now its going to be 2029.
Remember, The retirement scheme brought on the reforms in San Diego
VOSD promoted Proposition B which, as noted in this piece, closed the system to most employees and increased the cost of the city’s contributions to the system for many, many years to cover the cost of the closure. It was an expensive gambit which may well turn out to be a bad one financially. It may be overturned in the courts, which could be hugely expensive. It will certainly make recruiting and retention of employees harder.
Mr. Lewis may dislike public pensions, as he alludes here, but he and San Diego need to face the fact that they are the norm for public employees statewide. Thus, in competing for employees among other governments, San Diego is at a distinct disadvantage that it must make up with higher wages. In a competitive market, whether in the public or private sector, your pay and benefits must be comparable or better to attract and retain good employees.
As for the statement that a lot of investors would love steady 6.5 percent returns, it’s a cheap throw-away line. Pension funds invest for the long run, not the short run. The compound annual growth rate of the S&P 500 from January 1, 1992 to December 31, 2016 (25 years) was 9.15%. From 1996 to 2016 it was 8.35%. Over the past five years it was 14.64%. The compound annual growth rate of AAA corporate bonds over the same periods was 5.82%, 5.42%, and 4.674% respectively. Assuming one placed 35% in AAA bonds and 65% in the S&P 500, the total returns in these periods would be 7.99%, 7.33% and 11.15% in these same periods. The move to 6.5% assumes poorer returns in the future than in the past. There is no basis for that assumption of which I am aware.
Nationwide surveys have shown equal anxiety, across party lines, about retirement security. This is partly due to the lack of employer funded retirement programs that were the norm in the past. Rather than complain about public retirement systems, we should perhaps encourage them to be responsible and properly funded, while also promoting similar systems in the private sector, like Secure Choice. http://www.treasurer.ca.gov/scib/