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Archive for August, 2017

The town of Loyalton, CA is a short scenic drive north of Truckee and, seemingly, a world away from the financial strain facing Calpers. It is the equivalent of a gnat on an elephant’s back.

Yet, the town’s pension woes provide insight to the overwhelming crisis facing other – and much larger – municipalities whose employees are participants in Calpers.

An article in the Los Angeles Times reads like a case study in the dangers of unsustainable promises.

In summary, the last of the town’s covered employees retired; there are four retirees with a vested full retirement benefit.  Loyalton’s City Council elected to pull out of Calpers when the fourth one retired.

Calpers smacked the town with a $1.7M termination fee,

Why?

Because the long-term liability associated with future pension benefits was grossly underfunded. The article does not say that, but it is the primary underlying reason.  You see, if the town’s plan had been properly funded, there would have been sufficient assets to cover the four until the day they died, plus spousal benefits to the extent they existed.

Loyalton does not have anywhere close to that money lying around, so pensions will be slashed by 60%.

The retirees are screaming foul.  After all, they were promised a sum-certain benefit for life.

To be fair, the employees, council and mayor should have done the math a long time ago. The town itself was not managed well, but you can say that about many municipalities., including Los Angeles (LA does not participate in Calpers.  Nevertheless, it faces the same fundamental problem within its own retirement plans).

What Calpers is doing is financially and technically justifiable, but it demonstrates just how deluded many beneficiaries have become.  The promise of  guaranteed pensions for life is only as good as the assets backing them.

Loyalton could have weathered the crisis had it stayed in Calpers. What that points out, though, is the weakness in the assumptions underlying the entire retirement fund. It depends too heavily on contributions from current employees to cover past service.  It is a Ponzi scheme, in that respect.

But it does not have to be.  A defined benefit plan can work….if contribution levels are sufficient.  I accounted for several small defined benefit plans back in the day when I was just out of college. We used conservative assumptions and were straightforward in our projections to the employers and employees.

Employees throughout the state need to contribute more of their own money to close the funding gap.  It is unfair to charge the taxpayers for the state’s years of over-promising more than it could afford.

The good news is that higher contributions can be spread over many years.  The pain would be no worse than felt by private sector employees who do the math and decide to increase their 401-K payroll deductions.

If employees want a guaranteed benefit, they must pay a premium for the protection. That’s no different than when we choose  lower-yielding investments in return for less risk.

It is also essential to educate the participants in Calpers about what a promise really is.

No sense in trying to teach that to our legislators.  They have been in bed with the public union leaders for way too long.

 

 

 

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