Comparing CalPERS and CalSTRS with AT&T retirement

Comparing CalPERS and CalSTRS with AT&T retirement

att logoFollowing yesterday’s story, “State pensions improve, but members living longer,” it would be useful to compare California’s two large state retirement funds with a roughly equivalent private one, AT&T.

Most private companies have switched to “defined contribution” pension plans, in which the employer pays a defined sum in to a fund, such as a 401(k), controlled by the employee/retiree. But some companies still use “defined payment” plans, in which the employee, upon retirement, is paid a certain sum regardless of how the underlying investments have performed, with the parent company picking up any difference.

Most California governments also have “defined payment” plans. Which is why it is instructive to see how AT&T, one of the decreasing number of companies with a “defined payment” plan, compares to the similar plans for public employees, specifically the California Public Employees’ Retirement System and the California State Teachers’ Retirement System.

Although it is one of the four top providers of the modern technology of cell phones, AT&T is an old company and still has pension obligations that more recent companies do not.

Pretax loss

In a Jan. 16 filing with the Securities and Exchange Commission, AT&T wrote:

“For the quarter ended December 31, 2014, we expect to record a noncash, pre-tax loss of approximately $7.9 billion related to actuarial gains and losses on pension and postemployment benefit plans. At December 31, 2014, we decreased our assumed discount rates used to measure our pension obligation to 4.3 percent and to 4.2 percent for our post-retirement obligation. These reductions resulted in an actuarial loss of approximately $7.9 billion.”

That is, the company itself is picking up the tab for the pension losses. Although the company is doing well, with its shares up 32 percent the past five years, that $7.9 billion will come as a hit to dividends.

The report added:

“Also contributing to the amount were losses due to updated mortality assumptions offset by asset gains in excess of our assumed rate of return as well as demographic changes and other assumptions. Actuarial gains and losses are managed on a total company basis and are, accordingly, reflected only in consolidated results.” 

In other words, Ma Bell’s retirees are living longer than previously projected and so are collecting retirement pay longer. As noted yesterday, CalPERS has made similar calculations, with the lifespan of men increasing by 2.1 years and of women by 1.6 years.

Rate of return

Let’s now look at AT&T’s actions. The California Constitution, by most readings, guarantees public pension payments, with taxpayers on the hook. But private pensions like AT&T’s remain solvent only so long as the company does. If it goes broke, so do the pensions, with some payments picked up by the federal Pension Benefit Guaranty Corp (that is, U.S. taxpayers).

AT&T just lowered the expected investment rate of return on its pension plan from 4.3 percent to 4.2 percent. The public pensions also have lowered their expected rates of return — but not by much. Last March, CalPERS cut its rate to 7.5 percent from 7.75 percent. That followed a move with the same numbers two years earlier by CalSTRS.

Both CalSTRS and CalPERS claim their higher rate of return is reasonable because of their historical track record. But if they are wrong, then California taxpayers will be the ones taking up the slack.

By contrast, if AT&T is wrong and its retirement fund underperforms, retirees would see sharp cuts in their pensions, and the fund managers could have problems with shareholder lawsuits. So it makes sense for a private fund to be less exuberant in its expectations.


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  1. bob
    bob 27 January, 2015, 20:39

    7.2, 4.3, 0, -10….makes no nevermind what the CalPERS return is, Wayne. As Doglass and the rest of the trough feeders here will tell you, the taxpayers are on the hook for these state and local gummit pensions. So work harder and pay up!

    Reply this comment
  2. The Ted Steele System
    The Ted Steele System 27 January, 2015, 20:53


    Why don’t you compare the functions of AT&T and the functions of government ?????

    This is a tautological non starting sleep fest….zzzzzzzzzzzzzzz

    Reply this comment
  3. Ronald Stein
    Ronald Stein 28 January, 2015, 09:02

    The international business world is intelligent enough to know that defined benefits are financial disasters to any business, thus all businesses focus on the known, i.e., defined CONTRIBUTIONS alone. When public sector contracts are negotiated by public sector employees that hammer out a contract with defined benefits that forces under duress a third party, the taxpayers, to cough up the necessary dough, then it’s truly a case of the inmates running the Asylum. Any challenges to that “racket” would be heard before judges who have pension and benefit package they want to protect. Again, seems like a racketeering cover-up right before our public eyes.

    Legally, we may be obligated to pay those DEFINED benefit pension plans, but their unsustainability is killing the budget and discouraging new job creation as the entrepreneurs’’ taxes and fees are contributing to paying for those defined entitlements that are not available in the private sector.

    “Defined benefit” programs are lucrative to the recipients, but unsustainable as they are funded by investments that do not get defined rates of returns. Currently there are more than 12,000 people receiving pensions over $100,000 from CALPERS. When the CALPERS investments perform poorly, the consumer picks up the tab for those defined guaranteed pensions.

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  4. Sean
    Sean 28 January, 2015, 11:11

    I think this article really misses one critical point which is the rules that govern the operation of private businesses are quite different than the rules that govern the government.
    In the private sector, the discount rate used has to be based on rock solid investments like triple A corporate bond rates not on speculative investments like stock or real estate. And in normal times, there is a tension between what happens in the stock market and interest rates. If there is too much speculation in rapidly rising markets, interest rates rise and the cost of money depresses the price of riskier investments. But in these days of quantitative easing, the cost of money is artificially low so there is no interest rate check on the cost of speculation. As a result, markets are at record levels. But the corporate retirement plan must calculate is obligation based on interest rates rather than total investment performance the way the government calculates its obligation. I’ve even read stories where small private companies with defined benefit pensions had to shut them down because the low interest rates made them insolvent, even though the investment returns had been very good. The real issue here lies with the accounting rules in the public vs. the private sector. If these were made consistent across the board, the AT&T vs. CalPERS-CalSTRS treatment of discount rates would go away.

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  5. Wayne Lusvardi
    Wayne Lusvardi 28 January, 2015, 19:55

    The new Government Accounting Standards Board rules now require that public pensions have to at least disclose what the safe rater of return on their investments is and what total value that capitalizes into as to size of the pension fund and percent funded. So standards are not pretty much the same between public and private pension plans, which was one of the points of the article.

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  6. desmond
    desmond 29 January, 2015, 20:00

    Ted Queeg Ahaul, A comparison between the functions of ATT and govt is irelevant.
    What is that supposed to show, govt should not have to do accurate presentation of financial position. It makes no sense. Please add some mildly intelligent thoughts. It gets difficult when the next move in one’s life is final, but please.

    Reply this comment
  7. Larry Littlefield
    Larry Littlefield 30 January, 2015, 06:22

    AT&T is absolutely right. It doesn’t matter if the historical rate of return was 7.5%. That historical rate of return was not achieved from the point of an inflated stock market, rock bottom interest rates, low inflation, and the threat of deflation.

    When asset prices inflate, the expected rate of return needs to be cut down relative to those inflated prices. You can use a 7.0.% or 7.5% return starting 10 or 15 years out, perhaps. But based on current inflation rates, the dividend yield, and bond rates, 4.3% is probably a good return for the next decade.

    Reply this comment
  8. DJ
    DJ 30 January, 2015, 10:58

    1. Private pension employees have arms-length bargaining units that set pension benefits.
    2. Public pensions elect those friendly to them to sit on both sides of the bargaining table.

    Reply this comment
    • Tough Love
      Tough Love 30 January, 2015, 18:23

      DJ Has it right, but should have take #2 further, stating that the RESULT of NOBODY at that bargaining table looking out for the best interests of the TAXPAYERS is grossly excessive, unnecessary, unjust, unfair to Taxpayers, and clearly unfordable pensions (AND benefits) ….. ROUTINELY at least 3x-4x times greater in value at retirement than those of comparable Private Sector workers retiring at the SAME pay, retiring at the SAME age, and retiring the SAME years of Service.

      It’s WAY past time for this decades-long financial “mugging” of the Taxpayers by the insatiably greedy Unions and our self-serving elected officials to END.

      Reply this comment
  9. Tough Love
    Tough Love 31 January, 2015, 18:25

    Wayne Lusvardi,

    You are usually on the ball, but this time you blew-it. Why just state and discuss valuation differences ? Why not show something that rings home with your readers ?

    You COULD have and SHOULD have shown how an AT&T pension (one of the best and last remaining Private Sector Traditional-style Defined Benefit Plans) compares to the TYPICAL pension of a similarly situated Public Sector worker ….. say someone retiring at age 55, with 30 years of service, and with a final average annual salary of $100K.

    Had you done so …… noting that not only are Public Sector pension “formula factors” (per year of service) much greater, but Public Sector Plan “provisions” are much more generous (such as very young full/unreduced early retirements and annual COLA increases, virtually unheard of in Private Sector Plans) ……… you would have easily demonstrated that Public Sector pensions are TYPICALLY 3x-4x greater in value at retirement than those of their Private Sector counterparts, and with that 3x-4x rising to 4x-6x for safety workers with the most egregious pensions.

    And if you took it a step further and looked into the worker/taxpayer split of the total cost of these very rich Public Sector pensions, you could have quite easily demonstrated that all of the Public Sector worker’s actual contributions (INCLUDING expected investment earnings thereon) RARELY accumulates to a sum at retirement sufficient to buy more than 10%-20% of their VERY rich promised pension ….. with the taxpayers on the hook for the 80%-90% balance*.

    * And don’t fall for the Public Sector Union BS that investment income pays for most of the pension costs. ALL investment income derives from (and in proportion to) the actual principal contributions of the workers and taxpayers, and, in the absence of the need for the Taxpayers to make such exorbitant contributions, that investment income would have stayed in THEIR pockets (perhaps to help fund their MUCH SMALLER retirements).

    Reply this comment
  10. Ted Steele, CEO
    Ted Steele, CEO 4 February, 2015, 07:53


    T Lovey is a well known pension envy toll. She is always omn about something and of course free to create her own facts as above. Your story was a good one– she simply does not like stories without alot of made up “facts”….

    Reply this comment
    • Tough Love
      Tough Love 4 February, 2015, 12:31

      Spoken by a retired Public Sector worker doing his part to obstruct eminently justifiable, fair, and needed Public Sector pension reforms everywhere.

      Reply this comment
      • Ted
        Ted "Doc VanNostrum " Steele 5 February, 2015, 17:51

        LOL you know by know girlfriend that I only worked in guvment for a few years right?

        Surely you are clever enuf to have gleaned that? No?

        Surely you are witty enuf to have some other clever things to post about the Ted? I mean I clearly live in your tiny headspace…….lol

        Reply this comment
        • Tough Love
          Tough Love 6 February, 2015, 10:05

          As you ridiculously sign off on 90+% of your comments under your many “Ted” (equally silly) handles ………………


          Reply this comment
    • SeeSaw
      SeeSaw 15 February, 2015, 18:32

      Hi “Ted”, I have read enough of TL’s comments over the years, to be able to deduce that, without a doubt, TL is a “he”.

      Reply this comment
  11. Ted The Wet Sprocket-like Africanized Swarm
    Ted The Wet Sprocket-like Africanized Swarm 6 February, 2015, 21:45

    That’s it T Lovey? That’s all you can think of?

    Reply this comment

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