While we’ve yet to experience any large municipal pension failures, which is just a matter of ‘when’ rather than ‘if’, the small pension failures sprinkled across the state of California are starting to pile up. As The Sacremento Bee points out today, public workers in Trinity and Imperial counties are just the latest to have their pensions slashed by up to 90% as their cities admit what most of us have known for some time, namely that they’re running ponzi schemes which simply don’t have the funding required to payout the benefits they’ve promised.
Trinity County Waterworks District No. 1 west of Redding and Niland Sanitary District from Imperial County are in line to become the third and fourth government agencies to break with CalPERS over the past 12 months in a manner that shortchanges their retirees.
The CalPERS Board of Administration is scheduled next week to vote on ending contracts with the two small districts because they’re in default.
In Trinity, five current and former employees will see their promised pensions slashed by 70 percent. Niland’s five beneficiaries will see a 92 percent to 100 percent cut in pension benefits, according to CalPERS’ staff reports.
To fully fund their workers’ pensions, the two districts would have to muster up hefty termination fees. CalPERS asks for that money up front, and then moves the separating agency to a low-risk fund called the terminated agency pool.
CalPERS says Niland owes about $200,000 to cover the long-term costs of its employees’ pensions in the terminated agency pool, while Trinity owes some $1.6 million. Trinity has asked CalPERS for a 30-year, no-interest payment plan to cover the termination fee, but the district and the pension fund have not reached a deal, according to CalPERS.
Of course, as mentioned above, these pension cuts will impact a tiny number of retirees but that is all the more telling as elected officials are only willing to admit to their ponzi schemes in instances where the political carnage can be ‘managed’…certainly a handful of people here and there are ‘expendable.’
As you may recall, last October we wrote about the unfortunate situation in Loyalton, California whereby CalPERS was threatening to slash pension payments to a group of retired city workers after their City Council members failed to understand basic pension accounting and the unintended consequences of terminating their plan (see “Pension Benefits In Tiny California Town To Be Slashed As “Ponzi Scheme” Is Exposed“). That was followed by retirees of the East San Gabriel Valley Human Services Consortium getting similar cuts after their former municipal employer failed to pay their pension dues.
But her former employer, East San Gabriel Valley Human Services Consortium, left a $406,027 unpaid bill to the California Public Employees’ Retirement System, which manages benefits for 3,000 local governments and districts. As Calpers, the nation’s largest public pension, deals with a growing gap between what’s been promised and what’s been set aside, it may slash the checks of Lynch and 190 other workers by 63 percent — the rate by which the agency has fallen short.
“We were always told that it was set in stone. Now to find out that’s not true — is the sky blue? Is water wet?” Lynch, who lives in a 1994 motor home, said of her pension. “We’ve paid 100 percent of our responsibility into it. I just don’t understand how they can come along and cut so much out.”
Of course, while they try to lay it off, CalPERS certainly deserves a healthy portion of the blame here as they’ve been willing participants in perpetuating one of the largest public pension ponzi schemes in the country for years now. Just last December we noted CalPERS’ decision to only modestly decrease their discount rate by 50 bps, a move which their finance committee chairman all but admitted was politically motivated to allow “municipalities and other government agencies some breathing room” rather than lower it to where it should be and take the risk of bankrupting half of the state of California. Here’s what we wrote:
A few weeks ago we asked whether CalPERS would rely on sound financial judgement and math to set their rate of return expectations going forward or whether they would cave to political pressure to maintain artificially high return hurdles that
they’ll never meet but help to maintain their ponzi scheme a little longer (see “CalPERS Weighs Pros/Cons Of Setting Reasonable Return Targets Vs. Maintaining Ponzi Scheme“). The decision faced by CALPERS was whether their long-term assumed rate of return on assets should be lowered from the current 7.5% down to a more reasonable 6%. Well, we now have our answer and it seems the board erred on the side of maintaining the ponzi with a decision to reduce the fund’s discount rate by only 50 bps, to 7%, to be phased in over 3 years.
Of course, this decision should come as little surprise to our readers as we concluded our previous post with the following prediction:
We’ve seen this battle between math/logic and politicians played out numerous times in states all across the country. Somehow we suspect that “math/logic” will continue to lose…better to bury your head in the sand for a couple of more years and pretend there is no problem.
Meanwhile, Richard Costigan, chairman of the CalPERS finance committee, who owed that “this is just a start,” more or less admits that the decision was politically motivated to allow “municipalities and other government agencies some breathing room before they absorb the impact.”
Of course, while CalPERS is the largest public pension in the U.S. it’s certainly not the worst off from a financial perspective (yes, we’re talking about you Illinois). In fact, there is roughly $2 trillion in total underfunded state and local pension liabilities around the country.
That said, the situation looks even more dire if you adjust that underfunding amount to reflect an appropriate discount rate rather than the 7.5% “dream rate” that CalPERS and most of America’s other pension ponzis use. In fact, we recently took a stab at calculating the real taxpayer liability outstanding to America’s public pensions and found it to be closer to $5 – $8 trillion (see “An Unsolvable Math Problem: Public Pensions Are Underfunded By As Much As $8 Trillion“).
We decided to take a look at what would happen if all federal, state and local pension plans decided to heed the advice of Mr. Gross. As one might suspect, the results are not pleasant. We conservatively assume that public pensions are currently $2.0 trillion underfunded ($4.5 trillion of assets for $6.5 trillion of liabilities) even though we’ve seen estimates that suggest $3.5 trillion or more might be more appropriate. We then adjusted the return on asset assumption down from the 7.5% used by most pensions to the 4.0% suggested by Mr. Gross and found that true public pension underfunding could be closer to $5.5 trillion, or over 2.5x more than current estimates. Others have suggested that returns should be closer to risk-free rates which would imply an even more draconian $8.4 trillion underfunding.
But we can kick this can down the road for a while longer…so feel free to keep buying stocks irrespective of how close valuation multiples get to infinity.
via http://ift.tt/2jtif41 Tyler Durden