Pension: Riverside County Pension Debt Grows Slightly

Back in March 2020, I looked into the pension situation in Riverside County. At the time, based on the latest report as of June 30, 2018, they had a 3.5 billion problem. We now have an update as of June 30, 2019. (It is interesting how these updates are based on data that is over a year old.) Press Enterprise (Feb 9) reports:

Riverside County’s unfunded pension debt now stands at $3.6 billion, but a bond sale is expected to cut that amount by $476 million while bolstering the county pension system’s overall funding, according to a new report.

Between 2018 and 2019, the debt grew by $108 million. Not as bad as what happened after 2018 when it grew by $424.5 million. If not for the $476 million bond sale, it might actually have gotten worse next year as the S&P 500 Index barely budged between June 30, 2019 and June 30, 2020 due to the significant drop in the Index in February and March 2020 due to worries about the potential extent of the COVID-19 pandemic. 

Also, the article doesn't state so, but this sounds like a pension obligation bond. As mentioned in this blog post, two-thirds of such bonds end up losing money. The below indicates the county has budget problems coming up even without their pensions issues.          

  

. . . For years, pension costs have loomed as a cloud over county finances that threatens to consume money for public services. Now, the five supervisors must grapple with that debt along with the economic toll from the coronavirus pandemic. Early projections from May showed a $100 million COVID-19-related shortfall from lost tax revenue.

. . . To save money on interest that would have been paid to CalPERS, the board in spring voted 3-2 to sell about $720 million in bonds at a lower interest rate. Officials credit that move with saving $231 million in interest costs, with $77 million in savings within the next five years.

Is this really the time to be issuing pension obligation bonds? Marketwatch via MSN (Feb 20) has this to say regarding what Jack Bogle (Vanguard Funds) might be saying if he were still alive:

Two years before he died, in 2017, Bogle warned that U.S. stocks were already so expensive that longer-term, 10-year returns on a broad stock market index fund were likely to be meager at best.

His forecast: About 4% a year.

. . . But here’s the problem. Since then, U.S. stocks have already produced all of the returns he predicted for the next 10 years—and then some.

The article mentions that in those 10 years from 2017 to 2027, Bogle estimated that his Total Stock Market Index Fund would rise 50%, but it has already gone up 70% as of early 2021. His forecast was based on dividend yields, corporate earnings growth and price-to-earnings ratios.  

If Jack Bogle was correct, a lot of cities in California will regret their decisions to issue pension obligation bonds.