San Diego Housing Market News and Analysis
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....
*** WHAT YOU NEED TO KNOW ABOUT PUBLIC PENSIONS IN SAN DIEGO ***
A recent wall street journal article essentially said the SD county pension system was using derivaties to manage their portfolio.
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 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:
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
~Active forum topics~