Friends With Benefits - Part 16 In Good Times and In Bad?

Daniel Borenstein writes for the Contra Costa Times and is published locally in the S.M. Mercury Times.  He's written a piece that is the first fresh bit of insight into how some of the public pensions are digging an even deeper hole than the estimated half trillion dollars

Pension plans depend on investment returns to help fund workers' retirement payments. Systems for public employees assume that good years will outweigh the bad and over time provide average annual growth of 7 to 8 percent.

But what happens if they skim off money during good years? It doesn't take a financial genius to figure out that will drag down investment returns. Yet, that's exactly what San Jose and Alameda County pension systems do.

We're talking tens of millions of dollars in San Jose and roughly $1 billion or more in Alameda County. These misnamed "excess earnings" -- there's nothing excess about them -- are diverted to other benefits.

He goes on to note

The city (i.e. San Jose) established the diversion programs in 1986. They are modeled after a state law that permits similar transfers for county-level pension systems. Alameda is one of only three counties -- Tulare and Kern are the others -- that take advantage of that law. The Alameda County program dates to 1985.

So it appears that San Mateo County is not diverting funds.  One wonders about the individual cities and towns in the County?  Here's another state law ripe for repeal since it ignores the basic concept of averaged long-term returns that is essential to pension funding.

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From local columnist John Horgan:

Will Tom Huening's Voice Be Heard?
San Mateo County's government operation based in Redwood City is often a one-trick pony. Serious debate on major issues frequently lacks much staying power. That's because the overwhelming majority of the decision-makers speaks with one political voice which leans heavily liberal and Democrat. This circumstance tends to constrict any sort of healthy give-and-take on important matters of substance. That's where Tom Huening comes in. As a generally conservative County Controller, he's regarded as something of an alien in the halls of county administration. So there is a real question as to whether his latest alarms will be heeded, especially by the Board of Supervisors. He's been warning about two potential budget-busters for some time: Unfunded government employee pension liabilities and the annual cost of debt service for a proposed new County Jail. He has plenty of facts and figures to back up his red flags. But it will take some real gumption on the part of the supes to act on his findings. Are they paying attention? Dave Pine certainly is. As for the rest, well, we're waiting.

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http://www.smdailyjournal.com/article_preview.php?id=228721

[Joe]

Here are two interesting letters to the editor in today's Wall Street Journal:

The irresponsible handling of the city of Stockton's employee pension and health-care plans as described by Steven Malanga in "How Stockton, California Went Broke in Plain Sight" (Cross Country, March 31) borders on gross negligence. Stockton Mayor Ann Johnston admits that when she voted for union benefits while serving on the city council, "We didn't have projections into the future what the costs might be." Now she realizes that, "you don't make decisions without looking into the future." Her epiphany comes years late and several hundred million dollars short, although she is a step ahead of the White House and Congress.

In the heyday of U.S. dominance in the automobile, steel and airline industries, corporate executives made the same types of unaffordable pension and health-care promises to their union workers as did Stockton's generous politicians. By the 1980s, companies such as GM, Bethlehem Steel, Pan Am and TWA all had morphed into giant benefit plans that had peripheral activities in autos, steel or air travel. Stockton today (and many other U.S. cities and states, as well as Washington) is on the same track toward being first and foremost a pension and health-care scheme, with all other city functions relegated to secondary status.

With the U.S. housing industry still reeling, the prospect of buying or building houses sitting atop benefit-plan sinkholes is unnerving. Assuming 100,000 households in Stockton, an unfunded health-care and pension liability of $500 million represents an IOU of $5,000 per household, plus an annual funding expense of several hundred dollars—all on top of normal city operating costs. Those numbers may be modest relative to enormous state and federal liabilities per household but are still significant and potentially understated.

Scott Roberts
Jacksonville, Fla.

Stockton, Calif., is just the tip of the public iceberg.

Russ Garner
Davie, Fla.

[Joe]

Mr. Borenstein is still tracking this issue and the next meeting is tomorrow according to his piece from last week:

http://www.insidebayarea.com/ci_25085150/daniel-borenstein-gov-browns-conflicting-approaches-nations-two?IADID=Search-www.insidebayarea.com-www.insidebayarea.com

[Joe]

I'm just keeping you all up to date even if I am the only one who cares:

The state’s annual contribution to its massive pension fund is about to go up substantially, and much sooner than expected.

In a victory for Gov. Jerry Brown and his get-tough approach, the CalPERS board on Tuesday set the stage for a rate increase that will cost the state treasury around $400 million beginning July 1. The increase will be phased in over three years and will ultimately cost the state an extra $1.2 billion a year. That will bring the state’s annual payout to CalPERS to around $5 billion.

The CalPERS board also approved higher rates for school districts and local governments, but opted to start them later and phase them in more gradually.

Read more here: http://www.sacbee.com/2014/02/18/6169215/calpers-decides-to-speed-up-rate.html#storylink=cpy