4 ms·

California's $500-billion pension time bomb

16 points by cwan 17y ago

stretchwithme 17y ago
all the more reason for Californians to retire to Florida or some other state where they won't have to help pay for everybody else's retirement. Its really about time the taxpayers were put in charge of what is spent and borrowed. The interests of legislators and taxpayers are clearly not aligned. Switzerland has referendums on everything the legislature does and so can we. Most of these ridiculously expensive commitments and the gymnastics undertaken to hide them would be stomped in the polls. If we copied Switzerland's system in general, a lot of things would begin to improve. With more things under local control, there would be less shifting of costs to the unsuspecting.
- mrcharles 17y ago
  More like "All the more reason to create your own retirement fund". I live in Canada, but I don't trust that the CPP will be around when I'm old enough to qualify. I have my own retirement plan started, and frankly, I expect to die coding anyway, so I might as well make money off that till the end. I don't really understand how people can trust these systems to begin with. People have this mistaken idea that the money you pay in just gets set aside for you later -- that's rarely the case. You are often paying for retirees right now, and young people will be paying for you later. I don't know what the makeup of the Canadian government will be in 5 years, let alone in 30+. It seems foolish to trust a public pension program.
- Lewisham 17y ago
  Part of California's problems (certainly not all!) are exactly because the taxpayers have too much control of what is spent and borrowed. The number of social welfare things that appear on the ballot when voting time comes around is crazy, but no-one will vote for the taxes required to support them. Only if the state politicians had full control of the books could they say "there's no money for this" and not have their hands forced by the voter to spend money they don't have. Californians want a welfare state, but won't pay for it, and you can't have it both ways (personally, I prefer the welfare state and higher taxes, but that's just me).
  - stretchwithme 17y ago
    which is why I think we should consider radical decentralization too. The Swiss have another great thing too with their decentralized cantons. You can actually LEAVE your canton and join another one. Or start a new one. This is the ultimate in discipline for government. Competition!
  - deleted 17y ago
    [deleted]
tshtf 17y ago
The NYT article on the same subject - http://www.nytimes.com/2010/04/07/business/07pension.html http://www.nytimes.com/2010/04/07/business/07pension.html - explains why: "Currently, governments discount pension values by using the return they expect their pension investments to earn over the long term. For most public pension funds, that means about 8 percent. In California, the teachers’ fund uses 8 percent, Calpers uses 7.75 percent, and the University fund uses 7.5 percent... After the researchers applied a risk-free rate of 4.14 percent, equivalent to the yield on a 10-year Treasury note, the present value of the promised benefits ballooned. The researchers came up with a $425 billion shortfall for the three funds."
- btilly 17y ago
  Compounding the issue, in an attempt to achieve those investment rates the pension funds have invested heavily in private equity funds. However during the bubble private equity went on an unsustainable spending spree and those funds are certain to lose large amounts of money when large numbers of bought out companies can't make principal payments that come due in 2011 and 2012. The last time that private equity ran up a bubble like that was in the late 80s. The institutions that invested in private equity funds then were the S&Ls. That was a much smaller bubble than this, and we all know how well that turned out...
- nradov 17y ago
  A 7.5% long term return on pension investments is a complete fantasy. Look at current T-bond rates. The smart money is betting on low interest rates to last a long time.
mark_l_watson 17y ago
The article is good, but has one big error: the statement that existing pensions are contractual obligations and must be paid. Go back a few decades to the bankruptcy of Orange County California. Unions negotiated away a large part of pension obligations to members. When (not if) the state of California goes bankrupt, those obligations will not go away entirely, but will be reduced through bankruptcy negotiations.
- stretchwithme 17y ago
  hopefully, they'll greatly reduce the amount paid to people based on their final year's salary. what a scam that is. Work extra hard that year and then for that extra work for every year of your life after that? wtf! what sap would agree to pay that?
- nradov 17y ago
  The article is correct, in that the US bankruptcy code doesn't cover states. There is literally no legal way for a state to go bankrupt, and thus no way to force renegotiation of the pension contracts through bankruptcy court. Of course the day may come when the state pension funds simply have no cash left and stop paying benefits, and the pensioners will then sue to enforce their contracts. It's hard to predict what might happen then. Unions might be strong-armed into accepting a cram down. Courts could order the legislative and executive branches to increase taxes or reallocate funds. Who knows?
  - mark_l_watson 17y ago
    Question: so counties are allowed to go bankrupt, but not states? States can not print money, and many states including Arizona where I live are coming up short paying for essential services.
    - nradov 17y ago
      That's correct. Counties and municipalities can go bankrupt under Chapter 9. http://www.uscourts.gov/bankruptcycourts/bankruptcybasics/chapter9.html http://www.uscourts.gov/bankruptcycourts/bankruptcybasics/ch... There is no provision for states. It's an unprecedented situation so I don't think anyone can predict what will actually happen when they inevitably run out of cash.
roboneal 17y ago
This is what happens when deferred "defined" benefits spanning decades are controlled by political machines that operate under 2 or 4 year election cycles. Unfortunately, politicians get elected on the pork and candy they hand out NOW, not for the fiscal health of state pension funds 30 years from now.

16 points by cwan 17y ago

all the more reason for Californians to retire to Florida or some other state where they won't have to help pay for everybody else's retirement. Its really about time the taxpayers were put in charge of what is spent and borrowed. The interests of legislators and taxpayers are clearly not aligned. Switzerland has referendums on everything the legislature does and so can we. Most of these ridiculously expensive commitments and the gymnastics undertaken to hide them would be stomped in the polls. If we copied Switzerland's system in general, a lot of things would begin to improve. With more things under local control, there would be less shifting of costs to the unsuspecting.

mrcharles 17y ago
More like "All the more reason to create your own retirement fund". I live in Canada, but I don't trust that the CPP will be around when I'm old enough to qualify. I have my own retirement plan started, and frankly, I expect to die coding anyway, so I might as well make money off that till the end. I don't really understand how people can trust these systems to begin with. People have this mistaken idea that the money you pay in just gets set aside for you later -- that's rarely the case. You are often paying for retirees right now, and young people will be paying for you later. I don't know what the makeup of the Canadian government will be in 5 years, let alone in 30+. It seems foolish to trust a public pension program.
Lewisham 17y ago
Part of California's problems (certainly not all!) are exactly because the taxpayers have too much control of what is spent and borrowed. The number of social welfare things that appear on the ballot when voting time comes around is crazy, but no-one will vote for the taxes required to support them. Only if the state politicians had full control of the books could they say "there's no money for this" and not have their hands forced by the voter to spend money they don't have. Californians want a welfare state, but won't pay for it, and you can't have it both ways (personally, I prefer the welfare state and higher taxes, but that's just me).
- stretchwithme 17y ago
  which is why I think we should consider radical decentralization too. The Swiss have another great thing too with their decentralized cantons. You can actually LEAVE your canton and join another one. Or start a new one. This is the ultimate in discipline for government. Competition!
- deleted 17y ago
  [deleted]

tshtf 17y ago

The NYT article on the same subject - http://www.nytimes.com/2010/04/07/business/07pension.html http://www.nytimes.com/2010/04/07/business/07pension.html - explains why: "Currently, governments discount pension values by using the return they expect their pension investments to earn over the long term. For most public pension funds, that means about 8 percent. In California, the teachers’ fund uses 8 percent, Calpers uses 7.75 percent, and the University fund uses 7.5 percent... After the researchers applied a risk-free rate of 4.14 percent, equivalent to the yield on a 10-year Treasury note, the present value of the promised benefits ballooned. The researchers came up with a $425 billion shortfall for the three funds."

btilly 17y ago
Compounding the issue, in an attempt to achieve those investment rates the pension funds have invested heavily in private equity funds. However during the bubble private equity went on an unsustainable spending spree and those funds are certain to lose large amounts of money when large numbers of bought out companies can't make principal payments that come due in 2011 and 2012. The last time that private equity ran up a bubble like that was in the late 80s. The institutions that invested in private equity funds then were the S&Ls. That was a much smaller bubble than this, and we all know how well that turned out...
nradov 17y ago
A 7.5% long term return on pension investments is a complete fantasy. Look at current T-bond rates. The smart money is betting on low interest rates to last a long time.

mark_l_watson 17y ago

The article is good, but has one big error: the statement that existing pensions are contractual obligations and must be paid. Go back a few decades to the bankruptcy of Orange County California. Unions negotiated away a large part of pension obligations to members. When (not if) the state of California goes bankrupt, those obligations will not go away entirely, but will be reduced through bankruptcy negotiations.

stretchwithme 17y ago
hopefully, they'll greatly reduce the amount paid to people based on their final year's salary. what a scam that is. Work extra hard that year and then for that extra work for every year of your life after that? wtf! what sap would agree to pay that?
nradov 17y ago
The article is correct, in that the US bankruptcy code doesn't cover states. There is literally no legal way for a state to go bankrupt, and thus no way to force renegotiation of the pension contracts through bankruptcy court. Of course the day may come when the state pension funds simply have no cash left and stop paying benefits, and the pensioners will then sue to enforce their contracts. It's hard to predict what might happen then. Unions might be strong-armed into accepting a cram down. Courts could order the legislative and executive branches to increase taxes or reallocate funds. Who knows?
- mark_l_watson 17y ago
  Question: so counties are allowed to go bankrupt, but not states? States can not print money, and many states including Arizona where I live are coming up short paying for essential services.
  - nradov 17y ago
    That's correct. Counties and municipalities can go bankrupt under Chapter 9. http://www.uscourts.gov/bankruptcycourts/bankruptcybasics/chapter9.html http://www.uscourts.gov/bankruptcycourts/bankruptcybasics/ch... There is no provision for states. It's an unprecedented situation so I don't think anyone can predict what will actually happen when they inevitably run out of cash.

roboneal 17y ago

This is what happens when deferred "defined" benefits spanning decades are controlled by political machines that operate under 2 or 4 year election cycles. Unfortunately, politicians get elected on the pork and candy they hand out NOW, not for the fiscal health of state pension funds 30 years from now.