How will unfunded "pensions" affect the local economy?

User Forum Topic
Submitted by phaster on September 1, 2014 - 7:48am

Here is a simple question, how do you think unfunded pensions affect the economy, specifically RE prices?

To illustrate specifically what I am concerned with, below is an outline of a local unfunded public pension issue....


A recent wall street journal article essentially said the SD county pension system was using derivaties to manage their portfolio.

"Simply put, it could have a market exposure of $20 billion despite only managing half that amount."

To show why the current SD county pension "operations" is a bad idea, google "buying stocks on margin" and check out the first search result.

The math is pretty simple to understand (just add "000,000" to the following $ figures):

A Buying Power Example
Let's say that you deposit $10,000 in your margin account. Because you put up 50% of the purchase price, this means you have $20,000 worth of buying power.

Returning to our example of exaggerated profits, say that instead of rocketing up 25%, our shares fell 25%. Now your investment would be worth $15,000 (200 shares x $75). You sell the stock, pay back your broker the $10,000, and end up with $5,000. That's a 50% loss, plus commissions and interest, which otherwise would have been a loss of only 25%.

Think a 50% loss is bad? It can get much worse. Buying on margin is the only stock-based investment where you stand to lose more money than you invested. A dive of 50% or more will cause you to lose more than 100%, with interest and commissions on top of that.

A good basic math education, is all that is needed to understand the "downside" risk of a margin account (but all the reports in the media so far do not show this simple "downside" math).

Adding the "options" account variable complicates matters, but kinda explains the lackluster single digit portfolio returns of the SD county portfolio (i.e. the various options w/in the portfolio of "puts for downside protection and "calls" to try and win big on the upside" cancelled each other out - so far, in a market that has gone up), the big unknown is how the "options" are structured within the portfolio and how it react if there is sudden and dramatic turbulence.

Consider all it might take for the "local" house of cards to fall is some kind of foreign black swan event that drops the market towards 10% down, and because of leverage things could suddenly get ugly for the local economy (for example LTCM, which happened in a less complex world, now one has to factor in some thing akin to high speed robo traders, that will sell off a position because of a trigger event, thus converting a "paper" loss into a real loss for the pension portfolio??).

10 billion dollars placed into a margin account to play the options market IMHO is "insane" if anyone was investing their own money, but think I uncovered the motive.

The reason the county pension board might have taken such drastic action is the change in accounting rules which put public pensions on the balance sheet next year.

Few even in the investment community know that:

PUBLIC "Pension liabilities must be included on the balance sheets of the agencies responsible for funding their employees' pensions. Until now liabilities have been buried in arcane footnotes that few read and even fewer understood"

NOTE if San Diego's pension board margin-option strategy fails, the tax payer is on the hook!

One other thing, there is a youtube video (starting at 3:24), where san diego is mentioned at the being at the top of the list (for being the deepest in the hole overall for unfunded pensions and having an unfunded health care plan)

If pensions and health care costs have to both be included on the balance sheet, the bond markets are in for a real shock which will ripple through the economy and affect everyone on main street.

If you want understand why there is a problem with pensions in San Diego, read the history of pensions at the state level (which started out well managed and over the years turned corrupt and mismanaged):

The local(s) (city and county) basically followed the CalPERS model, and what might be telling is the former CEO of CalPERS just plead guilty to a fraud, corruption charge

Submitted by phaster on February 29, 2016 - 8:14am.

XBoxBoy wrote:
Parabolica wrote:
The problem with defined contributions plans as I see it is that the vast majority of working people lack the financial sophistication required to invest for their retirement.

I have no idea who is right in this argument or what is fair, but I'd like to point out another issue that worries me about defined benefit vs 401k. That is that 401ks are generally optional, while defined benefit are not. I have well educated, professional friends working in high tech careers, in their late 50s who have never put any money into a 401 or any retirement plan (other than social security). Compare that to govt. workers or teachers who have no choice but to contribute. Not only are people not savvy enough to manage the financial waters, they aren't savvy enough to figure out they need to save to have a retirement fund. Not sure how to fix that, but it seems to me to be a big issue lurking out there.

there is indeed a BIG ISSUE LURKING

[modesty/sarcasm ON]

and FWIW IMHO I'm RIGHT and everyone ELSE is to blame for causing an economic mess...

[modesty/sarcasm OFF]

As it stands politicians/lawyers/public-employees-union-members think it would be fair for the taxpayers to make them whole (after all they are the one's who did all the hard work of implementing the policies, writing the contracts and were in charge of the day in and day out operation of various pension fund accounts...)

"they" (politicians/lawyers/public-employees) using circular logic would argue, thus it is written (and ignoring "crucial evidence") therefore we find its the LAW

this POV isn't much different than the approach taken by leadership in the catholic church back in the day when the pope made a law that which said, the earth was at the center of the universe (and ignored all the math and science)

WRT the operation of the local pension fund - notice in press releases - on the side that supports the politicians/lawyers/public-employees position, stories ALL BUT IGNORE THE MATH because its an inconvenient truth

AND instead hide behind the convenient fiction that its possible to have a sustainable DB program for honest hard working muni "union" employees who will suffer otherwise

in the december 2015 (back pages news-paper story) that started me questioning the wisdom of existing fund management (yet again), the actuaries long ago calculated out that in order for the LOCAL pension portfolio to work, the investment vehicles (bonds, stocks, etc.) basically had to grow 8% over the long haul!!!

BUT as we know from year to year the market will vary...

so some years the total return of the portfolio will be much GREATER than the actuaries design target of 8%,... and some years the total return of the portfolio will be much LOWER than the the actuaries design target of 8%,... BUT OVERALL the idea was that pension portfolio was designed to AVERAGE OUT to 8%

its impossible to say exact DEBT figures w/out more data BUT think of the problem as being, for the past three decades the portfolio operators (i.e. politicians/lawyers/public-employees) said hey the portfolio is doing great and give themselves a pension bonus payment of say anything greater than the actuaries target of 8% (thinking this "EXTRA" is not needed)

for example, back in the 1980's and 1990's when the market was really booming (and the portfolio produced returns on average much greater than 8%)


during the 1980s the market returned on average 17.57%
during the 1990s the market returned on average 18.17%

the portfolio operators (i.e. politicians/lawyers/public-employees) in the 1980's said hey since we averaged 17.57% in the market, so we have an EXTRA of 9.57% to give our selves because of a simple formula we included in a contract (average market return - actuaries design target = EXTRA) or (17.57%-8% =9.57%)

the portfolio operators (i.e. politicians/lawyers/public-employees) in the 1990's said hey since we averaged 18.17%, we have an EXTRA of 10.17% because (18.17%-8% =10.17.%)

a misunderstanding of how "averages" work explains why the portfolio is BILLIONS in DEBT

City pensioners get '13th check' bonus

More than $6.1 million has been distributed to retired San Diego city employees in the form of a "13th check" — beyond their usual 12 monthly payments — making this year's holiday bonus the largest such payout in the history of the three-decade-old practice.

But it's become a source of conflict as the city's pension system faces a $2 billion shortfall in promised payments, which remains a taxpayer burden and has led to budget crises in the past at City Hall.

what the $hit for brains managers of the San Diego pension portfolio did, was in reality take/pocketed for themselves the "excess" profits back in boom decades of the 80's and 90's that were originally designed to be kept w/in the account so that the portfolio averaged out to 8% from the 1980's to the present day...

Handbook of Frauds, Scams, and Swindles: Failures of Ethics in Leadership (edited by Serge Matulich, David M. Currie)

Though SDCERS investments were earning well above the 8 percent rate of return estimated by the system actuaries, under normal conditions investments surpluses are required to make up for below-average returns in other years to achieve the average rate of return. Therefore, unless the actuaries' estimates are grossly incorrect, in the long run true "surplus earnings" are impossible. The use of surplus earnings for the purposes other than maintaining the pension system, such as to expand existing benefits should be viewed as a loan from the system THAT WILL REQUIRE REPAYMENT IN THE FUTURE.

page 286

the economic problem NOW (and into the foreseeable future) is further compounded with financial instruments like "swaps" (which really supercharges the amount of money that somehow needs to be accounted for w/in the system)

and IMHO makes an economic disaster all but unavoidable (all because politicians/lawyers in a position of power who were suppose to over see pension portfolio operations, never took a step back to look at the big picture and apply basic middle school math concepts WRT the financial instruments they were in charge of)!!

Submitted by FlyerInHi on February 29, 2016 - 2:04pm.

phaster, you're sounding the alarm a bit much.

The unfunded municipalities will have to declare bankruptcy and work out their finances. There's a process for that.

Submitted by phaster on March 6, 2016 - 9:55am.


I guess its up to me warn of the economic danger(s) since none of the old hands on this forum were able to connected the dots to paint the big picture of a parallel situtation as described in the big short prologue

...long story short

"public pensions and muni bonds" have mutated into a monstrosity that could chaotically collapse the economy and very, very, vary few of the experts, leaders or talking heads in the wider world seem to have a clue

I'm guessing most of you still don't know what most likely will happen AND truth be told its impossible to predict the future w/ 100% accuracy

yeah you might have some soundbite you repeat so you don't sound dumb about the state of public finance, but come on (is it actually possible for the "average" taxpayer to trust/verify the figures?)

CA renter wrote:
"Standard And Poor's Gives San Diego County Its Highest Rating
San Diego County has earned the highest possible rating from all three of the top credit agencies—Fitch, Moody’s, and Standard and Poor’s."

so while most in this country are distracted by political horse$hit (i.e. soap opera media coverage of TRUMP for president)

an honest outsider and math-centric weirdo might just see the giant lie at the center of the economy... by just PAYING ATTENTION!

NPR wrote:

After the stock market crash of 1929, the agencies began to also rate bond investments for banks — at the request of the U.S. government. But things began to change in the 1960s and 1970s. Instead of charging investors for their ratings information, the agencies began to charge the bond issuers themselves for the ratings.

"People were quite critical of this and said it could create a conflict of interest," Partnoy says. "You can imagine what the difference between ratings of restaurants and movies might be if instead of the Michelin Guide or the Zagat guide, if the restaurants or movie companies themselves were paying the raters to be rated, it's an obvious conflict of interest. And now it's very commonplace that companies and GOVERNMENTS — anyone who wants to borrow money — THEY ARE THE ONES WHO ARE PAYING FOR THE RATING."


Financial Outlook Shows San Diego's Revenue Will Grow

Revenues to the city of San Diego are projected to "modestly improve" over the next five fiscal years, while expenses will continue to rise, according to a financial outlook to be delivered Thursday to the City Council's Budget Committee.

The five-year outlook, released annually in November by the mayor's financial staff, projects steadily increasing general fund surpluses through Fiscal Year 2021.

The anticipated surpluses begin at $200,000 for the next fiscal year, and grow in subsequent years to $7.9 million, $25.1 million, $46.4 million, and $73.7 million.

THE PROJECTIONS DON'T INCLUDE FACTORS THAT OCCASIONALLY POP UP, like increases in contributions to the employee pension system.


PUBLIC "Pension liabilities must be included on the balance sheets of the agencies responsible for funding their employees' pensions. Until now liabilities have been buried in arcane footnotes that few read and even fewer understood"

Submitted by phaster on June 12, 2016 - 9:04am.

FYI wrote:

California Pension Fund CEO Sentenced for Bribery

A federal judge Tuesday sentenced the former head of the nation's largest public pension fund to four and 1/2 years in prison in a case in which the pension fund CEO acknowledged accepting more than $200,000 in bribes and trying to steer investments to help an associate.

Senior U.S. District Court Judge Charles Breyer called the case against Federico Buenrostro, the former chief executive of the California Public Employees' Retirement System, "seriously troubling" and said it reflected a "spectacular breach of trust for the most venal of purposes, which is self-enrichment." wrote:

Puerto Rico, Illinois And California: Public Pension Dominoes

In good times, lawmakers at the state and local level are more than happy to give raises to government employees along with generous benefit increases. The future costs for higher retirement benefits are assumed to be covered by the booming stock market investments held by pension funds.

This happened in California in 1999 after government union-backed candidates won both the governor’s mansion as well as the state treasurer’s race and then pushed through a massive increase to pension benefits on the financial strength of what turned out to be the ephemeral froth of the ’90s tech boom. After the promises were made and the market returned to more reasonable valuations, the state’s public pension contribution obligations jumped five-fold from $611 million in 2001 to $3.5 billion in 2010. California’s unfunded pension liability totals $25,325 per capita, the fourth-highest in the nation, when assuming a market rate of return. wrote:

A new study for the Mercatus Center at George Mason University ranks each US state’s financial health based on short- and long-term debt and other key fiscal obligations, such as unfunded pen­sions and healthcare benefits.

#44 California
#45 Hawaii
#46 Kentucky
#47 Illinois
#48 New Jersey
#49 Massachusetts
#50 Connecticut
#51 Puerto Rico

(CA public pensions) + (CA DROUGHT) = "tick, tick, tick"... CA BOOM!

Submitted by EconProf on June 13, 2016 - 5:08pm.

Phaster, you are largely correct in your analysis and I commend you for so thoroughly documenting your opinions.
The root of the problem, of course, is the fact that public sector unions have been able to control politicians with their contributions and lobbying while the hapless taxpayer has no one seriously representing them at the bargaining table. The unions are enhancing their members' long-run economic interests, the bill for which will come due long after the politicians move on.

Submitted by phaster on July 10, 2016 - 7:15pm.

EconProf wrote:

Phaster, you are largely correct in your analysis and I commend you for so thoroughly documenting your opinions. The root of the problem, of course, is the fact that public sector unions have been able to control politicians with their contributions and lobbying while the hapless taxpayer has no one seriously representing them at the bargaining table. The unions are enhancing their members' long-run economic interests, the bill for which will come due long after the politicians move on.

FWIW the physics concept of "equivalence principle" seems applicable

said another way... the end result will happen because of bureaucrats/politicians corruption/mis-management which might be viewed as actions of "economic warfare" against ordinary people

hapless taxpayer(s) VS [(politicians) + (public sector unions)]

(politicians) + (public sector unions) ~ 'War of a Thousand Cuts'


'War of a Thousand Cuts' = "tick, tick, tick"... bankrupt USA

and san diego (because of "critical mass" w/ in california) is ground zero???

supporting data... wrote:

Bin Laden: Goal is to bankrupt U.S.

"We are continuing this policy in bleeding America to the point of bankruptcy. Allah willing, and nothing is too great for Allah," bin Laden said in the transcript. wrote:

Bin Laden’s war against the U.S. economy

Bin Laden, according to Gartenstein-Ross, had a strategy that we never bothered to understand, and thus that we never bothered to defend against. What he really wanted to do — and, more to the point, what he thought he could do — was bankrupt the United States of America. wrote:

Bin Laden's 'War of a Thousand Cuts' Will Live On

Al-Qaeda's strategy of low-level warfare, meant to drain the U.S. economically, will continue to pose an underestimated threat long after its leader's death

...A key facet of bin Laden's anti-American warfare has always been economic. It's a lesson he drew from the Afghan-Soviet war, in which he first served as a financier of mujahidin efforts and then as a fighter. wrote:

As California goes, so goes the nation

...a sluggish economy, high unemployment, budget shortfalls, a shaky electrical grid and an abiding distrust in politicians' ability to do much of anything about such problems -- are pulsing through the bloodstream of American democracy more broadly.

...Are state governments becoming increasingly out of sync with the governed,' then you could look at the situation in California as yet another instance in which California gets there first, because it's larger, less disciplined, less tradition-minded, and the function that it so often seems to fill in national life is of acting out things.

...And Californians -- like the rest of the country, only maybe a little bit more so -- want it all, all the time: lower taxes and smaller classrooms; tighter pollution controls and bigger S.U.V.'s; cheap labor and fresh produce but tighter limits on immigration and provision of social services.


be careful of what you wish for


we have met the enemy and he is us

CA renter wrote:

October 1, 2014 - 9:23pm

I have also worked with negotiating committees and have done research for public employee unions.

Submitted by phaster on July 10, 2016 - 7:16pm. wrote:


The debate over public employee pensions often centers on funding — who’s paying the tab. Taxpayer groups point to large public contributions to retirement funds. Public employees and pensioners point to their own contributions.

New data from the U.S. Census Bureau shed light on the balance among those three sources.

The top contributor to state and local pensions in 2015 in California was investment earnings, at $28.2 billion or 45 percent of incoming revenue for pension systems. Next was government contributions, generally borne by taxpayers, at $24.6 billion or 40 percent of funding. Public employee contributions totaled $9.4 billion, or 15 percent of positive revenue.

The picture varies from pension fund to pension fund. One fund for judges is 98 percent government funded. The Los Angeles Fire And Police Pension System received only 18 percent of its funding from government last year. Employees of the Turlock Irrigation District contributed 1 percent of their pension fund's revenue last year, while Los Angeles MTA employees contributed 37 percent of their pension fund's revenue— the highest in the state.

Submitted by phaster on September 2, 2016 - 6:55pm.

harvey wrote:
bearishgurl wrote:

I'm truly sorry for you that YOU DIDN'T CHOOSE to attempt to "qualify" for one of these eligible positions in line for a(n eventual) DB plan upon retirement. However, that decision was YOUR CHOICE! You COULD have elected to "jump thru the proper hoops" in attempt to get hired ... alas but you didn't! Thusly, you have NO RIGHT at this late date to condemn those persons who have served their qualified (faithful) service so as to earn their current pensions.

Typical ad hominem response.

BG, you can't seem to discuss an issue without making personal claims about people that are completely fabricated.

(And then there's the perpetual references to your personal financial situation, which are just plain weird...)

Here's an actual fact: I did have a position that offered a DB pension. I was an officer in the US Army, commissioned through a full ROTC scholarship - a process that requires a few qualifications!

Now please tell us again, for the umpteenth time, how arduous it was for you to get your guberment job. I'm sure your experience makes boot camp and paratrooper training sound like a picnic on a sunny day...



Finally, a California government pension safety valve

For decades, under what was known as “the California rule,” once a government employee was hired, her or his pension benefits could only be increased, not reduced. This was based on the assumption that these benefits amounted to a contract between employer and employee.

But in a ruling on unions’ push to continue late-career pension spiking in Marin County despite a 2012 state law saying such maneuvers were no longer legal, Associate Justice James Richman made a broader point: “While a public employee does have a ‘vested right’ to a pension, that right is only to a ‘reasonable’ pension — not an immutable entitlement to the most optimal formula of calculating the pension.”

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.