About the author

Jacob Wolinsky

Founder and CEO of ValueWalk.com (the “Site”) is a web site owned by VALUEWALK LLC, a New Jersey limited liability corporation. I am the former VP of business Development of SumZero, LLC, the world’s largest community I have prior experience in a value based pe firm focused on PIPE transactions in micro-cap companies, and at a value based research firm, which focused on smid caps.

  • Jacob Wolinsky

    I did not realize the underfunding was so low, I understand the power of the unions and while they accomplished great things in the early part of the 1900s, they are crippling our economy now state by state, city by city. Maybe I am living in fantasy land, but I really hope we can fix these problems before we go broke. Here is another great article I found about pensions (largely agrees with my assumptions) http://www.investors.com/NewsAndAnalysis/Article/567229/201103251914/Public-Pension-Plans-Underfunded-Even-With-Rosy-Forecasts.htm

    Here is a great comment you made on SA about caLPERs, I am going to re-post it here for the readers to enjoy.

    “That “saved” it 400 million this year.” I appreciate you putting “saved” in quotes. I guess CalPers is really deferring another 400 million debt over the next 15 years while only charging 7.75% on the deferred money; a burden to paid by taxpayers for services already consumed. I guess we can add that to the already deferred 122 billion.

    I read Jacob Wolisnky’s comments (first post – link: http://www.valuewalk.com/?p=6828 ) and I agree with him that CalPERS has grossly over estimated their potential returns. He states that CaLPERS will have a 180 billion dollar shortfall over the next ten years based on his projections. I think it is already much worse than 180 billion for several reasons:

    1) CalPERS is already 122 billion under funded on a market value basis (based on a funding ratio of 65% and 227 billion in assets). Full funding is therefore 349 billion.

    2) CalPERS formula of a 7.75% rate of return is based on 100% funding.

    3) CalPERS rate of return might not impact the current MVA numbers but it does grossly underestimate the “actuarial value” numbers, and hides the true cost of the pension plan.

    4) CalPERS smoothing policy extends the amortization period beyond the 5 year industry standard. CalPERS has extended their smoothing policy at least three times over the past eight years in an effort to keep costs to their members (cities‘, counties, special districts) from literally bankrupting everything.

    5) CalPERS continue to lie about the severity of the issue; they prefer to get as much employee service credited at the guaranteed rate of return of 7.75%. Did I mention the unions control CalPERS?

    If CalPERS 7.75% rate of return is based on 349 B in assets they need to return 27 billion in investment earnings. Unfortunately for the taxpayers that are on the hook for any and all shortfalls, CalPERS needs to return that 27 billion based on what they have in assets, which is 227 B. That’s roughly a 12% return just to keep the unfunded liability from growing. If, as Jacob projects, the return is 2.7%, CalPERS will resemble a train wreck and expect the many Counties, Cities‘, and Special District pension plans that they manage to cover the cost of their union dominated Boards mis-management. That will manifest itself in the form of increased pension contributions that some are projecting will be 60-70% of payroll. California cities can’t absorb that cost and all fiscal hell will break loose if we don’t get honest with this problem.

    Some people think Illinois pension system is in the worst shape and it probably is. But California, and CalPERS, is using accounting gimmicks to hide the true nature of the problem. The rate and velocity of the pensions is California is growing at an alarming clip. Pension formulas are a huge problem and amongst the most generous country. When you compound the effects of generous pension formulas, retirement at 50-55, and the highest wages in the nation is it any wonder that pension are an issue. It is almost standard that public safety employees retiree as early as 50 with 100-150k in pensions.

    The smoothing policy used by CalPERS is a sham. They have extended payment on unfunded liabilities out so far, for work that has already been consumed, that future generations will be paying for work that performed before they were born. Some people are referring to this as “intergenerational theft” and I don’t disagree. I equate it to buying a used car with about one year of life left and financing it over 15-30 years. Anyway, Girard Millar, a pension expert, writes about calPERS smoothing policy. Here is the link for those who may be interested: Pink Slips and Pension Red Ink: http://www.governing.com/colu...

    Here is an excerpt:

    “How high will this flood crest? Local employers are now skeptical that they have been told the full truth about how high their pension costs will ultimately surge. Unlike the vast majority of public pension funds, CalPERS uses a 15-year actuarial smoothing process that camouflages the genuine economic impact of market fluctuations. I have no issue with normal industry-standard actuarial smoothing periods of 5 years, in light of the average length of a business cycle — which is 6 years based on 14 recession cycles in the past 84 years. But the CalPERS process is opaque and flunks the transparency test that taxpayers, public managers and municipal bond investors are entitled to expect. As I have explained before, such extraordinary “smoothing” practices deserve SEC investigation as an “artifice and device” to conceal relevant financial information from the investment community — as well as the employers who must now bear the financial brunt of unsustainable pension benefits.”

  • Reform

    Jacob,

    I enjoyed the article but I’m not sure I agree with your conclusion. While I agree with your math I don’t think using 227 billion as the starting point is the correct approach. CalPers has 227 billion in assets but they also have 122 billion in unfunded liabilities, for a total of 349 billion (based on calpers being 65% funded). You can correct me if you think I’m wrong, but the pension model is predicated on expected rates of return, or the discount rate, based on full funding (349 billion). If CalPERS 7.75% rate of return is based on 349 B in assets they need to return 27 billion in investment earnings. Unfortunately for the taxpayers that are on the hook for any and all shortfalls, CalPERS needs to return that 27 billion based on what they have in assets, which is 227 B. That’s roughly a 12% return just to keep the unfunded liability from growing.

    Now, if you calculate based on your 2.7% projected rate of return, you will see how precarious our situation is out here in not so golden California. Changing the retirement age might seem like an easy and logical remedy – until you understand that unions want no part of it. And the unions control our democratic state.

    Here is an example of what is going on in my city. What calPERS considers the “Normal Rate” for a 2.7@55 retirement plan was 8-9% of payroll. The Normal Cost has grown to over 10% payroll. The total “employer cost” will be over 21% of payroll beginning July 1. This extra 11% is being charged is to help cover a “portion” of the unfunded liability and also pay for some additional pension perks (CalPERS has been nice enough to allow us to pay our debt over a 15-30 year period at 7.75% interest – known as smoothing – so we don’t get too upset about the increased costs that would occur assuming they used a standard 5 year smoothing policy). On top of the 21% of payroll we also pay the “employees” 8% contribution. Employees pay zero (and do NOT pay into social security), and taxpayers pay 29% of payroll toward pensions (about 26k per year).

    The average salary of a worker in this plan (general employees and management) is 88k (BTW, this CalPERS plan was only 52% funded on June 30, 2009). One of the additional pension perks I mentioned allows employees to include the 8% the city pays on their behalf as compensation for the purpose of determining their pension. So assuming the person retired at the average pay, with 30 years of city employment (2.7@55), the numbers would look like this: 88k * (1 + 8%) = 95K * (30*2.7) 81% = 77K per year.

  • Reform

    Jacob,

    I enjoyed the article but I’m not sure I agree with your conclusion. While I agree with your math I don’t think using 227 billion as the starting point is the correct approach. CalPers has 227 billion in assets but they also have 122 billion in unfunded liabilities, for a total of 349 billion (based on calpers being 65% funded). You can correct me if you think I’m wrong, but the pension model is predicated on expected rates of return, or the discount rate, based on full funding (349 billion). If CalPERS 7.75% rate of return is based on 349 B in assets they need to return 27 billion in investment earnings. Unfortunately for the taxpayers that are on the hook for any and all shortfalls, CalPERS needs to return that 27 billion based on what they have in assets, which is 227 B. That’s roughly a 12% return just to keep the unfunded liability from growing.

    Now, if you calculate based on your 2.7% projected rate of return, you will see how precarious our situation is out here in not so golden California. Changing the retirement age might seem like an easy and logical remedy – until you understand that unions want no part of it. And the unions control our democratic state.

    Here is an example of what is going on in my city. What calPERS considers the “Normal Rate” for a 2.7@55 retirement plan was 8-9% of payroll. The Normal Cost has grown to over 10% payroll. The total “employer cost” will be over 21% of payroll beginning July 1. This extra 11% is being charged is to help cover a “portion” of the unfunded liability and also pay for some additional pension perks (CalPERS has been nice enough to allow us to pay our debt over a 15-30 year period at 7.75% interest – known as smoothing – so we don’t get too upset about the increased costs that would occur assuming they used a standard 5 year smoothing policy). On top of the 21% of payroll we also pay the “employees” 8% contribution. Employees pay zero (and do NOT pay into social security), and taxpayers pay 29% of payroll toward pensions (about 26k per year).

    The average salary of a worker in this plan (general employees and management) is 88k (BTW, this CalPERS plan was only 52% funded on June 30, 2009). One of the additional pension perks I mentioned allows employees to include the 8% the city pays on their behalf as compensation for the purpose of determining their pension. So assuming the person retired at the average pay, with 30 years of city employment (2.7@55), the numbers would look like this: 88k * (1 + 8%) = 95K * (30*2.7) 81% = 77K per year.

Copyright © 2015 Valuewalk.com

Developed by ValueWalk Team

Share with your friends










Submit
Share with your friends










Submit
Share with your friends










Submit