As I said to you one other time—- your point re the Boston study is why I think it has merit—-Cal will follow this in a way– continue contributions—require more of employees etc….. of course the only bummer is pulling new employees out! That will cost billions! But—- if the people want it they can do it. Only for future employees of course……Seems like Boston proved the folly of that though! Talk soon– Ted

As I said to you one other time—- your point re the Boston study is why I think it has merit—-Cal will follow this in a way– continue contributions—require more of employees etc….. of course the only bummer is pulling new employees out! That will cost billions! But—- if the people want it they can do it. Only for future employees of course……Seems like Boston proved the folly of that though! Talk soon– Ted

If you contact knowledgeable experts in the municipal bond business they say that the “rule of thumb” is that bonds cost double taking into considerable interest. I have calculated the actual NPV on bonds for articles that I write and then vetted that number by government bond experts who say “just double the face amount of the bond.” So I have had to defer to the experts who use doubling rather than an actual net present value analysis.

Some municipal bonds can have as much as 30% bond issuance and underwriter’s fees (Mello-Roos bonds which are land backed bonds for infrastructure). That is loaded into the face price.

I would suggest you contact Howard Cure with Evercore Financial Management in New York who is the most knowledgeable expert on this issue.

As to your last question about the number of LA City employee layoffs – you have to be apprised that cities say one thing and do another. What I was pointing out is that LA reduced its workforce by 4,900 but backfilled 5,000 new hires. They claim they cut back their workforce when they apparently didn’t. Many of the layoffs by City of L.A. were re-hired by the LA Dept. of Water and Power. So this was a sleight of hand.

Same thing in my home town of Pasadena. The city claims they reduced the workforce. In reality they just transferred most of those laid off to the Dept. of Water and Power or other special revenue programs that do not tap the city’s general fund.

My suggestion to you is to not over analyze numbers — numbers are just functions of assumptions. That is why I described the assumptions of the Northwestern, Boston College and Stanford pension studies. The Northwestern study assumes a closed pension plan with no new enrollees. Therefore their numbers indicate a pessimistic scenario.

The Boston College study assumed an open pension plan with new enrollees but a 6 percent annualized return. Again, Howard Cure of Evercore Financial considers this a more reasonable set of assumptions.

The Stanford study assumes an open pension plan but relying only on a safe rate of return of about 4 percent. This may also be unrealistically low. Therefore the conclusions of the study are once again pessimistic.

After I wrote the above article former California State Senator Joe Nation, now a finance professor at Stanford, conducted a second pension study with a more realistic interest rate of about 6 percent. (not reported in article because Stanford II study was conducted later).

I would also suggest you contact Pension Legislative Representative Eraina Ortega of the California State Association of Counties.

Thank you for your good questions and reading Calwatchdog.com

I am working on a longer reply to your many questions.

In the interim – regarding your question on Pension Obligation Bonds perhaps my article “Cities Bet on Risky Pension Bonds” will help you. Link here: http://www.calwatchdog.com/2011/12/19/cities-bet-on-risky-pension-bonds/

I will follow up with another response shortly.

Thank you for your insightful questions.

WAYNE LUSVARDI

When you say counties are in the most trouble I agree – but there’s an additional factor causing that. Twenty one counties don’t participate in CalPERS – they have their own independent pension funds. Twenty are organized under the County Employees Retirement Law (CERL). CERL counties have the general reputation of being where some of the most egregious examples of spiking and failures to live up to fiduciary responsibilities have happened. And I can say with personal experience there has been little or no oversight of these county retirement systems by the state or feds – many have been private sand boxes for county and retirement officials to play all sorts of self-created games to the detriment of the long term financial condition of their counties.

The IRS is currently examining all 20 CERL county systems under the “Voluntary Correction Program” – reports should start to be issued as early as this summer. I expect a bunch to be quite exciting.

I’m also working on producing a financial analysis of the financial impact these 21 independent county retirement systems have had on their counties – I think several are already so deep in the hole I doubt they can get out. I’ll be publishing it on my website http://www.YourPublicMoney.com in the next month.

Second – If anyone can clarify my confusions I’d sure appreciate it.

3. Pay-Go or Bonds, it says “There are two types of bonds: 1) general obligation bonds; and 2) revenue bonds. … a general obligation bond can require a tax levy at a rate for whatever level is needed — up to 100 percent — to recover a shortfall in taxpayer delinquencies. In California under Proposition 13, a general obligation bond must be authorized by a supermajority — two thirds — of voters. Voter rejection for raising taxes to pay a bond means that the local government will need to make space in its existing operating budget to make the debt payments.”

Local government Pension Obligation Bonds (POB) in California have been sold under the theory they are merely refinancing an existing debt and therefore don’t need a vote of the people. I assume that means they are not general obligation bonds – but they aren’t revenue bonds. Are they – in fact – neither? And is my assumption correct that no one can force local taxes to be raised to pay POBs?

4. Bonds Cost More – “As David Crane, advisor to former Gov. Arnold Schwarzenegger, testified: “For example, an annual obligation of $30,000 for 25 years for a government employee’s pension is projected to cost the government $320,000, while the same $30,000/year, 25-year obligation in the form of a bond is projected to be $425,000….”

I THINK that’s mathematical apples and oranges. $320,000 is (very close to) the net present value of 25 annual payments of $30,000 discounted at 8% a year – what used to be the “average” assumed rate of return for California public pension funds. $425,000 is the net present value of those payments discounted at 4.2% a year – I assume the bond rate.

Several issues. 1) when it’s said the pension is projected to cost $320,000 that’s assuming an 8% ROI. The general tone of this article seems to be partly based on the belief the actual ROI will be lower. So to say “the pension is projected to cost $320,000” isn’t that at an assumed rate of return people who agree with this article would say is unrealistically high – which means the net present value is in fact higher?

2) To say it’s “projected to cost” seems a bit confusing since the $320K is a net present value – not the sum of future payments. It will cost $30,000 a year (assuming 8% comes true) for a total of $750,000. If the Pension Fund earned 8% and in fact there turn out to be 25 years of $30,000 a year – then it would cost $320,000 TODAY to pre-fund the pension in one lump sum. The net present value of past contributions would have resulted in $320,000 if everything had worked according to plan – but the total the government would have paid in would have been much less.

Zero Interest Rate Environment – I certainly agree that with an assumed current 0% interest rate – ASSUMING that also reflects a very low inflation rate (not necessarily true) – then “real” ROI should be lower than past results that supposedly included an “allowance” for inflation. But – do 0% interest rates necessarily mean 0% inflation? And – in long-term investing which is what pension funds should be doing – should we assume this environment will extend indefinitely?

Adding Government employees: At the top of this section – “Despite the recession, from 2005 to 2010 the city of Los Angeles added 5,000 new employees added to its payroll.” At the bottom it says “Even after reducing its workforce by 4,900 positions in recent years, the city faces a $222-million budget shortfall,” I don’t get it.

John Dickerson – YourPublicMoney.com

(1) All NEW employees get only 401k-style DC Plans with a modest taxpayer “match”, and a MODEST taxpayer contribution to a health savings account (but no guaranteed retiree healthcare)
(2) Active Employees pay 100% of the Employee share of pension contributions … immediately
(3) Active employees pay all but 2/3-rds of the cost of a MODEST (not “Cadillac”) healthcare Plan.
(4) Retirees grade into (over a 3-5 year period) paying ALL but 50% of the cost of a Modest (not “Cadillac”) healhcare Plan IF they have 35 years of FULL-TIME service. The 50% subsidy is reduced proportionately for less service.
(5) Elimination of all COLA increases
(6) Full retirement age increases 1-year per calendar year until it reaches the full Social Security age of 67 (62 for Police & Firefighters).
(7) All current workers get a 50% reduction in the pension accrual rate for FUTURE service.
(8) Actives and retirees get haircuts for pension accruals for PAST service as necessary to get expenses in line with revenue W/O excessive taxation.

Take a real hard look at this nikkei 225 chart. Japan’s 1990 is our 2007. Read it and weep. Your pensions are history. The money’s not there to fund the boomer’s retirements let alone your generation’s. It will be a miracle if one check lands in your direct deposit!

http://finance.yahoo.com/q/bc?s=%5EN225&t=my&l=on&z=l&q=l&c=