Thursday, February 13, 2014

City of Sierra Madre: Why the 7.9% CalPERS Investment Was All Wrong

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(Mod: This post originally ran in February of 2011. What we saw back then was that in a few short years the City of Sierra Madre would find itself with largely unfunded retirement accounts, something that has now pretty much happened. The City's constant call today for more money could have its roots in this one fact, its pension obligations are now upside down. Look for more information here from the CalPERS - Sierra Madre site on Monday.)

(Feb 2011) - Cities all over California are facing serious financial shortfalls, many brought on by unrealistic investments in programs designed to care for its employees into perpetuity. And judging by what we saw Tuesday evening it appears that Sierra Madre's city government is planning to join the pack.

The City Council Tuesday evening was considering investing funds with CalPERS. As presented by Karin Schnaider, the returns from CalPERS investments are coming in at approximately 7.9% a year. While it is an admiral goal to try and obtain the highest returns possible, was that figure actually based on financial reality?

Here are the actual numbers.

Per the CalPERS annual report for the fiscal year ended September 30, 2010, the fund has returned the following:

Quarter ... 7.9%
1 year ...... 10.4%
3 year ..... -4.8%
5 year ...... 2.5%
10 year .... 3.4%

As you can see, CalPERS by their own report has not reached their stated goal. Assuming they were able to reach their goal of 7.9%, interest rates would have to increase dramatically. For that to happen you would have to have massive inflation. Were that to occur, public employees would be demanding large increases in pay, which would then necessitate the projected return to be even greater than 7.9%. But the projected returns are only one part of the problem.

Pursuant to comments made by David Crane, who was in the Schwarzenegger administration, GASB, which stands for Governmental Accounting Standards Board, allows government agencies to make projections using Alice in Wonderland accounting that allows governmental agencies to hide and understate liabilities. The return projections are too high and the assumed rate of pay increases is too low, which leads governments to overpromise and underperform. This Alice in Wonderland accounting has led to state and local governments understating pension liabilities by $2.5 trillion dollars.

This failure by CalPERS to meet its goal and understate liabilities has had a draconian effect on state, county and city governments as they attempt to meet pension obligations promised to its workers. The amounts and numbers of employees continue to grow. For example, the number of retired public employees is projected to grow to nearly 2 million over the next twenty years, which is as many public sector employees as there is now. Current payments to retired employees exceed $5 billion dollars a year, more than California's funding for the entire University of California system.

To highlight the egregious nature of the system, the number of state workers who draw a pension of more than $100,000 per year increased from 6,133 to 9,111 from 2009 to 2010, a staggering 49% increase in one year. The top ten recipients all receive in excess of $200,000 per year, with the top recipient receiving $509,666 (Bruce Malkenhorst of Vernon). Assuming the average is $200,000, this represents total pension payments of $1.8 billion for these 9,000 people. An incredible amount of money for so small a group of retirees. By 2015 20,000 public retirees is projected to receive more than $3.0 billion per year. (Source: California Center for Public Salaries 2010)

The problem of pensions is not limited to government. According to an L.A. Times article dated January 28, 2011 ("Utilities have no incentive to scrap pension plans"), Southern California Edison recently requested a 7% rate hike just to cover the shortfall in its retirement plans. Telling in the rate hike request was that there was no sunset provision included for the rate hike if (or when) that shortfall is covered. As discussed in this article, similar situations exist and must be dealt with by all the major utilities.

(As an aside, our city government and the utility companies do have something important in common. When they need more money, they get it directly from us.)

To his credit Joe Mosca did recognize the City's dangerous overexposure once the absurdity of that 7.9% figure was pointed out to him by residents during public comment. Five years from now when the consequences would have started to hit, the effects could have been disastrous, with vital service layoffs in police, paramedic and fire a distinct possibility.

However, that 4.5% or so figure he did push for after having things explained to him could also be unrealistic as well. Financial planning is just not as easy as saying "that number is bad, therefore this number must be good." This was not about hurrying along the meeting so that all of the agenda topics could be covered. That number needs to be re-examined.

But here is something to consider as well. Had those residents not stood up and patiently explained financial reality to both the City Council and City Staff, would Joe have gotten it? There was no prior indication that he was anything but happy to commit us to that Alice in Wonderland 7.9% number. And certainly City Staff didn't have a problem with it. After all, they were writing their own ticket.

Has the level of protection we are receiving as tax payers from our city government come down to public comment? Is all that is keeping this city from making disastrous financial decisions the concern of a few financial professionals who come down to City Hall to express their horror?

If that is the case, then perhaps that 3 minute rule should be reexamined. Apparently the residents have some vital contributions to make to the City Council's deliberative processes. And as such Public Comment is the only way this city is going to stave off the kind of terrible financial planning that has put the State of California and so many of its cities into the dire financial condition they are today.

Bonus Coverage

CalPERS poised to raise rates, but not on Brown’s timetable (Sacramento Bee - link)

http://sierramadretattler.blogspot.com

55 comments:

  1. The Defined Benefit plans should be replaced by Defined Contribution plans that can be budgeted for each year. The biggest problem we have with pensions is that city council members can promise the world to unions - done either in exchange for supporting their election or done to "keep the peace" during their tenure in office. Unfortunately, the bad financial consequences that result from this corrupt system do not manifest themselves until long after the city council members are out of office.
    That is the only solution.

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    1. Very well said. I'll add to that the fact that the guy people elected to fix the problem, Brown, started this unsustainable mess by giving public employees collective bargaining rights during his first disaster as governor back in the 70's. People need to get a clue about government, both local, state, and federal.

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  2. You can tell by their stance on Measure UUT where the candidates will fall on the pension giveaway. We're a small town. We cannot afford City of LA style pension plans. Heck, neither can they.

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  3. Goss and Green are engaging in red herring politics. They'll scream loud and long about things like the Library, but the real issue is pensions. It's disgraceful behavior.

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  4. Green is just another lawyer - all talk and minimal action. It baffles me that anybody is giving this guy any consideration for Council. He just moved into to town and all of a sudden he's everywhere seeking attention.

    Me, I like the library but really wouldn't be overly disappointed if it closed. We have a Pasadena branch just a few minutes away. Our librarian is paid an large income for managing a really small library.

    I don't trust Goss either - anybody that keeps running repeatedly for Council sends up a red flag for me.


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    1. Don't pick on Goose Goss or No Nothing Noah! They both LOVE this town.

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    2. It appears that the people who work in Sierra Madre City Hall are grievously out of touch with the economic realties that are going on outside of City Hall. An illusion that Sierra Madre is Beverly Hills, perhaps, or San Marino. Some households with excessive amounts of disposable income do not La Canada make, particularly when there are more households just getting by.

      The staff will bankrupt us.

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  5. Maybe Measure UUT would be more popular if we held a resident pension lottery. Every year two lucky taxpayers would get city retirement benefits for life.

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  6. Check out what is going on in Columbus, NM, in the LA Times today, page A9.

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    Replies
    1. Was it Pancho Villa again?

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    2. Gun smuggling rings and city collapse. Something like that. Not sure why it's relevant.

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    3. Oh. I thought maybe it had something to do with ping pong table storage.

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  7. I don't get the whole thing. I work in the private sector, and the "pension" I have is what I make.

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    1. Most people work until they drop.That is where I am at. And your nestegg is the house you live in. If you are investing in the people who are running this city now, your "portfolio"could take a big hit in a couple of years.

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    2. Folks in this City cannot afford the pensions that the City employees get. Very soon the entire budget will go for salaries, benefits, and pensions. Why do you think Staff is pushing for all the assessment districts. The assessment district and UUT and water rate increase will pay for all of the services in the future. The general fund will cover staff and their related expenses.

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  8. Doug Hayes and buddies are the ones that started this mess.
    Guess what? They support Gene Goss.
    Goss stated at one of the debates during the last election that one of his
    greatest accomplishments was the UNION CONTRACT for the teachers
    at Long Beach City College.
    Goss is yes on UUT
    Goss is yes on UNIONS

    Goss and his predecessors will continue to ruin this city.

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    Replies
    1. But he LOVES this town!

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    2. Does anybody know who loves Sierra Madre the most?

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    3. The Tattler do!

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    4. We need a poll.
      "Who loves Sierra Madre the most?"
      1) Joe Mosca
      2) Noah Green
      3) Eugene "Tax Me" Goss
      4) Nancy Walsh
      5) Josh Moran

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    5. what does the list have in common three were on the city council two will be

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    6. Not much really. They're just being laughed at.

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    7. Okay, 5:29 pm, I'm going to nominate Joe Mosca because he loves Sierra Madre so much he moved away and we seldom hear of him anymore. I can't think of a better gift Joey could have given to the citizens from whom he took so much. All the others? They're still here so what does that tell you?

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    8. Didn't Joe tell is supporters that he would be back by now? Can it be the glittering lights of the great capitols of Europe has caused the greatest Sierra Madre lover of all to forget all about them?

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    9. Put your Lord Jesus Christ, The Savior, Kurt Zimmerman on that list to, he split and never to be heard from.

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    10. He moved for a job. Joe, on the other hand, did not.

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  9. How can a city of less than 11,000 people be expected to fund bigtime pension programs? That's right, by paying the highest utility taxes in California. Vote NO on Measure UUT.

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  10. we heard that josh moran and Bernie Madoff are financial consultants. maybe these guys can offer city hall 25% return on the residents money!

    I don't get it... the city residents commenting on this blog - make comments about others, must be followers, 75% of the water paying customers failed to return the protest ballot, now we are crying over poor caliper's performance.

    watch out for your shadow, ground hog day is approaching...

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    Replies
    1. I like that, "Poor Calipers" - lol! Accurate and true!

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    2. Poor calipers don't measure up.

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  11. besides being smarter than you or I, what are Goss's qualifications?

    anybody supported or endorsed by those that created the mess we are in won't get my vote

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    Replies
    1. I would not concede that Goss is smarter than anyone else. Teaching poli sci at a Jr. College does not qualify anyone for genius status. If anything it shows a real lack of an imagination.

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    2. From the "Rate My Professor" website:
      "Every time I think of it, I regret taking this class with Eugene Goss. I didn't learn anything of value from the class. Its not political science, its a learn my political beliefs class."

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    3. He's an academic.
      They tend to be good at theory, inexperienced with reality.
      Bad choice for a city government that is always close to bankruptcy.

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    4. Goss is also a government employee. He sees no problem in sucking more money out of the taxpayers. After all, it goes to him. That is why he supports Measure UUT.

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    5. Goss has a defined benefit pension.

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    6. He would be a perfect fit with city hall. They are working full time now to fund their retirement. And the only way they can do it is get money from the overtaxed residents of Sierra Madre. Goss is their pitch man.

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    7. Sure wished Goss lived within biking distance of where he works.
      He is not very green

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    8. That commute to Long Beach is hell. Why would anyone want to do it?

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    9. Because that's where the job is.
      You might not think much of it, but poly sci teaching jobs are not all that common.

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    10. SMCC isn't good enough for him? Well la de da!

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    11. My heart
      Beats true
      To the order of the
      Kazoo
      Wherever in the world
      I be
      Forever true
      SMCC

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    12. Aw come on---how many Tattler readers live within biking distance of their work place?

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    13. Not that many. But in the other hand Tattler readers don't try to guilt trip people about driving cars, either.

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  12. It's about the library! No, really!

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  13. Isn't the City already invested in CalPers? Seems to me there was a discussion last year in which Chris Koerber questioned the projected 7.9% projection.

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    1. It is a repost of a Feb 2011 article. The point being a lot of people saw this coming. The city did it anyway, and now they're running out of money. BTW: CalPERS thinks Sierra Madre is retarded. City Hall and some of our dumbest City Council members ever have really screwed things up.

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    2. Vote YES on the UUT!

      CalPERS need the $$$.

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    3. Better off just flushing it down one of those Hart Park House latrines.

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  14. Was the Director of Finance being totally inept or was she trying to hide the financial exposure the City faces by under estimating the annual contribution? By using an unrealisticly high interest rate, she was able to under estimate the annual contribution, the actual amount the city needs to make. This gives the impression the City does not owe as much money as it really does.. When she told the Counsel how much the additional funds needed will be, again she was wrong.. The new annual contribution will be much higher.

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    1. Doesn't she have a conflict of interest?

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    2. CalPERS determines the assumed rate of return. That way the big cities like LA can pay as they go at much lower annual contribution rates...

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    3. Even if CalPERS assumes a rate of return, no law says you must believe them. You can use common sense and superfund. Karin is either naïve or unqualified for her job. She has been corrected by the residents on many occasions.

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  15. I think the 7.9% rate is set by the State.

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    Replies
    1. Used car prices are set by the lot owner. Doesn't mean you should buy the clunker.

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