Stockton bankruptcy: the case for CalPERS cuts

(UPDATE — A federal judge today ruled that Stockton is eligible for bankruptcy, leaving the question of whether CalPERS debt should be cut to negotiations on a debt-reduction plan to exit bankruptcy.

U.S. Bankruptcy Judge Christopher Klein was sharply critical of bond insurers for walking away from pre-bankruptcy negotiations when Stockton refused to discuss cutting CalPERS debt.

The bond insurers argued that Stockton had failed to negotiate with creditors in “good faith“ as required by law. The judge said bond insurers failed to negotiate in good faith when they “voted with their feet” to “stonewall” negotiations.)

If a federal judge rules today that Stockton is eligible for bankruptcy, bond insurers facing big losses may wonder if they should have taken a harder look at how the city’s CalPERS debt could be cut.

The insurers, including the backer of a $125 million pension bond, would have to pay bondholders millions under a city proposal to cut general fund bond payments and continue making full payments to its largest creditor, CalPERS.

Assured Guaranty and National Public Finance Guarantee argued during a three-day trial last week that Stockton failed to meet the requirement for “good faith” negotiations with creditors before filing for bankruptcy last June, temporarily staying debt collection.

The city argued that pensions are needed to remain competitive in the job marketplace and retain police, that labor has been hit by cuts in pay and retiree health car and that not paying CalPERS would trigger termination and a $1 billion payment.

Ironically, said a city attorney, the insurers provided no legal basis under California law for cutting pensions in pre-bankruptcy negotiations, but also oppose eligibility for the bankruptcy that might allow pension cuts.

“What good would dismissal of the Chapter 9 (bankruptcy) case do for them?” said Marc Levinson, an attorney for Stockton.

The financially “broke” city would still need debt relief, Levinson said, and file for bankruptcy again — this time without the 90-day mediation with creditors prior to filing bankruptcy under a new state law, using the emergency “off ramp” instead.

He said the bond insurers used extensive sworn testimony and document requests in a nine-month delay, seeking “leverage” with the “perceived threat” of heavy city spending on a “plan of adjustment” to cut debt after the “inevitable” ruling of eligibility.

The bond insurers focused on the city failure to seek debt relief from CalPERS or explore alternatives, such as withdrawing city assets from the pension fund without triggering a $1 billion termination penalty.

“The city never tried,” said Matthew Walsh, an attorney for National Public Finance Guarantee. The insurers argued that they were targeted for “disproportionate” cuts before Stockton began the 90-day mediation.

The city did not ask the California Public Employees Retirement System for a “hardship” rate reduction until Dec. 4, after the insurers had raised the issue of lowering pension costs by extending the debt payment period.

CalPERS said Stockton did not meet the criteria. In a followup telephone call an official said the city was told, among other things, that it did not qualify for an exception due to potential inability to “provide continuation of funding at termination.”

A hardship rate would save an estimated $4.5 million over three years, far short of closing a $26 million general fund budget gap. Stockton considered a hardship request early but decided to wait until after filing for bankruptcy, said Bob Deis, the city manager.

CalPERS also rejected a city request made on June 7 to lower its unusually generous annual inflation adjustment for most pensions (up to 5 percent if actual inflation goes that that high) to the 2 percent limit for police pensions.

Stockton said the 5 percent limit is not an additional cost for the city unless inflation is higher than the CalPERS long-term estimate, 3 percent. But 5 percent is above market, said the city, and an “uncertainty“ for budget forecasting.

Since the city chose to make the optional 5 percent limit an amendment to its contract with CalPERS, the big pension fund told Stockton, state law only allows the cost-of-living adjustment to be reduced if the contract is terminated.

The CalPERS rejection letter also mentioned the state law that Stockton officials said prevents the negotiation of cuts in CalPERS debt outside of bankruptcy.

“In addition, a modification of the benefits (which includes the COLA) promised by the city to its current and retired employees is not permitted under the vested rights doctrine in California without a comparable new advantage to these employees,” said the CalPERS rejection letter.

A bond insurer attorney briefly mentioned a way that the CalPERS debt might be cut, at least in theory, without cutting pension benefits protected as vested rights under state contract law under a series of court rulings.

A Stockton attorney had said CalPERS is technically not a creditor, but only a trustee of funds held for retirees. He said there is no big pool of city funds CalPERS could dip into to “backfill” a cut in Stockton’s pension debt.

U.S. Bankruptcy Judge Christopher Klein asked if that meant every $1 taken from CalPERS would be a $1 taken from actual pensions. “Exactly right,” said Norman Hile, the Stockton attorney.

The bond insurer attorney, Walsh, disagreed. He said CalPERS debt is based on actuarial projections “years and years” into the future, and with a small change “millions of dollars can be freed up.”

If the bond insurers, with deep financial pockets and talent from two global law firms, had pursued this line of inquiry they might have taken revealing testimony from CalPERS officials and outside actuaries about how pension debt can be manipulated.

It’s not a fixed amount like bonds and mortgages. Instead, pension debt varies with earnings forecasts, the actuarial or market value of assets, amortization periods for paying off debt, pay and inflation forecasts, demographic assumptions and other factors.

Would the bond insurers have discovered an acceptable actuarial change that would lower Stockton pension costs? Would the inquiry help the judge make a decision about accepting a “plan of adjustment” if Stockton is eligible for bankruptcy?

Another issue not explored in the trial is whether upcoming CalPERS decisions in the San Bernardino bankruptcy might apply to Stockton. After filing in August, San Bernardino stopped payments to CalPERS and owed about $13 million by Dec. 31.

How will CalPERS handle the San Bernardino non-payment — refinance the debt over a much longer period of time, go along with unprecedented pension cuts made through bankruptcy, terminate the plan and put a lien on city assets?

CalPERS opposes San Bernardino’s eligibility for bankruptcy. So CalPERS presumably wants to deal with the San Bernardino debt outside of bankruptcy and might have been asked about its plans during the Stockton trial.

The CalPERS board was told last November state law does allow pension cuts or aid from other funds when plans are terminated and lack the assets needed to cover liabilities.

“The law prescribes should that be the case the members’ benefits will be reduced until such a point basically as it is fully funded,” said Alan Milligan, the chief actuary.

“There is an out. The law does permit the board to bring them into the terminated agency pool without reduction in benefits if certain criteria are met,” Milligan said. “The two main criteria are that all reasonable steps have been taken to collect the funds and that doing so would not adversely impact the funding status of the terminated agency pool.”

Are these measures available in bankruptcy? It’s another issue not explored in the Stockton trial.

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at https://calpensions.com/ Posted 1 Apr 13

56 Responses to “Stockton bankruptcy: the case for CalPERS cuts”

  1. Tough Love Says:

    All of the laws and regulations that protect the upwards-only ratcheting of pensions and the vested-rights lock-in requiring the replacement anything taken away with something of equal value should be declared null and void … because those granting (or voting for) for these protections violated their obligation to act in the best interests of Taxpayers (not the employees), had a conflict of interest by they or their family benefiting from adding those protections, or colluded with the Public Sector Unions (in approving such protections) in exchange for campaign contributions and election support.,

  2. SeeSaw Says:

    There is no such thing as debt relief from CalPERS. CalPERS’s fiduciary duty is to the members who are all taxpayers. Stockton management (according to news articles I have read) qualified its employees and their families for retirement health coverage, if they had as little as six months on the job! That egregious, excessive benefit was poor management on the part of Stockton No reasonable public entity would give out that kind of coverage in such a short time. My former entity requires 25 years full-time work to qualify for a medical stipend, after retirement, and family members are not included. If Stockton is not allowed to file for bankruptcy it just has to
    limp along with what it has and keep working to pay its
    debts.

  3. Mike Harmanos Says:

    April Fools? No? Damn.

    I appreciate the list of variables that go into pension debt. Would you please define “other factors?” Better to explore every available avenue now than later.

    I am cautiously pessimistic all California cities will get out of this mess.

  4. Tough Love Says:

    The ultimate tax-sucking machine …. a Public Sector worker.

  5. Public Worker Says:

    Yup, I hate it when those nasty laws and regulations prevail . . .

  6. westcoastpatriette Says:

    Bless those Calpers hearts! Thank Heaven I am only slave labor here in Riverside County.

  7. Tough Love Says:

    While it wasn’t surprising that the Bankruptcy judge allowed Stockton’s bankruptcy to move forward, his complete SILENCE as to (apparently) supporting the screwing of the bondholders/Insurers w/o a peep as to reducing the grossly excessive pensions (& benefits) promised Stockton’s workers ….. is deafening and incomprehensible.

  8. Public Worker Says:

    Yup, those excessive pensions of $2,332 a month are certainly deafening and incomprehensible!

  9. Captain Says:

    In my county the average pension for only 30 years service is 79K + lifetime medical at 50, or 55, dpending on the bargaining unit. In my city, which reduced the retirement age for general employees in 1997, from 60 to 55, and reduced retirement age for public safety from 55 to 50, the numbers are surely much higher for a 30 year “career” pension payout. Then in 2003 they increased the pension payouts and made them retroactive (2.7@55 for general employees and management, and 3@50 for Public safety).

    And it’s not just management, Public Safety leads the list of six figure pensions. There won’t be one single Public Safety employee that will retire from this point forward with anything less than a six figure pension given even 25 years of service. And, of course, they get lifetime medical on top of it all, and even for an additional five years based on lowering the retirement age, which also increased the unfunded pension liability even before the retroactive pension benefits.

    I guess if there is a silver lining in the Judge Kliens bankruptcy ruling from today, and it’s probably three-fold, it is this:

    – hopefully the legal battle ends up in the US Supreme Court

    – the CalPERS Crooks continue to be scrutinized more than ever before

    – the cost of bond debt rises to the point we’re forced to quit borrowing, the train to nowhere is derailed, and the Bond market quits selling Pension Obligation Bonds to dead beat cities like Stockton that take the money – give it to CalPERS who loses the money- give employees raises which increases the unfunded pension liability, and then stiff the bond holders because Stockton City Management and employees want their pensions and don’t want a haircut – while secretely planning to sell taxpayers on a tax increase to fund public safety services – even though the only real cut to public safety budgets was in service and not the average employee compensation.

    CalPERS is Crooked!

  10. Tough Love Says:

    Public Worker,

    Regardless of the $ level of your pension, the TYPICAL pension of the Private Sector worker with the SAME pay, the SAME years of service, and the SAME age at retirement is 25-50% of the Public Sector worker’s pension.

    And …. to head off the bullsh** …. ALL of you pension contributions (including all of the investment income on your contributions) would accumulate to a sum at retirement sufficient to buy only 10-20% of your pension . The Taxpayers are responsible for the 80-90% balance.

    Yup. Change is coming … the MATH says so.

  11. skippingdog Says:

    Hi Tough Love! Another loss for you anti-government people today, so you must be feeling a little dejected this evening.

    Judge Klein had ample opportunity to address any misinformation or malfeasance by Stockton or CalPERS in his lengthy decision, but instead he focused entirely on the bad faith actions of the creditors in this matter. He also created the record that will be used in all subsequent proceedings, so his findings will form the factual basis of any appellate review as well.

    It’s very clear that Chapter 9 doesn’t permit a bankruptcy judge to order a workout plan that violates any of the laws or regulations pertaining to the municipality seeking relief. To find otherwise would not only violate the 10th Amendment, which you anti-federalists like to cite so much, but would also allow bankruptcy judges to order things like the sale of public property or unilateral increases in taxes to pay off municipal obligations, regardless of the laws restricting such actions in each state. Do you really want that level of federal intervention in state and local governance and, particularly, finance?

  12. Public Worker Says:

    It seems to me that it would be more prudent and advantageous to all workers to raise the level of non-government workers pensions than to lower the level of government pensions, which are, as I said, on average only 2,332 a month. The “elephant” in the room is the issue of whether this debate is about jealousy, or sustainability. If you are jealous, I can respect that; however the facts remain that CalPERS is a prudent pension system and fully sustainable.

  13. Captain Says:

    “It’s very clear that Chapter 9 doesn’t permit a bankruptcy judge to order a workout plan that violates any of the laws or regulations pertaining to the municipality seeking relief.”

    – I think you’re jumping to a conclusion prematurely. I don’t believe this issue is settled.

    “To find otherwise would not only violate the 10th Amendment, which you anti-federalists like to cite so much, but would also allow bankruptcy judges to order things like the sale of public property or unilateral increases in taxes to pay off municipal obligations, regardless of the laws restricting such actions in each state. Do you really want that level of federal intervention in state and local governance and, particularly, finance?”

    – I can’t wait to see CalPERS, a Judge, and the Unions do just that. Maybe what you describe is what it will take for the populous to understand how they’re being fleeced. As TL has said, the math doesn’t work. Today’s ruling doesn’t change the math.

    BTW, salary isn’t a vested right. As Jerry brown said during his 12 pension reform plan, when asked the question of what happens if the unions don’t agree to all the reforms: ‘then you can cut their pay. Pay isn’t a vested right.’.

  14. Tough Love Says:

    Skippy, Don’t be silly. Few thought the judge would not let Stockton enter bankruptcy. A Sacbee article accurately described the REAL Court challenge yet to come (quoting):

    “Legal observers expect the creditors to aggressively challenge the repayment plan presented by Stockton in the next phase of the process. “That’s where it will be precedent-setting,” said Karol Denniston, a municipal restructuring expert who monitored the trial. “Does bankruptcy code apply to CalPERS or not? If bankruptcy code trumps state law, then that’s huge and it has huge implications in terms of what happens next for other municipalities across California.”

    If the Courts rule that Pensions CAN be reduced in Bankrupt, I predict a flood of such filings (and pension haircuts) in short order.

    And if it goes the other way, the MATH and REALITY will cause the slow painful death of many Plans anyway.

  15. Tough Love Says:

    Public Sector worker …. I suggest an Basic Economics course.

  16. skippingdog Says:

    Long settled law, Captain. You could review code yourself, but I’ve provided a primer for you to save time. Take note of the 10th Amendment challenges and restrictions.

    http://www.afgi.org/resources/Bankruptcy_Primer.pdf

  17. skippingdog Says:

    Keep hoping, TL. What are you now? 0 for 10 or so?

  18. Public Worker Says:

    Tough Love,

    Stick to facts and avoid personal comments and your positions may be more persuasive and credible.

  19. Tough Love Says:

    Public Sector worker, If YOU like “facts”, why do you quote irrelevant ones like the “average” pension which is meaningless because it includes:
    (1) those who retire long ago on smaller salaries,
    (2) the small pensions of short career workers,
    (3) the small pensions of part timers,
    (4) the smaller 5o% survivorship pensions of spouses of deceased retirees

    Isn’t the more relevant figure the average pension ONLY from full- career, full-time, recent (say 2012) retirees … where it can readily be compared to the similar pensions of Private sector workers ?

    But you really don’t want to show THAT now do you …. because it would prove my point, that Public Sector pensions are always multiples greater than those of comparable private Sector workers….. AND they start 10-15 years earlier …. AND they ROUTINELY get COLA increases while Private Sector pensions almost never do.

    What makes you think that Public Sector workers, while earning no less in cash pay, are deserving of ANY greater pensions (or benefits) let alone ones that are multiples greater in value … and 80-90% on the Taxpayers’ dime ?

  20. Tough Love Says:

    Skippy, The end-game of the Public Sector worker piggishness is massive civil unrest and possibly the destruction of this country as we know it.

    You seem bright enough. …. you should see this as well.

  21. skippingdog Says:

    I’m always tickled when you invoke the specter of “massive civil unrest” or “the destruction of this country as we know it” to support your legally and morally untenable positions on public pension obligations. The outcomes you predict would do nothing more than create exponential growth in the public safety services, as most people would be far more concerned with general security amid such lawlessness than they would be with some marginal increase in their overall tax rate.

    Major reforms of public pension programs have already begun to be implemented. The economy is slowly gaining strength and growing – substantially faster, by the way, than other world economies – and the baby boom generation causing the expansion of costs for pensions and health related services will soon begin its natural decline and exit from this vale of tears. It’s also wise to remember that the departure of the baby boomers will create the largest transfer of wealth in our history, so the unhappy heirs of today will reap the benefits of their parents in the approaching future.

    The U.S. remains a strong nation with vast resources. We may well need to scale back some of our military expenditures and modify our cult-like worship of wealth and warfare to regain our balance, but we will undoubtedly do so. Don’t be such a pessimist.

  22. Captain Says:

    “skippingdog Says: Long settled law, Captain. You could review code yourself, but I’ve provided a primer for you to save time. Take note of the 10th Amendment challenges and restrictions.”

    You’ve been spending too much time reading “CalPERS Responds”. Only time will tell but My belief is that CalPERS, the corrupt organization that it has become, has found itself fighting on multiple fronts and will eventually succumb to the reality of mathematics or a true court challenge. I’ve never believed, not for one second, that CalPERS possesses the legal protections they claim, and I certainly do NOT believe their “Old Wives Tale” claims of case law, which is flimsy at best.

    Unfortunately for taxpayers we are footing the bill for CalPERS investment failures, CalPERS legal battles against the very taxpayers that provide the money for calPERS to operate, CalPERS corrupt policies, and the Fraud and Embezzlement of tax dollars at the hands of the most senior members of the CalPERS administration. Of the course the Board of Administration is as corrupt as any Chicago pension board but that goes without saying.

    CalPERS is Crooked. I wonder how many neighborhood party’s CalPERS employees are no longer invited to?

  23. Tough Love Says:

    Skippy, So you call (rarely more than) pension changes for NEW workers “major” ? Really ?

    And quoting ….”and the baby boom generation causing the expansion of costs for pensions and health related services will soon begin its natural decline”

    Considering that the baby-boomers were born from 1947-1964 with a midpoint of 1954-55, the midpoint wont even BEGIN to collect Full SS benefits (at age 66) for another 7 years and then live 15-20 more years. Looks like you’re about 25-30 years off in that “decline” you said would soon begin.

    Ad if you’re looking for things to “cut back” on, I suggest telling your still “active” associates that follow you that they’re going to have to accept a smaller pension for future service (a LOT smaller) …. or they’ll take you and I and themselves all down together.

  24. Captain Says:

    From the previous Calpension article: “The total CalPERS fund had 101 percent of the projected assets needed to cover future pensions in 2007. The funding level dropped to 60.8 percent in 2009 and in the last valuation (as of June 30, 2011) was back up to 73.6 percent.”

    That 73.6% funder ratio, as of June 30, 2011, is now less than 68% based on CalPERS dismal FY 2011-12 returns of 0.1% (ZERO POINT ONE PERCENT), which also put CalPERS in the BOTTOM ONE PERCENT based on pension fund performance of their peer group.

    CalPERS – The Humpty-Dumpty of pension funds – knows they are about to take a great fall. Instead of working to solve the problem to the benefit of all, Humpty-Dumpty- CalPERS is proposing what amounts to a pension payroll tax increase of 50%, on top of the 100% pension surcharge we’re already paying on the original payroll tax, to cover pensions costs incurred from increased pension benefits they said wouldn’t cost anything.

  25. skippingdog Says:

    Have it your way, Captain. A little basic research on our state constitution, CalPERS, and Chapter 9 of the bankruptcy code might highlight the flaws in your thinking process, but only if you care to find out what the truth really might be.

  26. Captain Says:

    Wake up skippy, CalPERS is a Cancer.

  27. spension Says:

    Well paid attorneys arguing representing ultra rich clients consisting of investment banks and various other assorted billionaires vs. well paid attorneys representing people who can retire on taxpayer funds with $100K/year and full health insurance for life.

    Kind of like watching a wrestling match between Lizzie Borden and Charles Manson.

    Private sector benefits? Here are 21 retirement packages in the private sector worth >$100 million. And you can bet a whole lot of that was made on cost+ contracting from the good old federal government… taxpayers stuck again..

    http://origin.library.constantcontact.com/download/get/file/1102561686275-69/GMI_GoldenParachutes_012012.pdf

    And don’t forget the total liability to the taxpayer (according to Neil Barofsky, SIGTARP) for the 2008 Wall Street bailout to the private sector would be $23.7 trillion. All sorts of shell games have been played to hide that…like, borrow money at 0% interest from the taxpayer, and say you’re investment bank has paid it back, while the same investment bank charges small borrowers 27% interest.

    Small wonder public employees want their slice too… Wall Street and the private sector have taught them greed is good in America.

    I say (and have all said) let *both* bondholders and pensioners take haircuts. Any entity (person or corporation) with yearly gross income less than $50K should not get cut at all, any entity with yearly gross income >$200K should lose 90% of the income from California. In between make an interpolation. Cyprus did something similar.

  28. Tough Love Says:

    Captain, It’s not just CalPERS, The right of Public Sector Unions to collectively bargain (for ANYTHING other than genuine safety issues) and to contribute to election campaigns of those who make decisions impacting their pay, pensions and benefits …. is the CANCER on Society.

  29. ProudCalifNative Says:

    Operational costs like payroll, utility bills, etc. are exempt from a muni bankruptcy — they need to pay some bills to keep functioning as a city. Calpers payments are a fringe benefit and are inseperable from payroll. It’s not ordinary debt that can be discharged without impacting the ability to retain core employees. The right way to cut pay and pension payments at the same time is to lay off non-essential employees, and Stockton did that. Judge made the right call here.

  30. Public Worker Says:

    TL,

    That’s why they call it an average.

  31. Tough Love Says:

    Public Sector worker, Yes, an “average” which you (as most public Sector workers do when the opportunity arises) used to mislead the reader.

  32. spension Says:

    Remove collective bargaining only if we also remove the `right’ of any corporation or medical entity to specify cost+ payment. Jeez, >$1 million/year salaries for medical administrators are accepted and paid for (with benefits, overhead, and a 6% profit tacked on top) by Medicare and Medicaid.

    http://healthland.time.com/why-medical-bills-are-killing-us/

    The pension costs are negligible in comparison to the bilking of the taxpayer by the medical establishment.

  33. Public Worker Says:

    TL,

    It appears you have taken a position and are selecting certain facts and ignoring other facts to support your position. It might be more rewarding to you to accept all the facts, even the ones that don’t support your position, and let them lead you to the truth. Good luck in that!

  34. Tough Love Says:

    Public Sector worker …. so tell me. what pertinent facts have I ignored ?

  35. Public Worker Says:

    TL
    http://www.calpers.ca.gov/eip-docs/about/facts/retiremem.pdf

  36. Jason Williams Says:

    Public employees are the new “illegal immigrants”. We are blamed for everything economic. If the bankers would not have sold home mortgages the way they did, we would not be in this type of ecomony. Where is the focus on them? Where is the hatred for waht they did? Oh, that’s right, they got bailed out by Obama and even got bonuses to boot. What do you have to say to them apples “Tough Love”?

  37. Tough Love Says:

    Public Sector Workers,

    That’s hilarious. You direct me to CalPERS itself, the bastion of one-sided information.

    They too publish the “average” pension (with all it’s misleading “defects” I mentioned earlier).. And no mention at all of the more meaningful figure … the average pension of full-time, full-career workers who retired in 2012..

  38. Public Worker Says:

    Good luck TL, you’re going to need it. Your anti-government, I’m right-you’re-wrong, ignore-the-facts attitude prevents further legitimate, mature and thoughtful discussion. Ciao!

  39. Tough Love Says:

    Public Sector workers …. and we circle back …

    Again, please tell me what “facts” I have ignored.

  40. Berryessa Chillin' Says:

    PW: Where in TL’s argument can one find an “ignore-the-facts” attitude? Granted, like everybody else his projections of the future (e.g. civil unrest) are conjecture since human beings cannot accurately know the future, but his arguments about the present state of CalPERS and the near-future actuarial predictions seem quite reality-based.

  41. spension Says:

    Tough Love is not entirely impermeable to facts… BTW, the best comparison I know of (the one flaw is they should have also done a chart for retirement at age 65 or at the age of full Social Security Benefits) is page 24, bottom, of:

    http://www.fixpensionsfirst.com/docs/Full_Report.pdf

    State Non-safety Tier 1 get pension/SS/DC total of $770,000; private sector is $480,000; so state is 160% of private sector.

    Where the state retirement system is way better: health care benefits, valued at $320,000 for state retirees, and only $50,000 or so for private sector. Of course, the American healthcare system is a shambles, with cost+ coverage the norm for the most economical portions of the system (Medicare and Medicaid), significant gouging for those covered by private health insurance, and criminal $ costs (from the chargemaster system) for those who pay cash.

    http://healthland.time.com/why-medical-bills-are-killing-us/

    Tough Love was right about the use of different discount rates for the computation of public sector and private sector pension debt; but missed the fact that both use about the same growth projections (7-8%). Not even the private sector uses the `risk free’ treasury bond rates that most economists opine is best; the private sector uses corporate bond rates, which are higher.

    Tough Love has proven a bit confused by the expense ratios and distinctions between DB and DC plans.

  42. Tough Love Says:

    Spension, It’s interesting how you self-appointed yourself the arbiter of what I know (or don’t know) …. and routinely either say that I said (or implied) something that I did not, or put your own “spin” on my words.

    For example, above, you said that I …”…missed the fact that both use about the same growth projections (7-8%).” I didn’t “miss it”. I wasn’t discussing investment returns at all, just the differences in the Public vs Private Sector rates used for discounting liabilities.

    You also aid that I’m …”… confused by the expense ratios and distinctions between DB and DC plans.”

    I assure you that (as they say) I have forgotten more than you will ever know about pensions, both DC and DB. As they say, been there, done that.

    Your problem is the fixation that DC Plans trump DB Plans without being open to listen and absorb the material negatives of DB Plans (not the least of which is the selling-out of the taxpayers by our elected representative … which would not happen with DC Plans because they could not defer or hide the cost of their double-dealing),

    You also insist that reforming Public Sector pension reform MUST be accompanied by “sovereign default”. I don’t agree that one must accompany the other. Creditors to our cities and States aren’t bad guys. Our States and Cities wouldn’t be able to function w/o the loans they provide. It’s the Public Sector Union/workers and the self-interested, vote-selling, contribution-soliciting politicians who approved these grossly excessive pensions and benefits that have cheated the taxpayers. Reform should be focused on those who have cheated us.

  43. Captain Says:

    “Tough Love Says: Captain, It’s not just CalPERS, The right of Public Sector Unions to collectively bargain (for ANYTHING other than genuine safety issues) and to contribute to election campaigns of those who make decisions impacting their pay, pensions and benefits …. is the CANCER on Society.”

    Don’t worry, I get it – And I agree with you! May I add that these unions are negotiating with current/former union members many of which have “me too” clauses in their own contracts that increase their compensation to insure a percentage differential between the contracts they are approving and their own pay (as has been recently described in the article about Alameda County’s top administrator who will be receiving over 400K in annual pension payouts). While that pension payout is outside the norm it is also a current reality, as is the “me too” clause in way too many contracts. Same can be said for cities like San Bernardino that are in a fiscal emergency yet have automatically approved over 1 million in raises because the method for doing so is written in the employee contracts (compensation adjustments based on what cities with money are doing).

    In my County our Water District pays for/provides a 2.7@55 pension formula (still), while also contributing 1500 dollars annually to all employees in the form of a 401K contribution. Get this, they do it “to encourage employees to save for retirement”. It should come as little surprise the district is asking for yet another rate increase while also converting the current 5 year temporary rate increase into a permanent rate hike, with the new rate hike tacked on top of that. You just can’t make this stuff up.

    CalPERS have yet to take any responsibility for the mess they’ve created. CalPERS is too busy creating cover for every city council, city manager, and failed politician that is being asked to reduce pension costs, while threatening/bullying bankrupt cities that consider reducing “future” pension formulas.

    CalPERS is CROOKED. CalPERS represents the lymph nodes that have allowed this CANCER to spread to stage 4.

  44. Tough Love Says:

    Captain, The sorry thing is that with ultimate failure of these excessive pension promises all but assured based on the math alone, why must the citizens (not on the receiving end of this largess) suffer for years with reduced service and greater taxes as the sore festers.

  45. spension Says:

    Quoting Tough Love… `Quoting …”At least one board member, J.J. Jelincic, disagrees with critics who say the CalPERS earnings forecast, 7.5 percent a year, is too optimistic and conceals massive debt. He asked Milligan for the probability of reaching 120 percent funding. Jelincic cited a 2011 report that the 100 largest corporate pension funds had an average earnings forecast of 8 percent. “Our return assumption is not unreasonable,” he said.”

    His last sentence shows just how incompetent he is to be on this Board.’

    Excuse me, the topic Jelincic brought up was ***earnings forecast***. CalPERS does use the ***same or more conservative*** forecasts that the private sector uses.

    Tough Love, it was **you** who inappropriately interjected off-topic information about discount rates, but you neglected to mention that the private sector *also* uses an unrealistically high discount rate (based on corporate bonds), which is not recommended by economists, either.

    Quoting Tough Love “(not the least of which is the selling-out of the taxpayers by our elected representative … which would not happen with DC Plans because they could not defer or hide the cost of their double-dealing)”

    You honestly think that the worst selling out of taxpayers by elected representatives is over public sector pensions? You are more gullible than I thought. The private sector drains the taxpayer at 100X or 1000X the rate that public sector pensions do. Example # 1: $23.7 trillion liability, according to the Special Inspector General for TARP, Barofsky, for the total TARP and related private sector bailouts. Example #2: Cost+ accounting by the medical care industry, leading to unbelievable waste in Medicare. Example #3: The Iraq War, which siphoned money into Blackwater, Halliburton, etc.

    Public sector employees learned `greed is good’ from the private sector and Wall Street, Tough Love. Odd that you spend no words on those issues.

    Dead easy for elected representative to guarantee returns in DC plans. Didn’t CalPERS do that? Doesn’t UCRP do that still? Since your such an expert, you already knew that, but chose to hide your knowledge. If the root problem is selling-out and double-dealing, DC plans are no refuge whatsoever. Just a few law changes in the dead of night by unanimous votes (as happened with pension raises in California… yes, Republicans voted uniformly *FOR* all the 1999 etc pension increases).

    I’ve never said Creditors were good or bad guys. In my opinion, they are no better or worse than public sector employees. Creditors lent money, but be fair: public sector workers do at least as much to keep this state running too.

    All of them deserve a haircut for California’s financial mess. I’m sure, Tough Love, you’d like your favored class of creditors to get a special amnesty from losing $, because you think they are better people than some other people you hate. I say treat them all the same.

  46. Captain Says:

    “Tough Love Says: Captain, The sorry thing is that with ultimate failure of these excessive pension promises all but assured based on the math alone, why must the citizens (not on the receiving end of this largess) suffer for years with reduced service and greater taxes as the sore festers.”

    Because CalPERS says so. And the city managers and unions that benefit the most saythey agree with CalPERS. The math will eventually rule the day.

    TL, did you read Judge Klein’s ruling? I think he did a very good job explaining his decision but there are a few references I find inaccurate/troubling.

  47. Captain Says:

    “spension Says: Quoting Tough Love… `Quoting …”At least one board member, J.J. Jelincic, disagrees with critics who say the CalPERS earnings forecast, 7.5 percent a year, is too optimistic and conceals massive debt. He asked Milligan for the probability of reaching 120 percent funding. Jelincic cited a 2011 report that the 100 largest corporate pension funds had an average earnings forecast of 8 percent. “Our return assumption is not unreasonable,” he said.”

    His last sentence shows just how incompetent he is to be on this Board.’

    Excuse me, the topic Jelincic brought up was ***earnings forecast***. CalPERS does use the ***same or more conservative*** forecasts that the private sector uses.”

    I can’t take it anymore, spension. J.J. Jelincic is the same guy whose judgement has been called into question both internally and externally at CalPERS. So I can care less what J.J. has to say. Spension, your comment here:

    “the topic Jelincic brought up was ***earnings forecast***. CalPERS does use the ***same or more conservative*** forecasts that the private sector uses.”

    You have got to be kidding! I’ve read your previous comment on this issue and, even if true, it doesn’t mean they discount unfunded liabilities at the same rate, or even use the rate to determine the unfunded actuarial accrued liability, or use highest 12 month compensation to determine the payout, or include accumulated sick leave or holiday pay to spike pensions. And it certianly doesn’t mean that other pensions are taking on the same amount of risk that CalPERS is subjecting taxpayers to.

    Private sector pensions are also not the cause of our cities, county’s, and special districts raising fees, promoting creative bonds, or asking for tax hikes. And, like in the case of Stockton, private sector pensions do not provide 5% COLA’s. And what pension organization do you think it is/was that put a program in place that allows for FIVE PERCENT COLA INCREASES?

    CalPERS is CROOKED

  48. Tough Love Says:

    Spension, addressing your points:

    (1) CalPERS board member J.J. Jelincic thinks 8% is a not-unreasonable (long term) investment return assumption. I do, as does Warren Buffet and just about every economist who has written on the subject over the past 2 years. Let the reader decide on that as well as why you choose to make this an issue of contention.

    (2) Isn’t in interesting that in my earlier comment I said you …”routinely either say that I said (or implied) something that I did not, or put your own “spin” on my words.” Aren’t you doing exactly that again when you said …”You honestly think that the worst selling out of taxpayers by elected representatives is over public sector pensions? ” ?

    Where did I say this was the “worst” of anything, or compare it to other misdeeds of our elected officials? I choose to address THIS issue … the grossly excessive Public Sector pensions & benefits, their very high cost and their impact on services and taxpayers …. and how the Public Sector Unions and our elected officials are the root cause of the problem. Are you saying that I have no right to do so without also discussing OTHER misdeeds of our elected officials ? Really ?

    (3) While DB have positive merits (primarily, mortality pooling), those positive attributes are far far overridden time and time again by the self-serving actions of our elected representatives. The power of politicians to spend other people’s (the Taxpayers) money (on excessive pay, pension, and benefits in return for campaign contributions and election support) is like crack-cocaine in the hands of an addict. All they see is positive benefits for THEM today … with the hiding and/or deferral of the high cost to another day for someone else to deal with. THAT’s how we got into the financial mess we are in today. DC are FAR less subject to such tactics as the cost of accruals is paid for immediately. If they over-promise with improper DC Plan guarantees, THEY (not someone else) have to answer immediately to taxpayers for their stupid actions.

    (4) you said …” Creditors lent money, but be fair: public sector workers do at least as much to keep this state running too.”
    The issue isn’t one of fairly compensating Public Sector workers (in cash pay, pensions, and benefits). It’s the need to materially bring the significant overcompensation that exists today (not generally in “cash pay”, but in the pension & benefit components of Total Compensation).

  49. Tough Love Says:

    Captain, I read a portion of Judge Klein’s ruling. I (as most) was not at all surprised that Stockton’s Bankruptcy is moving forward.
    He does appear to be open-mined to pension cuts as well as hitting lenders…. a good thing.

    My guess is that it’s going to be a LONG haul before this is settled. This is too big a deal for either side to throw in the towel before all avenues for appeal have been exhausted.

    By the way, in your response to Spension you said …” And, like in the case of Stockton, private sector pensions do not provide 5% COLA’s”. While I’m guessing that YOU know, for the benefit of other readers, Private Sector pension Plans almost never include automatic annual COLAs that go up with the CPI or by some fixed percentage. Some of the lager Corporations gave ad-hoc COLA increases about once every 5 years when Plans were flush with assets (a LONG time ago).

    And as to the cost of a COLA benefit …. adding a 3% annual COLA to an otherwise identical Plan w/o COLA increases the Plan’s cost by just about 1/3 at the ages Public Sector workers generally retire.

  50. spension Says:

    Quoting Tough Love… “The end-game of the Public Sector worker piggishness is massive civil unrest and possibly the destruction of this country as we know it.”

    Uh…your apocalyptic Tone, Tough Love, not mine. But the root cause is carelessness and graft by politicians (both Republican & Democratic); you don’t ever suggest mending that problem.

    You only talk about one symptom, the public pensions. You fail to mention the $23.7 trillion liability to Wall Street, the inexorable rise in health care costs due to cost+ government payments, fighting poorly thought-out wars on credit, etc.

    Which makes it apparent that all you care about is bashing public employees.

    Again, the *private* sector assumes an 8% growth rate in their pension planning. That is my point. You and Warren Buffett disagree with the *private sector* too, which you fail to mention.

    And, uh, well, the private sector *does not use* the federal treasury bond to discount its liabilities. The private sector uses the higher corporate bond rate. You don’t talk about that problem.

  51. SeeSaw Says:

    The majority of CalPERS COLAS are 2% or less, depending on the CPI. I received less two years in a row and the most recently eligible retirees got zero. There are no automatic COLAS with CalPERS. Stockton’s management excesses is what is causing its problems–5% COLAS sound very irresponsible to me and I don’t know any retiree who has such.

    CalPERS stopped pension spiking in 1993. Vacation and sick leave accumulations are not used to spike CalPERS pensions, with the exception that a retiree may use one half of their final sick leave accumulation to increase the
    service time–not the salary.

  52. Tough Love Says:

    Spension, responding……….
    (1) Mending the politicians (am I God)? Actually, I support public dollar funding of elections accompanied by outlawing ANY and ALL campaign contributions. With equal Public dollar funding they would have to win elections on their merits, not whose votes they could buy. There would still be some issues (like those giving favors for the cushy job that might await them after leaving office) but the bulk of the problem would be solved.
    (2) As to your $23 Trillion & Wall street beef, like I said before, the decades long financial rape of Private Sector taxpayers via the grossly excessive pensions and benefits granted them by our self-serving politicians is the issue I have chosen to pursue for reform. Someone else can deal with the other issues.
    (3) Yes, the private Sector discounts Plan liabilities at what’s roughly high-grade Corporate Bond rates, not the lower treasury rates …. BECAUSE Private Sector Pension Plan regulations SPECIFY what rate to use (no choice). The Gov’t did so because such rates are at least “reasonable”, and, as PBGC backstop for failing Plans, would minimize it’s getting stuck because of Plan’s choosing inappropriately high rates to discount Plan liabilities … JUST LIKE ALL PUBLIC SECTOR PLAN DO TODAY.
    (8). The investment return assumption has ZERO impact on the Plan’s funding ratio ((PV of liabilities)/Assets), only the Rate used to discount liabilities does. With Private Sector Plans you get a MUCH more accurate picture of the Plan CURRENT status. Additionally, unlike Public Sector Plans which amortize (their UNDERSTATED) unfunded liabilities over ridiculously long periods (sometime over 30 years), Private Sector Plans must amortize any underfunding that develops over very short periods. These Private Sector Plan requirements (virtually all of which are missing under Government Plan accounting rules) act to limit underfunding that can develop from aggressive investment return assumption such as the 7.5%-8% used in most Plans today. The bottom line is that a high investment return assumption is much more damaging to Public than Private Sector Plans … because while Private Sector Plans MUST quickly make up for developing shortfalls with greater contributions, Public Sector Plan do not have to (and in fact, often do nothing at all to address the growing shortfall).

  53. Captain Says:

    SeeSaw Says: “CalPERS stopped pension spiking in 1993. Vacation and sick leave accumulations are not used to spike CalPERS pensions, with the exception that a retiree may use one half of their final sick leave accumulation to increase the
    service time–not the salary.”

    Seesaw, it isn’t true that CalPERS has eliminated pension spiking.

    – Not sure where you worked but many public employees, if not most, are allowed to apply any accumulated sick leave (which is typically more generous than the private sector standard 80 hours per year to begin with) to purchase service credit. CalPERS policy grants one year of service credit for 1440 hours of sick leave. I think the combination of higher levels of accrued sick leave and a very low number for what constitutes a year of service represents pension spiking.

    – Allowing for highest 12 months salary as a basis for calculating pension payouts is a CalPERS policy and that is also pension spiking.

    – Holiday Pay IS used to spike pensions. While this issue might be contained mostly to 24/7 operations (Water Districts & Public safety for instance) they are allowed to not take their holidays and roll those dollars into compensation – spiking their pensions.

    – Many are also allowed to include specialty pay, even educational incentive pay, Car Allowances, and Uniform Allowances into the calculation of pensionable income – this is also pension spiking and essentially means that people will receive these allowances (car & clothing to name a few) throughout their retirement years.

    Seesaw, you also said, “The majority of CalPERS COLAS are 2% or less … Stockton’s management excesses is what is causing its problems–5% COLAS sound very irresponsible to me ”.

    – 5% Cola’s sound very irresponsible to me also. Who do you think provided that irresponsible optional benefit? It had to be CalPERS, right?

  54. SeeSaw Says:

    CalPERS’s various plans and formulas are the result of State legislation. Any City who provides a 5% COLA for its retirees must pay for it–and such City should not be offering benefits it cannot pay for. Like I said, I don’t know any public employees who have a 5% COLA–not in my section of CA. If Beverly Hills can pay or it, let them. Stockton could not pay, and it is their fault–not the fault of CalPERS.

    CalPERS

  55. Tough Love Says:

    SeeSaw, CalPERS certainly has a hand in this ….. they told Stockton that they cannot reduce the COLA from the 5% level in place now.

    ALL of these absurd pension promises should be reneged on.

    Public Sector pensions should be no greater (as a % of pay) than what their Private Sector counterparts get…. which about 25-50% of what Public Sector workers get today.

  56. SeeSaw Says:

    Yes, TL. Once the contract is signed, the bill is owed. CalPERS does not negotiate–if that should ever happen, it would be the beginning of the end for DB pensions.

    My spouse gets $723/mo, gross, for 22 years service-credit in the Carpenter’s union–a vocation that he gave 50 years. Don’t think we could make it, if that was all my pension was. Private workers should be treated better–that is true.

    The federal government did take away my spouse SS allotment with the GPO–you will not be happy until they cut my public pension down to where I will need to go on social services. You really don’t want to see other people as stable, unless it is according to rules made by you. I am so glad that you don’t make the rules, TL.

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