The Burlingame Voice

Calpers: Losses pile up and cities pay up

Watching the performance of the state's pension manager, CalPers, isn't quite like watching paint dry, but close.  It is the largest pension fund in the country--and it has to be given how poorly the state is run up in Sacramento.  While it may seem arcane and far away, here is the WSJ's take on why we should watch:

The California Public Employees’ Retirement System returned minus 6.1% for the year ended June 30, the fund said Wednesday.   A multiyear downturn could be costly for states, towns and school systems around the country and by extension their residents, leading them to squeeze money from workers, taxpayers or other government services.  Calpers’ stock portfolio returned minus 13.1%, while bonds returned minus 14.5%, the pension fund said.  (Ed:  Private equity made up some of the loss but relying on it is tricky as valuations are being written down left and right.)

The lackluster return will mean California towns, counties and school districts will face higher annual pension contributions during their 2024 or 2025 fiscal year.  U.S. state and local pension funds have accumulated hundreds of billions of dollars since the last financial crisis in 2008, thanks to blockbuster returns from an 11-year bull market. Last year, huge gains in public and private equity markets drove median returns to nearly 27%, a 30-year record.

Some states also topped up their pension coffers with tax revenues from the stimulus-fueled Covid-19 recovery.  But all of those gains have been outpaced by the growth in the cost of the benefits that state and local governments have promised.

We shall see what the impact on the city budget is going forward.  We have been holding on pretty well -- you can look here for the last update from March.  I'll get around to addressing the move to raise local business tax rates in a bit, but Calpers' performance this year highlights the variability and risk associated with being tied so closely to the state.

Minimum Wage: San Mateo backpedals hard

There is plenty of herd mentality in city councils up and down the Peninsula as the hue and cry to "Do Something" drowns out common sense.  The herd mentality can trample on all sorts of issues.  Think back about two years when this happened

On September 21, 2020, the Burlingame City Council adopted an ordinance to establish a minimum wage of $15.00 per hour for all Burlingame businesses beginning January 1, 2021.  On January 1, 2022 and every year thereafter, the minimum wage will be adjusted based on Consumer Price Index (CPI) percentage increases. A negative CPI will not lower the minimum wage. There are no exceptions for tipped employees.

That has led B'game to a planned January 1, 2023 minimum wage of $15.60+ 2022 CPI.  We won't know the final CPI kicker for another 6 months, but figure it will be 7+%.  Now San Mateo is preemptively backpedaling hard on their formula as noted in the DJ

To help small businesses coming out of the pandemic struggling with rising costs, San Mateo’s City Council will cap its current minimum wage amid rising inflation.  At its June 20 meeting, a council majority recommended setting a Consumer Price Index cap at 3.5% for its minimum wage.  The current minimum wage is $16.20 an hour. The council cited the need to help struggling businesses stay afloat, guard against inflation and provide long-term budget stability.  Cities use CPI because it is predictable for employers and workers and keeps pace with the rising cost of living.

Someone should tell Janet Yellen about the CPI's predictability.  Here is the herd mentality on full display in San Mateo

Mayor Rick Bonilla disagreed with the council majority on a 3.5% cap, calling it too low and suggesting higher rates of around 5%. Bonilla noted minimum wage workers are most affected by a CPI cap and have the most challenging time.  “The businesses will take care of themselves. The workers don’t have any other way. There’s nobody else to help them.” Bonilla said. “It’s us. If we don’t, nobody else will.”

Translation:  I get to pick the winners and losers in my city and consequences be damned.  San Mateo's website does not mention if Bonilla has ever signed the front of a paycheck.

Here's the math on a 7% jump in B'game.  $16.70/hr - no ifs, ands, or buts.  Happy Independence Day.

Friends With Benefits - Friends in High Places

We have not had a Friends With Benefits post in a long time, but this one just came barreling out of the blue like a runaway freight train.  If you are going to have friends in high places, I cannot think of a higher perch than the White House.  The SF Chronicle has the story:

California is being denied $12 billion in federal transit funds. Here's how it'll hurt the Bay Area

A decision by the Biden administration to withhold $12 billion in federal transit funds from California could immediately affect services provided by the Bay Area’s 27 transit operators as they attempt to recover deep financial losses sustained during the pandemic, local officials say.

The denial of the transit funding is the latest twist in a long dispute over whether California’s 2013 Public Employees’ Pension Reform Act, which capped pension benefits for new employees, infringes on the collective bargaining rights of public transit workers in the eyes of the federal government.   In an Oct. 28 decision, the Labor Department reversed a determination it made in 2019 and essentially deemed California’s law improper because the pension rules changes were implemented via legislation and not bargained with public unions.

Of the federal transit funds California stands to lose, about $9.5 billion would come from the money earmarked for the state in the infrastructure bill approved by Congress last week. Also at stake in the decision is $2.5 billion in federal COVID relief funds allocated to sustain transit services during the pandemic, which had not yet gained Labor Department certification at the time of the ruling.  It’s the loss of the latter bucket of money that could be felt most immediately by Bay Area transit agencies and their riders.

The article goes on to describe the potential impact on BART, the transBay corridor project, Muni, and the Golden Gate Bridge district.  It doesn't mention Caltrain or the High-speed rail project by name, but you have to believe they are in the mix--or out of the mix in this case as the Feds throw their weight around.

I happened to get an cursory update on the Caltrain electrification project a week ago:  92 foundations for poles are complete, 67 poles have been installed and all 10 power transformers are in place.  86 new cars have been shipped from Switzerland, 73 are in Salt Lake City for final assembly and 1 is in test in Colorado.  There was no word on whether further Fed funds will be held up over the pension reform fight since this just popped into the public view.

Municipal Charity is Limited

The City-funded support for local businesses, residents and charities is coming into focus as the DJ reports today

The Burlingame City Council agreed to build a $500,000 grant program for local businesses, while setting aside $250,000 to purchase gift cards for struggling families and donating another $250,000 to service providers.  The program is to be administered by the San Mateo County Economic Development Association, or SAMCEDA, which is also operating a similar program through the county.

Noting the city’s contribution capacity is limited, Councilman Michael Brownrigg said the Burlingame Back in Business program would likely serve about 50 companies fitting a limited criteria with grants capped at about $10,000.

Officials also agreed to purchase about 1,000 gift cards from Visa or Mastercard worth $250 which would be distributed to families in Burlingame, with hopes the cards would be redeemed at local businesses.  Councilmembers had first discussed attempting to restrict spending to a specific zip code, but ultimately determined allowing flexibility for families who need assistance would be more valuable.  Those eligible for the program will be contacted by the city’s utility provider, which maintains a list of those who qualify for financial aid.

We are in the fourth quarter of the city's fiscal year which ends on June 30th.  Using last year's financial report as a rosy baseline,  page 34 shows the $84.5M of revenue had major components of property taxes (25.7%), sales and use taxes (21.1%) and the biggie that is also the most at risk, hotel tax (34.8%).  When Michael Brownrigg says that the city's contribution capacity is "limited", he ain't kidding.  We could easily see the hotel tax get cut in half for the year--which would be a $15M hit to the budget.

Even at the end of June when the next report arrives, we won't really see the complete picture since the pain arrived at the end of the third quarter.  Another DJ piece on the San Mateo budget shortfall lays out the timing issue

“There’s a challenge we have on sales tax in that the data we get is essentially six months in arrears. The most recent sales tax data we have is for the third quarter of 2019,” said Finance Director Richard Lee. “We won’t see the true impact of COVID-19 for another six months. … It’s a similar concept for [hotel] tax.”

San Mateo's predicting a $7M "structural imbalance" next year which seems small to me.  It's total projected budget is $251M but only 14.3% in sales and hotel tax, so we shall see.

Friends with Benefits: Calpers Hedged or....Not?

Four months ago, we looked at the new Calpers chief investment officer Ben Meng's early moves to shore up the municipal and state workers' pension fund here.  We watch this because the City sends a sizeable chunk of pension money to Calpers to invest on its behalf.  We already know the coming year or two is going to be ugly for city finances.  The hotel tax ("TOT") has evaporated and it's certain the various sources of sales tax are going to be down substantially.  So sending cash off to Calpers in Sacramento has to be funded from somewhere and how Calpers manages it is important to all of us.  A piece in today's Wall Street Journal highlights Meng's call to exit several "tail risk" funds--meaning they hedge against rare events (the "long tail" in a probability distribution).

The California Public Employees’ Retirement System was well prepared to cash in on a stock market selloff. Until a few months ago.  After suffering big losses during the financial crisis, the $371 billion pension fund hedged against another dramatic downturn by investing in three funds designed to produce big payoffs when markets fall steeply. But the pension, also known as Calpers, decided to sell out of these hedges last year, giving up what could have been a payday of more than $1 billion.

Some members of the Calpers board were caught by surprise.  “He took away a risk strategy that the board had approved without telling the board,” Ms. Brown said in an interview.  Calpers began investing in both funds in August 2017 and developed a third internally managed fund with a similar strategy.  Calpers decided to unwind the positions in October, and by March it only had a residual stake left in one fund-- LongTail Alpha LLC , according to documents and people familiar with the changes.

Mr. Meng, who took over as the pension’s chief investment officer in January 2019, said he has no regrets about exiting Universa and the other funds. “Knowing what we know, we would make the exact same decision,” he said in an interview.

We shall see how the board and Meng address this.  Meng may have put in a viable substitute strategy--it's a story that is just starting, but one that highlights how expensive this lockdown will be for everyone regardless of whether they are working now or not and regardless of whether they are stock market investors or not.  Personally, I'm glad I live in a fairly well-run (financially speaking) city and that over the years we have chosen to limit our interdependence on other cities.

School Funding: Newsom's Next Budget

There is a group called Govern For California (GFC) that keeps an eagle eye on where state monies go--and suffice it to say they often point out poor trade-offs and poor policies regarding expenditures.  I like the group a lot and rely on their assessments of various buckets of spending.  School funding is going to be a hot topic in B'game over the next two months as Measure O is on the ballot hoping to raise $97 million in bond money for school facilities and teacher housing.  Before we get into that, here is GFC's latest comments on the Gavinor's 2020-2021 budget proposal

K-12. At $84 billion, Proposition 98 spending is nearly 70 percent greater than ten years ago and total K-12 spending will exceed $100 billion this year on nearly six million students but student performance has not materially improved and many school districts are in fiscal distress despite record revenues. The causes predate Governor Newsom's tenure but still we are disappointed the governor proposes only to modify bureaucratic Local Control and Accountability Plan (LCAP) forms and to boost training dollars rather than to enact bold reforms that would enable school districts to manage workforces and budgets for the benefit of students.

90 percent of California's public schools are operated by public employees under an Education Code written by elected officials who have been heavily influenced by public employee unions since 1975. When combined with the centralization of school funding in Sacramento following the passages of Proposition 13 in 1978 and Proposition 98 in 1988, one result has been central control that runs schools chiefly for the benefit of those unions instead of students.

Also, the Governor's Budget doesn't address easily fixable fiscal distress in school districts such as Sacramento City where, despite record revenues, young teachers are currently being laid off in part because -- believe it or not -- that district is unnecessarily diverting money from classrooms to subsidize out-of-pocket health costs for retired employees, including retirees covered by Medicare or eligible for Obamacare or new state subsidies for middle-class Californians enacted last year.

The rough numbers of $100 billion divided by 6 million means spending is about $16,600 per student.  There are multiple sources for state-by-state spending and they vary quite a bit from source to source, so I wouldn't take any of them to the bank for comparison purposes, but they mostly show California in the middle of the pack.  The last Superintendent election didn't go as I had hoped so I'm not sure there will be any progress on most of these allocation issues any time soon.  In the meantime, we can ponder the best way forward for our excellent Burlingame schools, especially with all of the residential construction going on.

Friends With Benefits: New CalPERS Guy Gets Tough

We haven't addressed much in our "Friends With Benefits" category since this post in August of 2017 that noted an 11.2% return that year and a 68% funded ratio for benefits.  During the council rotation Monday night, Mike Brownrigg commented that some of the unheralded accomplishments of the council this year was additional funding for pension benefits.  Compared to many cities we are in good shape--emphasis on compared to many other California cities.  This matters because the added funds come out of the funds available for everything else in town.  Last week, the WSJ had a piece on the new investment head at CalPERS that was revealing and encouraging

It didn’t take Yu Ben Meng long to find problems at the nation’s largest pension fund.  Six months after starting as investment chief of the California Public Employees’ Retirement System, he told board members at a Santa Rosa, Calif., gathering in July that some older investments might be valued too richly, said people familiar with the matter. By fall, the fund had shaved the value of a real-estate investment trust and was looking more closely at a five-plus-year-old bet on a solar developer, other people said.

Now as his first year comes to a close, Calpers has cut ties with a longstanding manager on a hometown project, jettisoned under-performing stock pickers, and slowed work on a multi-billion-dollar private-equity experiment.  Calpers’ has struggled to consistently meet its 7% yearly target at a time of high retirement costs and ultra-low interest rates. The pension fund has on hand only about 70% of the assets it will need to fund future retirement checks.  He told board members in January that the world today has many bigger, more nimble asset managers not based in Sacramento.

The fund also jettisoned four of five firms in a program that sought to attract women and minority managers that his predecessor helped grow.  Cuts to such a program “could be a hot potato and have political ramifications,“ said Co-Chairman Howard Marks of Oaktree Capital Management. ”But if your job is to achieve investment performance, you can’t be confused about what’s No. 1.”

Staffers are looking more closely at a developer of solar energy assets that some staffers at the fund believe is worth half or less of what it is valued at, a person familiar with the matter said.

So he won't overtake Judge George Miriam as person-of-the-year, but I'm thinking he makes an excellent runner-up.  Now if Yu can just keep the Legislature and Newsom from burning through the $21.5 billion budget surplus on pet projects and be as disciplined as B'game has been, we might get somewhere.

Marshall Tuck for School Supe

Four years ago I highlighted Marshall Tuck's run for California Superintendent of Public Instruction here.  He came close, but did not win.  Now Tuck is back to try again.  I met him last night at a fundraiser which gave me a chance to hear about his platform.  There are at least two good reasons to vote for a candidate.  You can support their platform.  Or you may be forced to vote against a candidate you don't like--the "lesser of two evils" approach.  I think they both point to a vote for Tuck.

Over the course of an hour of Q&A, Tuck demonstrated a firm grasp of a wide variety of issues. He understands the the role of charter schools and how workable approaches can be shared with public school districts.  He demonstrated that understanding with examples that are precluded by the ponderous California Education Code, like work-study options, for example.  He showed a grasp of the financials including the pension explosion (no pun intended, just $80 billion unfunded) and pointed to some additional funding options (e.g. the marijuana taxes and the new Internet sales taxes).  And he has feet on the ground experience in the LA public schools.  You get the drift and can read more here.

Getting him to address the second issue of his opponent's record took a bit of prodding, but Tuck is well aware of Thurmond's shortcomings as enumerated by the SF Chronicle here.  You should click through and read the litany of failures before you vote.

I wasn't the only B'gamer attending last night.  There was a bit of a hometown feel since Tuck grew up in B'game and later H'borough and he went to OLA and Crocker. I met our own B'game Elementary School District superintendent, Maggie MacIsaac, at the event and she was very clear on her support of Marshall's platform.  That is actually a third reason to vote for someone-- when a trusted advisor recommends it.  Here is Maggie and Marshall and the Education Code tome that could probably use a good trimming down.

Political Malpractice

Today every Bay Area paper led with Gov. Brown's signing of not one, not seven, but 15 so-called "affordable housing" bills yesterday.  Let's face it.  We are governed by idiots.  The state is broke.  Anyone who can actually read a balance sheet and understands the basics of pension funding knows this.  Any money for "affordable housing" comes from somewhere else in the budget.  The "somewhere else in the budget" might easily be school funding--let's add huge numbers of new kids and not fully fund the schools.  Couple that with the fact that housing 10's or 100's of thousands of new Californians without one iota of new water storage capacity is downright criminal.  Like I said, "idiots".

We were also treated to the news that

The first stage of California’s costly high-speed rail project may be even more expensive — $3.6 billion more — than previously thought, according to a report prepared by the Federal Railroad Administration and reported by the Los Angeles Times.  The analysis warned that the Central Valley track, 119 miles from Merced to Shafter, could be 50 percent over budget — and seven years behind schedule, according to the Times. The original budget was $6.4 billion, but costs could reach $10 billion, the Times reported.

You have to laugh at the verb:  "maybe be more expensive".  Dude, it will be more expensive--a lot more expensive.  Remember, they are building in the Central Valley now.  Forget Merced, wait til they get to an urban area.

Addition:  My new favorite term:  "functional insolvency".  See the comments.

Friends with Benefits: CalPERS gets 11.2%

Anyone paying attention knows that public pension costs are climbing, investment returns have been overestimated and the funding in place is inadequate to cover the future costs.  This week, courtesy of the Wall Street Journal, we got some up-to-date details

The California Public Employees’ Retirement System, the biggest in the U.S., earned 11.2% in fiscal 2017—largely because of stocks and private equity. But the fund, known by its acronym Calpers, noted that it has just 68% of the assets it needs to pay for future benefits. That is up from 65% in 2016.

“We welcome this fiscal year’s strong returns, but we also remain about 68 percent funded and vulnerable to a downturn in stock markets,” Calpers Chief Executive Marcie Frost said in a statement. The fund has about $332 billion in assets for 1.8 million workers and retirees.

The California State Teachers’ Retirement System, which sits roughly one mile from Calpers in Sacramento, Calif., reported a fiscal 2017 return of 13.4%. The fund’s chief investment officer, Christopher Ailman, touted the number on Twitter as being higher than Calpers: “BOOYAH!!”

This ties to B'game since CalPERS does the investing for city pensions and benefits.  Back on July 24th, the Daily Post noted that the pension shortfall for our burg "has swelled to $51.9 million, up 5.3% from two years ago".  The city has set aside $3.7 million this fiscal year to use in whatever strategy it chooses to close the widening gap:  extra payments earlier--either recurring or ad hoc--or tapping the general fund reserves or borrowing.  More to follow as the Council decides.