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.          

  

Another Southern California City Looking at Pension Obligation Bonds: Whittier, CA

I've discussed my concern around pension obligation bonds since 2018. Pension obligation bonds work under the hope that the cash raised by these bonds can be invested and earn a higher rate of return than the interest paid on the bonds. As discussed in this 2019 blog post, research indicates that two-thirds of these bonds end up losing money. Considering that we haven't really had a bear market in years (we did have one in March 2020, which has to be one of the quickest bear markets in world history) one has to be concerned that the next one isn't that far away.

Well, the city of Whittier, CA has decided that it will be one of the one-thirds that doesn't end up losing money. Whittier Daily News (Jan 27) reports:

Facing rising pension costs, Whittier City Council members on Tuesday, Jan. 27, voted to consider issuing a $143 million bond issue that would pay off its unfunded portion of the city’s pension liabilities and stabilize ongoing costs.

Defund the Police Movement: Why not look at pension costs?

With the death of George Floyd, protesters have galvanized around the concept of Defund the Police. This movement ranges from opinions that go from reallocating budget resources to the idea that we should abolish the police department. I think getting rid of the police department is a rather dumb idea, but I do support the idea that budget resources need to be reallocated. What should be the first budget line item that needs discussion? Pensions, of course.

KCRW has an article up about police political power in California and has this brief quote about pensions:

Then, 20 years ago [Proposition 172 that dealt with public safety], the full-scale police looting of municipal budgets began, with retirement enhancements allowing officers to retire at age 50 and claim huge pensions. These pension boosts were both retroactive and permanent, and included easily-abused rules that allowed cops to spike their pensions astronomically. Current LAPD Chief Michel Moore briefly retired and exploited one pension provision to pocket $1.27 million.

Pension Crisis: Simi Valley and Riverside County

Back in July 2019, I wrote about how Simi Valley was looking into issuing pension obligation bonds. They must have decided to put that idea on hold, because according to the Simi Valley Acorn that idea is back. One reason is that the unfunded accrued liability increased from what was $147.4 million in July 2019 to a current estimate of $158.8 million:

On Dec. 9, the City Council voted 4-1 to file for judicial validation with the Ventura County Superior Court, a first step that would allow the city to issue a pension obligation bond as a means to refinance the interest rate on debt payments to CalPERS. That rate is currently 7% and could be reduced to 3% or 4% with the bond, officials said.

. . . Councilmember Elaine Litster objected because she’s concerned about the impact a bond could have in the long-term. She pointed to cities in San Bernardino and Stockton that issued obligation bonds to deal with pension liability problems and then faced bankruptcy.

Latest Corporate and Public Pension Articles

A consulting firm called Willis Towers Watson released a report that estimated that corporate funding status of their pensions only improved slightly in 2019: improving from 86% to 87%. This is even though they estimate that investment returns hit 19.8%.

Institutional Investor reported on the reason why there was such limited improvement in funding status even though returns were so significant:

Interest rates experienced the largest one-year drop in two decades last year, said Joseph Gamzon, senior director of retirement at Willis Towers Watson. According to Lewis, this is important because interest rates affect how liabilities are calculated. When they fall, liabilities increase, which affects a pension’s funded status.

Pensions: The Coming Crisis Isn't Just in the United States

The LA Times has a couple articles up about pension issues across the globe. Here are some quotes from a Nov 24th article:

Tens of millions more pensioners and savers around the world are facing the same retirement insecurity, as plunging interest rates since the financial crisis wreak havoc on the funding of schemes. As average life expectancy increases, pensions have become a defining political issue in countries as diverse as Russia, Japan and Brazil.

. . . A common factor in this global pension upheaval has been suppressed bond yields. Bonds have historically provided a simple match for the cash flows needed to be paid out to the members of retirement schemes. But decades of declining bond yields have made it far harder for pension funds to buy an income for their members, pushing them more into equities and other riskier, untraded investments, such as real estate and private equity. 

Pension Obligation Bonds: Montebello, CA

California cities are having to make difficult decisions when it comes to pension obligations. Some cities are considering risky options such as pension obligation bonds. Montebello, CA is considering this option. Via San Gabriel Valley Tribune:

Seeking to address the dilemma of rising pension costs, Montebello City Council members plan to issue a $155 million bond to pay off its unfunded portion of the city’s pension liabilities.

It’s a bond that some think is risky, although no one, including council members, spoke up at Wednesday’s meeting. That’s when City Manager Rene Bobadilla was authorized on a 5-0 vote to begin the process. If all goes as planned, the city would issue the bond in February, and it would take taxpayers 20 years to pay off.

California: Pension and Budget Analysis

Back in August, I quoted a newspaper article that had a discussion with Joe Nation. Well, he recently wrote an article on CalMatters. He provides a little history lesson. Back in 2008, he and some graduate students did an analysis of California's pension system and determined that the "unfunded liability was over $500 billion -- seven times the number officially reported." In 2018, that figure went up to $1.109 trillion or $81,300 per household.

If I'm reading the write-up correctly, that is based on a market basis. If one goes by an actuarial basis, the debt per household drops to $22,800 (this is still an increase from $8,000 back in 2010). He doesn't mention it immediately, but further in his article, the $22,800 amount comes out to $311 billion.

I haven't read too much about the difference between market basis and actuarial basis. What seems to be the big difference is what discount rate is used. The market basis uses the terminal rate, which is a much lower rate than the actuarial basis. I'll need to dig into this a little more, but it does explain the reasons for the big difference between $311 billion and $1.109 trillion.

Pensions: Gauging Risk, California's Prop 13 and Corporate Pensions

From Pensions and Investments we get some news on how states are hiring chief risk officers:

Connecticut is joining a growing number of major public pension funds that have appointed chief risk officers since last decade's financial crisis to evaluate volatility, liquidity, leverage, the impact of rock-bottom interest rates and new risks like global warming.

. . . BNY Mellon's Risk View allows clients like pensions and endowments to see how their current portfolio would have performed during periods like the Asian "flu" in 1997, the Russian debt crisis in 1998, the bursting of the dot-com bubble in the early 2000s and the 2008 financial crisis.

. . . Connecticut lowered the rate on the teachers' pension to 6.9% from 8% while extending the amortization period for its unfunded liabilities to 30 years.

California Pensions: Costs Growing Faster than Other States

The Sacramental Bee had an interesting article up on pensions recently:

Median pension costs went up $7,022 per employee in a selection of cities and counties in California from 2007 to 2016, compared to a national median increase of $1,216, Sarah Anzia, an associate professor of public policy, said Wednesday in Sacramento. 

The rising pension costs have consumed an increasing share of local government revenues, absorbing an additional 2 percent of general revenues over the 10-year stretch in California compared to a national median of 0.7 percent, according to Anzia’s data. 

From 2007 to 2016, per-pension costs for local governments with less than 50 percent union membership increased by a median $740, while those with more than 50 percent increased by a median $2,950. 

There's a lot of data points here: costs, percentage of revenue, unions. The problem with the growing percentage of general revenue going towards pensions is the fact that there will be less money to go to upkeep of cities and counties. Less money for parks. Less money for police (other than the money that goes to fund police pension funds). Less money over-all in general. At the end, if residents of a city want to continue those services, they will need to vote for higher taxes or be willing to fight it out with city unions.

Pensions: Update on CalPERS Returns and Approaches Taken By Cities

Pensions & Investments writes that CalPERS had a 6.7% net return for their fiscal year ending June 30th. This was below the target of 7.1%. Though this return is below expectations, it is an improvement above what Pension & Investments reported back in January when it said that CalPERS earned -3.9% for 2018. That return was driven by the market drop in December 2018.

This is what they write for the fiscal year ending June 30th:

The $372.8 billion California Public Employees Retirement System, Sacramento, earned an annualized net return of 5.8% over five years, a 9.1% return for the 10-year period and 5.8% for the 20 years ended June 30. Over the past 30 years, the CalPERS fund has returned an average of 8.1% annually.

California Teacher Pensions

As I recently blogged, Measure EE that would have helped fund LASUD got voted down by a significant margin. That doesn't mean that the funding problem doesn't go away.

LA School Report had an article up on California's pension system:

CalSTRS has gone from more than 100 percent funded to 63 percent funded in just 17 years . . . CalSTRS members who retired in 2018 received an average annual pension of $54,144  . . . California teachers do not pay into Social Security, and so do not receive those benefits when they retire. However, CalSTRS pays them more than double what a Social Security beneficiary would receive with the same final working salary and retiring at the same age. 

Measure EE: Los Angeles Voters Defeat Parcel Tax for LAUSD

Measure EE was parcel tax proposal that would have raised about $500 million per year for LAUSD. Per the Daily News:

Under Measure EE, commercial property owners would have paid the bulk of the estimated $500 million per year in tax revenue, with an average cost to homeowners of $100 to $450 per year. The measure was written to sunset in 12 years.

The measure was voted down on June 4th: 54.3% no, 45.7% yes. It needed a two-thirds majority vote to pass so it went down in flames.

Interestingly, LAUDS is forecasting that they will have a $576.6 million deficit for the 2019-2020 Fiscal Year. So basically, the $500 million per tax would keep things flat.

California: Pension Needs Increase

The Sacramento Bee posted an article up about a month ago regarding public employee pensions:

California state government’s bill for public employee pensions is set to rise by $676 million. CalPERS on Tuesday advanced a scheduled increase in employer contribution rates, bringing the state’s total bill for the 2019-2020 budget year to about $7 billion.

From what I can tell, the increase is driven by:

1. $340 million increase due to paying down the current unfunded liability. The article states that California has $287 billion in unfunded liabilities that it is trying to pay down over 30 years. Governor Newsom wants to add an additional $3 billion to that amount.

2. $229 million will have to come from various public agencies as the rate of return is being reduced from 7.25% to 7.0%.

Wall Street Journal: Public Pension Problems

The Wall Street Journal recently had an article up on government pensions. The basic direction is that even though we've had a significant bull market, public pensions are still having issues.

Liabilities of major U.S. public pensions are up 64% since 2007 while assets are up 30%, according to the most recent data from Boston College’s Center for Retirement Research . . . In the 1980s and 1990s, double-digit stock and bond returns convinced governments they could afford widespread benefit increases . . . The Illinois Supreme Court in 2015 threw out cuts by the legislature that were expected to save tens of billions of dollars . . . The Maine pension fund, which back in the early 1980s assumed a long-term investment return of 10%, now assumes a rate of 6.75%. If that rate were just 1 percentage point higher—where it was about 10 years ago—the projected $2.9 billion shortfall, most of which must be paid off over the next decade, would drop by more than half to $1.1 billion.

Pensions: Illinois' solution

Via MSN we learn the plan that Governor J.B. Pritzker hopes to implement to resolve the Illinois' pension problem.

The potential solutions:

1. Graduated income taxes versus their current flat tax.

2. Allowing more time to get to 90% funding -- shifting the target from 2045 to 2052.

3. Selling state assets.

Pension Tidbits

With the stock market having taken a nose dive in December and then bouncing straight up in January, it is interesting to read news on the situation around pensions.

Here's three articles that I found interesting:

This one is rather minor, but being from California and reading about the situation around PG&E, I had to read this article from The Sacramento Bee:

The California Public Employees’ Retirement System, which manages about $350 billion in investments, owned about 1.8 million shares of PG&E Corp. at the end of November, according to the latest figures available from the fund. At the time, the shares were worth about $47 million. CalPERS also owned Pacific Gas and Electric Co. securities worth about $35 million, according to the fund.

At the end of November, the stock price was around $26. At the end of January, it was around $13. If CalPERS still own the stock, it would equate to a loss of around $23 million. Not even a 0.1% hit to the fund. But then I guess when you're trying to hit a 7% return, even 0.1% counts.

Pensions: CalPERs returns

Pensions & Investments reported the following regarding 2018 and prior trends:

CalPERS earned -3.9% in the year, 6.3% for the three years and 5.1% for the five years ended Dec. 31, CEO Marcie Frost told the board for the $348.7 billion pension fund at its meeting Tuesday. The 10-year return ending Dec. 31 was 7.9%.

In his first presentation to the board, newly named Chief Investment Officer Yu Ben Meng said that based on performance, CalPERS is currently 65% or 66% funded. By comparison, the Sacramento fund was an estimated 71% funded as of June 30.

So the -3.9% 2018 performance also hit the funded amount pretty hard.

I want to key in on the 10-year return of 7.9% as short term variances can always be expected. With that said, Chief Investment Officer provides some additional information:

California State Pension and Stock Market Declines

I've been wondering what the impact of the recent market sell off would have on state pensions. One would assume that pension returns wouldn't drop at the same rate as the stock market as they're diversified across various asset classes. Yet, considering the pensions are of concern, any lower than planned returns will hurt.

Chief Investment Officer has an article up on how California is doing (these returns are prior to the December sell-off).

Baggesen [acting chief investment officer] didn’t given exact investment returns in detailing the low investment numbers to the CalPERS Investment Committee on Dec. 17, but CalPERS data from July 1 through Nov. 30 shows that the system lost overall a 1.9% during the five-month period.

Note that this starts from July 1st through November 30th. Looking at charts, the S&P 500 closed at 2,718 on Friday, June 29th. On Friday, November 30th, the S&P 500 closed at 2,760. So it actually increased during this time frame by 1.5%.

California: Pension Editorials

There are a handful of editors that have popped up regarding the topic of California pensions.

Here's one from the Mercury News. Some interesting notes:

Newsom will inherit a staggering $257 billion shortfall in state and school workers’ pension and retiree health care funds . . . So when state Legislative Analyst Mac Taylor gushed earlier this month about the annual state budget being in “remarkably good shape” with a forecast $15 billion surplus for the upcoming 2019-20 fiscal year, we had to question that characterization. The only reason there is a surplus is because Brown kept payments on retirement debt low by irresponsibly stretching them out for decades.

That's an interesting note about the $15 billion surplus. One could call it smoke and mirrors. I'm assuming without stretching out the pension payments, we'd be in a deficit. At least, this is how I read the sentence.