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October 29, 2013

Comments

Joe

Switching from CalPers to CalSTRS, this arrived today:

Saddled with a massive debt on what is needed to meet its pension obligations the California State Teachers Retirement System (CalSTRS) added more than $4.0 billion to that debt in 2012 because it chose to underfund its so-called “catch-up” payment. That is the conclusion reached by a study released this week by the California Public Policy Center. Using data from publicly disclosed financial reports - the most recent CalSTRS annual report as well as their most recent actuarial valuation and review - the study evaluated how much cash was actually contributed to the plan in 2012, including how much was contributed to pay down their unfunded liability.

During the fiscal year ended 6-30-2012 CalSTRS collected $5.8 billion from employees and employers to invest in their pension fund. Of this $5.8 billion, $4.7 billion was the so-called "normal contribution," which was a payment to cover the present value of future pensions earned during 2012 by actively employed participants. The other $1.1 billion that was collected and invested in the fund was a "catch-up" payment to reduce the unfunded liability, which at the end of 2012 was officially estimated to be $71.0 billion.

Using pension evaluation formulas and unfunded liability payback terms formally recommended by Moody's Investor Services in April 2013, this study shows that if the "catch-up" payment is calculated based on a level payment, 20 year amortization of the $5.6 billion unfunded liability - still assuming a 7.50% rate-of-return projection - the 2012 catch-up payment should have been $7.0 billion per year, nearly seven times what was actually paid. The study also shows that if the OCERS pension fund rate-of-return projection drops to 6.20% (the historical performance of U.S. equity investments, including dividends, between 1900 and 1999) the unfunded liability recalculates to $107.8 billion and the catch-up payment increases to $9.6 billion per year. At a rate-of-return projection of 4.81% (recommended by Moody's), the unfunded liability recalculates to $154.9 billion and the catch-up payment increases to $12.2 billion per year.
The conclusion of this study is that CalSTRS relies on optimistic long-term earnings projections and very aggressive unfunded liability repayment schedules in order to contribute the absolute minimum each year into their pension fund. As a result, the study estimates their officially recognized unfunded liability actually increased during 2012 by over $4.0 billion. If CalSTRS is required to even incrementally lower their rate-of-return projections - something that market conditions may eventually dictate - their funded ratio which was already only 67.02% will fall precipitously.

To read the entire study, click on "Are Annual Contributions Into Orange County’s Employee Pension Plan Adequate."

Lorne

In case anyone missed this-- "The officers who run the California Public Employees' Retirement System (CalPERS) are proposing to lower investment targets, a move that could lead to higher contributions for government workers across California.."

http://www.businessinsider.com/r-calpers-officers-propose-lower-investment-targets-wsj-2015-10

Joe

Thanks, Lorne. You beat me to it as I saw it yesterday in the WSJ as well:

The plan from the California Public Employees’ Retirement System, which will be considered by its board next week, would trigger a reduction in the fund’s current 7.5% return assumption following profitable years when it earns more than expected.

The target could drop by as much as a quarter of a percentage point during those years, according to a fund document viewed by The Wall Street Journal. A final decision on the proposal won’t be made until later this year, a fund spokesman said.

Reduced return targets often mean governments or workers are asked to pay more to account for future liabilities. Pension funds use a combination of investment income and contributions from employees, states and cities to fund retirement benefits.

The potential cuts are the latest move by the Sacramento-based retirement system, known by its abbreviation Calpers, to reduce risk and complexity in an investment portfolio worth about $294 billion. Over the past year, Calpers has said it would shed its $4 billion investment in hedge funds and would sever ties with roughly half the external managers handling its money.

dewey cheatam

Hey Joe, we all don't get the Wall Street Journal.

Try explaining this stuff to us in plain English for simple folks like me.
I have no idea what you wrote.

Gracias from one who just reads the San Mateo Daily Journal.
Gracias

Joe

OK, here goes: The folks who manage the money to pay retirement costs for civil servants (except teachers who are separate) have tried to get 7 1/2 percent per year returns in the past. Now they are planning to get less so the working civil servants and cities and towns will have to make up the difference.

Does that work?

Hating the unfunded liabiities

Lowering the target rates is a conservative move that will underestimate the returns moving forward thus requiring more to be contributed by cities and, assuming the projections are overly conservative, over funding the pensions. Calpers has been criticized in the past for overly rosy projections that exacerbated the unfunded liability problem.

Dewey-we put away money for employee retirement far in the future. We determine how much to put away based on their age and estimated returns on investment (money is sitting there earning interest for years). Calpers estimates this return based on historical returns and had been overly optimistic. Now they are lowering this estimate to below what they have earned. So the estimated amount way in the future is now lower and cities have to contribute more to make up. If returns turn out to be better, cities would have less to contribute in the future.

RandyC

Partially correct. Partially not. The "money is sitting there earning interest for years" implies a fixed income vehicle which is not the CalPERS preferred way to juice their returns. Taxpayers should remember they cut 25 basis points off the target four years ago so this is the second shoe to drop. The big concern is they might have four or five feet.

Lorne

Looks like we may be getting closer to a lower assumed return from Calpers (from the current 7.5%), and thus potentially higher contributions from employers/municipalities:

http://www.pionline.com/article/20161128/PRINT/311289986/calpers-balancing-risks-in-review-of-lower-return-target

Joe

3.5% is the new 7.5% ;-(

Joe

From the "Even a blind squirrel finds a nut once in awhile" department, comes this Mercury News editorial:

Directors of the California Public Employees’ Retirement System voted to lower their investment forecast, a move in the right direction that means employers and in many cases employees will contribute more to shore up the ailing pension plan.

But the changes will be phased in at a glacial rate over the next eight years, and CalPERS’ own numbers show they’re not nearly enough.

By its actions Wednesday, CalPERS acknowledged it has only 63.5 percent of the assets it should. That places the system’s shortfall at about $170 billion, which averages more than $13,000 of debt for each California household.

It’s actually worse than that. And the longer the union-dominated CalPERS board fails to comprehensively address its funding problems, the larger that debt will likely grow. Unlike upfront contributions that are shared between government employers and workers, the shortfall lands solely on taxpayers.

More than what? Yes, it’s closer to a reasonable target than the past policy, which was completely divorced from reality, but it doesn’t come close to actually putting CalPERS on a sustainable path.

To understand how far short this move falls, consider that CalPERS announced Wednesday that it hadn’t hit a 7 percent average over the last 20 years and, going forward, it estimates that there’s only roughly a 1-in-4 chance that it will meet that target.

And CalPERS’ consultant warns that the pension system should anticipate only an average 6.2 percent in each of the next 10 years.

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