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Retired public employees' pensions slashed after California city stopped making their payments to CalPERS

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There was a sad article in this Sunday's Los Angeles Times 

I've alerted mods to delete my post -- apparently some technical issue is blocking the entire post

ETA:  Apparently the ability to add text is working now.  

Although the  Los Angeles Times article discusses retirees in a very small California city, it is important to be aware that other cities and counties also have pension liabilities that are significantly underfunded.  The Voices of San Diego reported earlier this year, that "San Diego county and city pension funds have nearly $7 billion less in the bank than they need to cover benefits already earned by current and former employees, a deficit that’s risen 90 percent in just two years, new reports show ...The imbalance persists despite major reforms in the city of San Diego. Voters eliminated guaranteed pensions for all new city employees – except police officers – in 2012. This followed a previous decrease of new employee pensions."  Link to Voices of San Diego article:

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So your solution to the federal government's massive subsidization of red states is to...increase the subsidization of r... (more)

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None of the math behind these pension funds has ever been accurate. The firm/analyst that says you are going to need to ... (more)

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Pension predictions aren't very accurate.   They can't be very accurate.   They're trying to predict a variety of variab... (more)

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bighitter said:   There was a sad article in this Sunday's Los Angeles Times 
  Linky

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fwuser12 said:   
bighitter said:   There was a sad article in this Sunday's Los Angeles Times 
  Linky

  
Thanks a lot  for helping with the link..

This should be a wake up call for California taxpayers as well as public employees..
 
CalPERS has long been criticized by financial analysts for their overly rosy return projections, which was recently reduced to around 7%.   CalPERS optimistic assumptions have kept the pension fund contribution requirements quite low for cities and other municipal agencies for a decade. Unless CalPERS "actual" returns increase significantly (questionable in today's low interest rate environment),  cities will be facing much larger funding payments soon to make up the CalPERS return projection's shortfall.

Pulling out of CalPERS was too expensive for the city of Loyalton.  Other cities who have also wanted to to pull out of CalPERS have abandoned the idea because of the exit cost.  As the Times article mentions,    "Villa Park in Orange County toyed with the idea of leaving CalPERS in 2014, in part because officials wanted to determine the small city’s long-term pension liability. Former Villa Park Mayor Rick Barnett said other, more affordable options are available, including deferred compensation plans similar to a 401(k). But Villa Park opted not to move forward after CalPERS tallied the termination fee: $3.6 million."



 

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Does CalPERS still make its investment decisions based on the political correctness of the companies invested in?

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Many pensions promises will never materialize... this is just the start.

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bighitter said:   There was a sad article in this Sunday's Los Angeles Times 

I've alerted mods to delete my post -- apparently some technical issue is blocking the entire post

The mods and their support team are currently working on the technical glitch.  Thanks!

Also many thanks to fwuser12 for posting the LA Times link.

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taxmantoo said:   Does CalPERS still make its investment decisions based on the political correctness of the companies invested in?
 I've read about that issue and it should be a cause of concern.  However my biggest concern, and one that I think needs to be immediately examined, is political appointees influencing investment decisions and/or selection of third party money managers.


 

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Not the first time and won't be the last.

Link

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I'm really opposed to public, tax-payer funded pensions, but wouldn't a better solution be to offer a 401k instead of a pension to new hires going forward in order to reduce costs?

The way I see it, they're breaking a contractual obligation made to existing workers, who signed up for the job partly because of the pension.

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Don't know about CA but they are already migrating toward a 401k style plan here in WA and the new hires doesn't get any where near the generous payouts.

I still consider Fed pension to be safe though.

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I know i'm a cold-hearted bast__d, but I'm not feeling a lot of sympathy for the folks featured in the article.  Four people, who worked for a town of 760, that currently has one full-time employee and an annual budget of $1m.  Those four people had probably among the best jobs in the area when they were working.  I think they should have realized that there was significant risk that their unfunded pension obligation couldn't be met, same as if they had worked for a small struggling private sector company.

ETA:  Featured 56yo guy is still going to get $1k a month, plus his own SS (presumably DI), plus his wife's SS.  One of the others is going from $4,100 down to $2,100. And these were presumably among the people who mysteriously got a 50% pay raise while they were working. There are probably a fair number of people in town that would gladly trade places with them.

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brettdoyle said:   Many pensions promises will never materialize... this is just the start.
 I agree. Private sector dealt with this issue WAY earlier than governmental entities. They moved a lot of retirement plan from defined benefits to defined contributions when it became apparent that keeping things afloat hoping for 10% returns forever was not going to happen. As always public sector knows better ... until the proverbial you know what hits the fan and retirees are left holding the bag with slashed pensions... And this is in a climate of the most enduring bull market for a while. If/when a correction hits, numbers will get even uglier sadly.

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The story isn't really saying much about Calpers itself.

The story is about a small town with 4 total retired employees. The town has been mismanaged. Its bookkeeper was charged with embezzlement and later the employees mysteriously gave themselves 50% raises. The mismanaged little town then pulled itself out of Calpers and the results is the retirees pensions were slashed. The town is currently paying the shortfall and they're on the hook. The mayor acknowledges that if the payments stop then the retirees could/would sue.

The situation sucks for the 4 people in question. But this is hardly the "beginning of the end" for pensions in general and really says nothing about Calpers finances.

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I am surprised the mods allowed the article at all. The matter in the article materially affects exacly four people. It affects them specifically because of their town's decision and the consequences were clearly spelled out in a financial agreement the town made with CalPERS. The article has little to do with the public pension system in general. Yet, there is a need to periodically turn FWF into a blog where people get green for snarky remarks about market forces, cömmünism, etc. This article and the accompanying discussion has contributed zero value to my financial education.

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aleck said:   I am surprised the mods allowed the article at all. The matter in the article materially affects exacly four people. ...
  
Theres nothing wrong with talking about it.  Yes its only 4 people but its still 4 people potentially getting screwed out of their retirement.    There are undoubtedly many other cities where this situation could occur.   

People should be wary if they work for a mismanaged half bankrupt city or other municipality.

OTOH its not a common issue and the risk of this kind of thing is low / minuscule for most pensions.    And even in this situation the retirees in question have the right to sue for their benefits and no real reason to think they wouldn't win.    But then even if they win it may be hard to get money the city if it results in bankruptcy.


 

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Pension should never be invented. How can government pay full salary for every employees for the rest of their lives? No wonder we are in huge deficit. They should have retirement plans, but pension is not an answer, it's a problem.

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aleck said:   I am surprised the mods allowed the article at all. The matter in the article materially affects exacly four people. It affects them specifically because of their town's decision and the consequences were clearly spelled out in a financial agreement the town made with CalPERS. The article has little to do with the public pension system in general. Yet, there is a need to periodically turn FWF into a blog where people get green for snarky remarks about market forces, cömmünism, etc. This article and the accompanying discussion has contributed zero value to my financial education.
  
It may surprise you to learn that when Stockton – not a small city (300,000 people)  -- filed for bankruptcy in 2012,  US Federal Bankruptcy Judge Christopher Klein was willing to allow the city to reduce pensions.   Eventually the city employees were able to strike a deal in the bankruptcy settlement agreement wherein their pensions remained intact but $550 million of the city’s unfunded health benefits were wiped out and all new hires will have significantly lower pensions.    Creditors who held Stockton's municipal bonds accepted restructured bond debt.  Whether that will be sufficient to get Stockton out of the hole they dug themselves into remains to be seen.  

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TheDealMaker said:   Pension should never be invented. How can government pay full salary for every employees for the rest of their lives? No wonder we are in huge deficit. They should have retirement plans, but pension is not an answer, it's a problem.
  pensions were popular with many private companies and still by many unions. blame the actuaries who underestimate how long people will live with overestimation of returns and advances in healthcare that has prolonged lifespans.
most pensions do not pay "full salary"; the percentage will typically depend on years of service, age of retirement etc. i know you want to blame "big government" at every level, but pensions aren't what drive the federal deficit.

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ArmchairArchitect said:   I'm really opposed to public, tax-payer funded pensions, but wouldn't a better solution be to offer a 401k instead of a pension to new hires going forward in order to reduce costs?

The way I see it, they're breaking a contractual obligation made to existing workers, who signed up for the job partly because of the pension.

I thought so too.  But my cynical side is seeing the pension system for nothing more than a Ponzi scheme.  In addition to outliving its utility, it has assumed that more people will be paying into the system than withdrawing. 

Take this example: Person A (near-retirement) has been paying 5% of their income, Person B (newer employee) is paying 5% of their income, and the municipality is paying an annual lump sum 'match' into the pension pool, so Person A can pull a pension.  

If Person B contributes to a 401k, then do municipalities just contribute more to the pool so the fund has enough money for Person A to draw their expected pension payments of 60 -100% of salary for the next 10-40 years of their life?  

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Just depends on the pension program.

Some of them are 100% ponzi which require an ever growing number of suckers to pay for retirees to work. An example would be Illinois which is liabilities something like triple their assets.

On the other hand some of them are 100% funded with assets equal to liabilities and will have no problem paying out.

And of course the Federal Government has a printing press so they'll never "default" on their obligations (inflation is just a different type of default.. you just repay obligations with currency that has lost value). It is also possible that the Federal government could bailout pension plans although that would be a terrible precedent and highly inflationary. 

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Yep - Illinois is indeed the poster child.  Whether or not a state has modified it's defined-benefit pension system (many of which have high and completely unsustainable COLAs), depends on both the politics of that state and the strength of the laws and rules supporting that system.  In the case of Illinois, those guarantees reside in the Illinois Constitution and are apparently inviolable according to its Supreme Court.
 
It might sound cruel but it's better to cut benefits, if possible, than to crash the system for everyone.  Even better for a state to have changed to a 401K or perhaps "hybrid" system.  Some did - link 
 
On per-capita basis, stats show that more people with "means" are leaving Illinois than any other state.  This has been true for the past several years.  That's what happens when gold-Plated retirement benefits are "guaranteed" to be paid by taxpayers, to the exclusion of all else - including common sense.

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fw9999 said:   Yep - Illinois is indeed the poster child.  Whether or not a state has modified it's defined-benefit pension system (many of which have high and completely unsustainable COLAs), depends on both the politics of that state and the strength of the laws and rules supporting that system.  In the case of Illinois, those guarantees reside in the Illinois Constitution and are apparently inviolable according to its Supreme Court.
 
It might sound cruel but it's better to cut benefits, if possible, than to crash the system for everyone.  Even better for a state to have changed to a 401K or perhaps "hybrid" system.  Some did - link 
 
On per-capita basis, stats show that more people with "means" are leaving Illinois than any other state.  This has been true for the past several years.  That's what happens when gold-Plated retirement benefits are "guaranteed" to be paid by taxpayers, to the exclusion of all else - including common sense.


The underlying problem is that Illinois politicians were gutless for decades. Rather than either (a) telling the public employee unions to back off, or (b) raising taxes, they just boosted pension benefits, which let them effectively raise employee comp without having to admit that it would be costly. I understand the POV of the state employees, they were promised benefits, and they want to get what they were promised. Whether the state can deliver on those promises remains to be seen.

Personally, I'd apply ERISA rules to state and municipal pensions, but that'll never happen.

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another issue that got many of them out of balance were "last 3 year" clauses that based pension benefits off the total compensation of only the last 3 years of employment, versus the total years worked (as things like social security do)...

employee's gamed the system by shifting all overtime to soon-to-retire employee's who sometimes doubled their salary through those last 3 years by working every bit of overtime available...

not quite as "fatwallet" as mysterious 50% pay raises, but pretty nifty for them.... not so much for taxpayers and future generations of public employees.

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ArmchairArchitect said:   I'm really opposed to public, tax-payer funded pensions, but wouldn't a better solution be to offer a 401k instead of a pension to new hires going forward in order to reduce costs?

The way I see it, they're breaking a contractual obligation made to existing workers, who signed up for the job partly because of the pension.
From what I've seen, the public sector jobs with the tax-payer funded pensions pay lower salaries. So the higher pension promise is a trade-off. The problem is that they promise a certain percentage of your final pre-retirement income, which not only can be gamed as mentioned above, but is also much higher than would be accrued from those employees contributions even if it wasn't gamed.

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scripta said:   
ArmchairArchitect said:   I'm really opposed to public, tax-payer funded pensions, but wouldn't a better solution be to offer a 401k instead of a pension to new hires going forward in order to reduce costs?

The way I see it, they're breaking a contractual obligation made to existing workers, who signed up for the job partly because of the pension.

From what I've seen, the public sector jobs with the tax-payer funded pensions pay lower salaries. So the higher pension promise is a trade-off. The problem is that they promise a certain percentage of your final pre-retirement income, which not only can be gamed as mentioned above, but is also much higher than would be accrued from those employees contributions even if it wasn't gamed.

  
The thing is, especially in Illinois at least, that "low salary" trade-off is a thing of the past.

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TheDealMaker said:   Pension should never be invented. How can government pay full salary for every employees for the rest of their lives? No wonder we are in huge deficit. They should have retirement plans, but pension is not an answer, it's a problem.
  
People who retire are not paid salaries. They receive what is considered to be the equivalent of a monthly annuity payment.  Insurance companies are actively selling annuity products.  Technically, the pension system is funded by what is equivalent to an annuity contribution.  Annuities and pensions operate on contributions (for investment purposes) and the payouts for those retired.  When the payouts exceed the contributions (and earnings), then you have a problem.  Life insurance operates in a similar fashion.  If every customer died prematurely, there would be no money to pay from the policies.  This is all based on actuarial tables and life expectancy.  When the numbers head in the direction that goes against the annuity or pension company, then you cut back or in extreme cases, you  close up shop.  That is how the cookie crumbles. 

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No pity on the town, as it was well mismanaged. Who on anywhere CA gets a 50% raise in one year at same job/employer? If the city leaders did not know what were they doing until now? They kept quiet because they also got the raise.
Who needs a Municipality for 700 residents? Greed.

BTW, CalPers has every right to ask for a termination fee when a contractually obliged member leaves. The judge who is calling it a golden handcuffs should be investigated. Btw, he probably depends on CalPers too.

These retirees should hold the town's criminal employees and dirty politics responsible instead of CalPers.

BTW, I could have supplied the rock with the town's name for 1/3 of the price. My question would be who was the contractor who supplied this and whats his connection to the town's council.

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Yesterday’s Wall Street Journal has an article about the underfunding gap of large US pension plans that oversee pensions for police, firefighters, teachers and public workers.  I can’t link (paid subscription),  but if someone here is able,  the article is entitled,  “Stock Rally Fails to Fill Pension Shortfalls.”  The  WSJ states:

According to Wilshire Consulting, as of 2016 “Large public plans currently have just 70% of what they need to pay future benefits to their retirees ...  Even with the large stock market gains this year, Marcie Frost, CalPERS CEO, said that it has just 68% percent of the assets it needs to pay for future benefits."  She is concerned about vulnerability if there is a downtown in the stock market.  Connecticut State Treasurer Denise Nappier said that their pension fund has only 35.5% of what it needs for municipal employees and 56% for teachers.  “The state, Ms Napier said, make a mistake by not contributing more to the funds in past years.”

According to a report by the Center for Retirement Research at Boston College, "Funding levels won't improve significantly unless cities and states ramp up their yearly pension contributions."
 
So who is going to have to make up this shortfall?  Will the taxpayers get hosed with higher taxes or will the retirees be forced into benefit cuts?
 

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Taxpayers won't get hosed because they can vote with their feet and leave the state. Many of the blue states with high taxes are already losing population... higher taxes will just accelerate the outflows.

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brettdoyle said:   Taxpayers won't get hosed because they can vote with their feet and leave the state. Many of the blue states with high taxes are already losing population... higher taxes will just accelerate the outflows.
Unfortunately leaving may be the only viable solution for taxpayers in California.

California Governor Brown and Treasurer Chiang proposed the following solution a month or so ago -- borrower $6 billion from the state’s Pooled Money Investment Account and spend it on an extra payment to the California Public Employees’ Retirement System.  

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brettdoyle said:   Taxpayers won't get hosed because they can vote with their feet and leave the state. Many of the blue states with high taxes are already losing population... higher taxes will just accelerate the outflows.
  
Or, the federal government could stop massively subsidizing the red states, freeing up funds for blue state budgets. 

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brettdoyle said:   Taxpayers won't get hosed because they can vote with their feet and leave the state. Many of the blue states with high taxes are already losing population... higher taxes will just accelerate the outflows.

This is not a CA specific or blue state specific problem.     There are numerous red states with worse pension problems.   IL may be the worst but KY and KS are just as nearly screwed.    
You can't really escape the problem either.    Sure if CA defaults and slashes its state spending that will mostly hurt CA residents but its going to hurt the nation too.    CA is 1/8 of our GDP and if they  go bankrupt it will absolutely hurt the country as a whole.


 

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cestmoi123 said:   
brettdoyle said:   Taxpayers won't get hosed because they can vote with their feet and leave the state. Many of the blue states with high taxes are already losing population... higher taxes will just accelerate the outflows.
  
Or, the federal government could stop massively subsidizing the red states, freeing up funds for blue state budgets. 

 Or, alternatively, the Feds could pass tax reform eliminating the subsidization (i.e., deductibility) of taxpayers' state income taxes.  This would have 2 benefits: 1) free up funds for the Federal budget, 2) give many blue state taxpayers a far more honest and realistic experience in "feeling the love" that their home State has for them, in assessing taxes!

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fw9999 said:   
cestmoi123 said:   
brettdoyle said:   Taxpayers won't get hosed because they can vote with their feet and leave the state. Many of the blue states with high taxes are already losing population... higher taxes will just accelerate the outflows.
  
Or, the federal government could stop massively subsidizing the red states, freeing up funds for blue state budgets. 

 Or, alternatively, the Feds could pass tax reform eliminating the subsidization (i.e., deductibility) of taxpayers' state income taxes.  This would have 2 benefits: 1) free up funds for the Federal budget, 2) give many blue state taxpayers a far more honest and realistic experience in "feeling the love" that their home State has for them, in assessing taxes!

  So your solution to the federal government's massive subsidization of red states is to...increase the subsidization of red states?  OK, then.  

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None of the math behind these pension funds has ever been accurate. The firm/analyst that says you are going to need to be saving $X to provide for these predictive benefits gets fired if $X doesn't fit into the budget and they find someone else who will come up with a model that says a number much lower than $X will work.

People are retiring now in California at 65 that predictive models are counting on dying at 82 which is simply fantasy.

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fourchar said:   None of the math behind these pension funds has ever been accurate. The firm/analyst that says you are going to need to be saving $X to provide for these predictive benefits gets fired if $X doesn't fit into the budget and they find someone else who will come up with a model that says a number much lower than $X will work.

People are retiring now in California at 65 that predictive models are counting on dying at 82 which is simply fantasy.

  

Pension predictions aren't very accurate.   They can't be very accurate.   They're trying to predict a variety of variables over future decades.   Nobody can do that with high certainty.   And you have to make assumptions on a lot of things and if you change any of those assumptiosn it all changes.   Or if reality doesn't pan out or if theres a stock market boom or recession, etc.
Thats also why the funding levels fluctuate by a lot year to year.    Oregon was like over 100% a few years ago and now its at 80% or worse.

I don't think pensions generally just fire employees or consultants for putting out pension reports they dislike or expectations they dislike.     Examples?

I don't see any reason to think its "fantasy" that retirees will live to age 82 on average.    Maybe its off by 1-2 years, but again, this is predicting the future.   What number do you think is right and why??
 

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