Posted By thestatedtruth.com on August 18, 2009

CalPERS Admits California “Pension Costs Unsustainable” – So What To Do About It?

In an unusual display of honesty CalPERS Actuary Says “Pension Costs Unsustainable”

The CalPERS chief actuary says pension costs are “unsustainable,” and the giant public employee pension system plans to meet with stakeholders to discuss the issue.

“I don’t want to sugarcoat anything,” Ron Seeling, the CalPERS chief actuary said as he neared the end of his comments. “We are facing decades without significant turnarounds in assets, decades of — what I, my personal words, nobody else’s — unsustainable pension costs of between 25 percent of pay for a miscellaneous plan and 40 to 50 percent of pay for a safety plan (police and firefighters) … unsustainable pension costs. We’ve got to find some other solutions.”

Dwight Stenbakken of the League of California Cities told the seminar that pension benefits are “just unsustainable” in their current form and difficult to defend politically.

“I think it’s incumbent upon labor and management to get together and solve this problem before it gets on the ballot,” he said.

“I actually think it is sustainable,” said Terry Brennand of the Service Employees International Union. He said the basic problem is investment losses, not high benefit levels.

“What is sustainable?” said Lou Paulson of the California Professional Firefighters. He said proposals to extend the retirement age for firefighters from 50 to 55 would result in more injuries with advancing age, driving up workers’ compensation costs.

Sustainability In Eyes Of Beholder

The California Firefighters Association and the Service Employees International Union think the plan is sustainable. I think it is too, if they are willing to put 25% of their pretax pay in every year at retire at 60 after 25 years of service.

Otherwise, they are speaking as extremely biased beneficiaries of massive public handouts, not as impartial unbiased observers.

8% annual returns are not sustainable, at least not with long-term yields at 3.5%. Indeed chasing performance is one of the reasons CalPERS suffered the losses it did. CalPERS is attempting to get 8% returns in a 4% return world.

Perhaps the crisis is just too noticeable to deny any longer, but it’s refreshing to see a bit of reality from CalPERS even as the unions are in a massive state of denial.

Politically Unfeasible Solutions

The article notes that four years ago Gov. Arnold Schwarzenegger backed an initiative proposed by former Assemblyman Keith Richman, R-Northridge, that would have switched all new state and local government hires to a 401(k)-style plan. However, Richman has since called a switch to a 401(k)-style plan “politically” unfeasible.

Dropping defined benefit plans may be “politically unfeasible”, but they are “Actuarially Mandatory”. If unions had any brains (and typically they don’t), they would hop on the 401K bandwagon for new employees, hoping to save what they have for current members.

Instead, they risk municipal bankruptcies such as happened Vallejo, California, where some bankruptcy judge ultimately decides who gets what.

Note that the system is so broken that it is highly probable that a massive reduction in pension benefits is necessary even IF the unions would agree to the 401K solution.

http://globaleconomicanalysis.blogspot.com/2009/08/calpers-admits-california-pension-costs.html

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