If you only care about your one issue then you also care about the pension issue and just don't know it yet.
From the In Box:
Is the Mayor still listening to the Fed? Aging baby boomers may hold down U.S. stock values for the next two decades as they sell their investments to finance retirement, according to a paper from the Federal Reserve Bank of San Francisco.
“U.S. equity values have been closely related to demographic trends in the past half century,” adviser Zheng Liu and researcher Mark Spiegel wrote in a paper released by the bank today. “In the context of the impending retirement of baby boomers over the next two decades, this correlation portends poorly for equity values.”
The equity-price-to-earnings ratio of U.S. stocks tripled from 1981 to 2000 as Americans born between 1946 and 1964 reached their peak working ages, Liu and Spiegel said. Overseas investors’ demand for U.S. stocks might help mitigate the effect of a baby-boomers’ sell-off, yet the impact would probably be limited, they said. “Foreign demand for U.S. equities is unlikely to offset price declines resulting from a sell-off by U.S. nationals,”they said.
On top of this from Chris Street:
The three largest California public retiree plans (CalPERS, CalSTRS,
and UCRS) that administer pensions of approximately 2.6 million State
and Local public current and retired employees have been under
tremendous scrutiny since last year’s release of the Stanford
University Institute for Public Policy report: “Going For Broke”.
The study concluded that California retirement plans liability was
under-funded by over $500 billion. The report blamed most of the
shortfall on the pension plan’s expectation of future annual investment
returns of 7.75%; versus a realistic expectation of a 4.14% annual
return. The cabal of California politicians, bureaucrats, and
crony consultants that justified granting lucrative benefits to
employees while failing to contribute enough to support the true
pension costs; solemnly dismissed the Stanford report
as unsophisticated reflections by academics. But now that a swarm of
local governments want to abandon the floundering retirement trusts;
the State plans are only willing to credit a 3.8% expected
return. If the California State pension plans adopted the same 3.8%
rate they are only willing to credit when participants want to leave;
their published $288 billion in pension shortfall would metastasize
into an $884 billion California State insolvency.
Translation: The 7.75% ROR that the city allows CalPERS to use is not conservative.
It doesn’t take a Stanford MBA to realize producing consistently
high investment returns since 2007 has been a difficult in the extreme.
The California State pension plans that currently control $432 billion
in assets, suffered a $109.7 billion in losses during the 2008 to
2009 recession. Pension plans normally require employers and their
employees to mutually increase contributions to make up pension
shortfalls. But public pension plans are notorious for not requiring
employees to make significant contribution. California police, prison
guards, firemen, and lifeguards can retire at age 50, but have never
been required to contribute to fund pensions. With headlines that
California plans are in big trouble; many government agencies applied
to withdrawal from the State plans. But as calculated below;
compounding investments at 7.75% grows to more than three times the
amount of compounding investments at a 3.8% rate of return.
Play with the calculator at Chris's site here.
When I was elected as Treasurer of Orange County, California in
2006, I was flabbergasted to discover that the County’s $8 billion of
retirement investments was covertly leveraged up by $22 billion of
derivatives. I quickly learned that many unions see pension benefits as
contracted rights; and pension investing as a no risk crap-shoot for
extraordinary returns. If the pension investment returns sky-rocket,
the unions will bargain for increased benefits. If the
pension investment returns crash; the public employees are protected by
rock-solid contract law that prevents any reduction in benefits. In
2007, I was fortunate to gain the support of enough OC Pension Trustees
to reduce speculative derivative use by 90%. At the time, Trustees for
the California public pension plans solemnly dismissed Orange County as
unsophisticated. Shortly thereafter the stock market crashed and the
State Pension Trustees stopped making comments.
Once famous as the Golden State for leading the nation in high tech
growth industries that provided excellent wages; California is now
tarnished for having the second highest unemployment and worst state
credit rating in the nation. Forbes
recently quoted a top venture capitalist that compared the California
business climate to France: “I try not to hire here, and I certainly
would not launch a company here. But the wine is good.” Tripling of the
burden for under-funded pension liability to almost $1 trillion will
probably ruin the taste of California wine for most taxpayers.