Wednesday, April 12, 2017

Desperados Under the Expected Rate of Return

And if California slides into the ocean
Like the mystics and statistics say it will
I predict this motel will be standing until I pay my bill

-- Warren Zevon

Hell-raising rock and rollers aren't usually actuaries, but as California's bills start to come due, the artist has a point:
California cities and counties will see their required contributions to the largest U.S. pension fund almost double in five years, according to an analysis by the California Policy Center.

In the fiscal year beginning in July, local payments to the California Public Employees’ Retirement System will total $5.3 billion and rise to $9.8 billion in fiscal 2023, according to the right-leaning group that examines public pensions.

The increase reflects Calpers’ decision in December to roll back the expected rate of return on its investments. That means the system’s 3,000 cities, counties, school districts and other public agencies will have to put more taxpayer money into the fund because they can’t count as heavily on anticipated investment income to cover future benefit checks.
As Walter Russell Mead points out, the expected rate of return was pretty high:
Calpers has concealed the depth of the pension shortfall by using unrealistic rates of return in its accounting estimates. But to stay solvent, it was recently forced to cut its projected rate from 7.5 percent to 7.375 percent (with more reductions almost certainly on their way). The state will need to make up the difference with tax increases and austerity.
So if the actual rate of return turns out to be more like, say, 5 percent? Good luck. We have looming pension crises in a lot of places. And if California imagines that some other entity is going to make up the shortfall, they are sadly mistaken. The printing presses at the Fed are still running full bore and it's not going to be enough.


R.A. Crankbait said...

Require state pension funds to "mark to market", and the revolution begins.

Mr. D said...

Require state pension funds to "mark to market", and the revolution begins.

No kidding. The tumbrels would be rolling in short order.

Gino said...

and CA just passed a $52 Billion tax on gas and registration fees to build/repair roads... and everybody knows that money will end up where the other road tax increases went...
we need a revolution. a bloody one.

Bike Bubba said...

Mark to market could be a huge mistake--in corporate income statements, what it's done is ensure that the book value is what you could get pretty much in a fire sale. Plus, in a Democratic legislature, it's a DOA proposal. Really anything of substance is DOA in Sacramento until they get some adults elected.

I think what you do is you simply get a group together to present good data that says "here is the model they're using, here is reality--the difference amounts, actuarially speaking to $X/year. What are we going to do to fix this--and no, I'm not paying $Y in taxes because the pension board was either incompetent or lying."

R.A. Crankbait said...

Of course "mark to market" would be disaster for the pension plans; one could argue whether that's a feature or a bug. Point being, MTM was enforced on the private sector during the financial crisis to restore some confidence and credibility in the process that had been running on speculation, pixie dust/unicorn farts and "greater fool" theory. All of which pretty much describes the pension market. And if there's any place where confidence and credibility are sorely needed, it is there. I'd love it if they'd do a "real numbers" approach such as you outlined, but too many in the decision-making roles will clap their hands over their ears and say, "Na, na, na - not listening!" - even as the bricks fall on their heads.

Bike Bubba said...

Nah, no sense talking nonsense just because the other side does. I grant fully that the left will say "nah nah I can't hear you", but that's not who needs to listen. Who needs to listen is voters. And if they won't listen, we are screwed no matter what.