CalPERS vs. City of Loyalton

what was it you wanted to say right as we were about to begin yet the city of Loyalton is a is a unique situation because the city contracted with CalPERS in 1986 but in 2013 they decided to end their contract with us and that's different than other employers because at that point in time CalPERS who's administering the pensions no longer has the ability to get contributions from the city so we have to build them for the amount of money to pay these retirees for their lifetime and the risk is now born to CalPERS and that's something that we have to pay that obligation off over time okay we're going to talk about that that seems like the excuses to why a 1.6 million dollar bill right right now I get that yeah but let me talk you know generally sir this is the first time ever that retirees who are part of the CalPERS system are going to have their pensions cut is that accurate that's correct it's the first time that CalPERS has had to cut pensions to retirees and it's unfortunate it's a decision that we regret we had to make but you have to remember that pensions are a shared responsibility it's a responsibility between the employer the employee and CalPERS and we administer the pensions and the employers make that obligation on behalf of their employees as part of their compensation but and this is going to be six roughly a 60% cut for those for benefit receivers correct roughly let me ask Amy it's 40 percent isn't it yeah it's a 40 percent cut 40 percent type okay so what is the message this sends do you think - I mean you have 1.8 million people who are active you know still working or are retired or are you know the beneficiaries of CalPERS retirees what does it say to them that for the first time in 85 years for people are going to have their pensions cut yeah I think for all of our beneficiaries the thing they should know is CalPERS is a healthy system we have the ability to pay pensions for the long term but the obligation that the employer has made is an obligation that they have to keep and so in this case the city of Loyalton wasn't able to fulfill that obligation and in in a situation as unfortunate it is it as it is as the administrator of the pensions were forced to take action and reduce those pensions you just made a claim that CalPERS is a healthy system donation over at Stanford Institute for Economic Policy Research would absolutely disagree with what you just said it's not a healthy system well we're 68 percent funded and so we have 68 percent of the assets that we need to pay benefits for the long term well let's let's put this in your numbers sure you have a liability of 463 billion in the long term of which you have assets totaling 299 billion but you are missing you have a debt essentially of 163 billion that doesn't sound very healthy to me 163 billion is what you need if you had to make good on all of this now right but remember pensions are a long term investment I mean we look at it over a 20 or 30 year period we don't have to pay all the benefits now we have to pay the benefits over the long term and so what CalPERS is doing to help in this situation is reducing the risks the costs and the complexity in the fund those are the levers that we have to pull to ensure the long-term sustainability of the system so when you talk about the funding level of the system CalPERS its board has determined a rate of return of roughly 7.5% correct on average and yet it historically is just not the case you'd have to go back almost 30 years for CalPERS to get that kind of return the last time with 7.7% 1986 the last 20 years the rate of return has been 6% the last ten years it's been 3.2 percent the last five so point seven percent and for the last three one percent the reason I mentioned that sure is you talked about the you know a long-term view that hundred and sixty three billion dollar shortfall actually gets worse based upon CalPERS own projected rate of return which doesn't really exist and that's why our board is considering lowering that rate of return in fact they're doing it next week in a meeting the staffs going to recommend that we lower our what often is referred to as the discount rate or the return on our investments lower than the seven point five percent but what's that say to the retirees and and you know the board makes the decision helper staff has been telling the board to lower that rate of return for years it's never been what calpers said it would be no actually that's not true that's why because if you look at the long-term projections only in recent years has it fallen below the seven point five percent there's been times over the twenty or thirty year period that we were well above the seven point five percent it's the last couple years where we've earned less than one percent or a negative return where it's actually fallen down below so the five the 10 and the 20 and the thirty year returns have only fallen down below in the last couple years if you look historically before that we were well above those seven point five percent returns okay but and I'll give that we had an economic calamity in worldwide that contributed to that but if that's the case then why lower the discount rate if CalPERS was zooming along just fine say before 2006 because now what our investment staff have looked at is over the next ten years the financial markets are going to return what we expected and that's just a global phenomenon all pension funds are maturing and CalPERS is one of those and so when we look at the next ten years our investment team and our consultants average that we might be able to earn six point four percent return on the asset allocation that we have today so we have to look at lowering that investment return so really manage to the realities of the fund and to ensure that we're sustainable for long term and those are decisions that our board has to make and they're going to be considering those over the next couple months and to make sure that the pensioners who are requiring on those checks every month when they retire because as the returns drop each member of CalPERS the municipalities and the different municipal entities that contribute their contribution will go up as that rate of return goes down will it not it will go up in the short term and over a period of time long term it will it will go back down so what we're looking at now and let me back up about the pension fund dynamics so we're in a negative cash flow position we're paying out more in benefits than we're taking in and contributions both from contracting employers and from our members you're not taking it enough from employees employers so let's talk about the dynamics of the CalPERS system today we stand in a negative cash flow position so we're paying out more in benefits than we're bringing in from employer contributions and contributions from the members themselves so that means we have to sell assets to make up that shortfall to pay benefits on a monthly basis or you have your members contribute more money you could have the municipality could raise taxes and contribute more to meet its funding obligations right the members could contribute more money but that's not a decision that CalPERS can make that's legislative or bargaining between employees and employers what we control is the investments and we don't set the benefits those are set by the employers and through the legislature so what we have to look at is how can we reduce the risk in the funds and the costs that we pay to run this fund and members are living longer and more people are retiring so what we're looking at is reducing what we assume on our investment return to ensure that more contributions are flowing into the system and that it's sustainable for the long term but that and I realize CalPERS can't control the 3,000 plus different municipal entities that contribute but that where taxpayers are in kind of squeezed because all of these different municipal entities have made promises and contractual obligations and in some ways the only way to meet those and to fund their their requirements to CalPERS is going to be raising taxes or selling assets that they might have in order to cover these bills yes so as we reach lower than our discount rate it does mean increase contributions to employers but we've talked to employers and they understand the impact but they also understand the necessity because pensions are recruitment and retention tool for them it's part of compensation for public employees it's part of the services that they provide to citizens but here's and I really will turn right now let's hope as an anomaly yeah and an offshoot but for the first time ever we had a small town which had economic difficulty and made a decision I'm not going to make a judgment call whether it was right or wrong but made a decision to terminate and in order for their for retirees who are part of the system to continue to receive full benefit CalPERS said they'd have to pay 1.6 million dollars what what is that 1.6 million so when a city or a county or a special district terminates we no longer have the ability to take contributions from that city so CalPERS is now on the hook to pay the pension that that city has promised to these retirees for their lifetime so we need to look at what assets that city has in our system now we commingled the assets for investment purposes but but you're looking at what Loyalton paid in on behalf of those right they were only 40 percent funded so we have to calculate how much money do we need to pull into the system to pay those for retirees for their lifetime and it's larger than what you would assume in our normal investment portfolio it's what you why is it that the 7.5 percent know the amount of money that we required from the city of Loyalton is larger because we invest that money more conservatively we don't assume the 7.5% you assume a much lower discount rate we assume a much lower discount rate but we have to preserve that capital but why wouldn't you you but you don't do that for CalPERS now I mean CalPERS you just said we assume a much lower discount rate for those four individuals right because we it's it's it's a less risky actually plan going forward correct why wouldn't you do that with the total CalPERS fund now because the uniqueness with loyal tennis they've terminated their contract and there's no more contributions flowing into the system but with the other employers they continue to make contributions on a long term basis and we believe that whether the 7.5% is correct today that may change we believe that we can earn a higher return and we don't have to preserve that capital like we do with the city of Loyalton the critics of CalPERS and I realize Lowell 10 triggered this situation by the City Council's decision but the critics say you're having your cake and eating it too you just said we can assume and you're going to recommend next week that they lower it but we can assume a 7.5 percent return on investment when in fact we're going to tell these other people no it's more like a 2 and 3/4 return on investment well that's because the city of Loyalton decided to end its relationship with us and we have to put the protections in place but you have the assets obligation but you have the assets that they paid prior already well would a 30% if only 40% but why wouldn't that 40% earn 7.5% as CalPERS predicted as opposed to 2 and 3/4 it's only 40% we have to preserve the capital that we have and they're all individual plans so even on that 40% we have no way for contributions remember the other employers are continuing to make contributions into the system the city of oilton is not it still sounds like you're you're a double not a double edged sword it sounds like you're have two standards one that lets CalPERS be overly optimistic and one that is almost dire for the city of Loyalton but you haven't clearly explained to me why I mean I hear your explanation but you've got even if it's 40% you still got that money what you're telling me is that money that you're trying to preserve won't grow at the same rate as the rest of the CalPERS funds well and I think the unique differences is that there's no more employer contributions coming into this it doesn't matter my own early does well that the money that CalPERS money no it man it matters because the other employers are paying contributions on the obligation that they made right in the case of Loyalton because they've voluntarily terminated we only have the assets that we have on hand and we have to have additional money to pay the benefits that they obligated the city of Loyalton defaulted on their retirees they made a bad decision and those retirees are going to suffer for it so let me let me ask you in return in regards to that why are you convinced this won't happen in other towns or cities that are part of CalPERS going forward or is there a list of potential you know those in trouble who might default so there is a silver lining in the story on the city of oilton and the silver lining is that the employers that belong to this system are paying close attention to the obligations that they owe and they're looking at not only what they owe today but what also that they owe in the future and we find very little distress to agencies and if there are other distress agencies they're very small or they're going out of business or closing in some form or fashion like a very large cities that were on the verge they didn't Stockton San Bernardino did not default but those were not large and they were in distress yeah but the difference between the San Bernardino Stockton and Vallejo is those officials in those cities they've made it very clear that their financial issues run much deeper than pensions and so it's a myth and really inaccuracy to say that pensions alone tip those cities over that's okay we keep losing the lights yeah energy efficiency Thank You Jimmy quarter but still okay so what percentage what number of agencies might be facing distress small large whatever Restless we we monitor collection certainly I mean that's part of our business is collecting contributions from all of our 3,000 employers and at this point in time I'd say we have less than five that we're talking to about being behind on their contributions or paying us even in the case of San Bernardino and Stockton and Vallejo yes the issues that brought about those bankruptcies are greater than just pensions but bankruptcies bankruptcy and had they defaulted you know that would have been and then that may still happen I mean some of these towns come and cities come back into bankruptcy and their elected officials certainly look at whether they're going to default or not and and you can't stop them CalPERS can't control whether they do that or not what happens if that rears its head again San Jose's faced those Stockton's faced this so in the case of Stockton Stockton had a choice they could have stopped paying CalPERS the judge said that but the choice that they made was to continue their contributions to the system because they see the importance of public employee pensions and they've been very clear in public that recruitment and retention of their police their fire and the people that work for the city pensions are important and so they've continued those obligations if they had stopped then we would go through the same process that we would go through with the city of Loyalton we made 50 calls to the city of Loyalton ten notifications asking them to pay and we would have to do that with any other employer and ultimately we'd have to decide if they couldn't pay if we would have to reduce pensions ultimately a place like Stockton politicians will one day look at they cut you know employee benefits CalPERS has no role in that but the future benefits but as taxpayers demand services and things don't get done because money is being used to maintain current obligations and roads don't get paid potholes don't get filled and sidewalks don't get repaired at some point there's the potential for a city to say you know what we're gonna have to say goodbye CalPERS I mean I I'm trying to protect the future and I can't but a lot of people the former mayor of San Jose Chuck Reed says we are on that that trajectory for a lot of municipalities in California and it would seem to me that I would be nervous if I were CalPERS because I can't stop that if these municipalities because they are stressed by the obligations they have to me for all of their citizens look at CalPERS and saying we're not going to fund this anymore I mean do you guys worry about that so we recognize the cost of pensions is increasing and that city's County special districts all have to figure out how to pay for those obligations what we also see though is they all realize the importance of pensions and so they're planning for that what CalPERS can do is look at our investments working we do reduce risk where can we pay less where can we pay less to Wall Street money managers yeah you had made headlines to what two years ago when you stopped using hedge funds that weren't returning the kind of investment they should have what can we eliminate from the portfolio that that may not return what we can and so that what's what we're doing I mean it's it's a partnership remember it's a shared responsibility so everyone has a stake in this but we're confident that over the long term we can fulfill the mission of this system and provide retirement security to these members who watches out for the taxpayers in all of this though because in the municipalities for your members where you can't make decisions they're the ones who get squeezed whether it's because roads aren't paved and what sidewalks aren't repaired or with taxes going up to meet contractual obligations I mean that's something our courts have not yet determined but where are we going to go when these contracts might be violated when municipalities say we're not going to the retirement so I think it's important that CalPERS and employers all watch out for taxpayers in these situations and again the leverage that we have to pull or reduce cost to the system so we can earn more money because the more money we earn the less the taxpayers have to foot but this system was built on a promise and the promise was our first and foremost duty is to pay these members and if an employer makes an obligation like the city of Loyalton did they have to fulfill that obligation and the city taxpayers and members all have to understand that as well as the policy makers now we've seen pension reform and that's going to help but it's going to be over the long term so today we have to focus on the reality that that's in front of us and that really is what levers can we pull to make sure that this system stays healthy anything you want to add no I'm trying to think we've got all of it let me ask you that question everybody look at me yeah are you punishing oilton are they being made an example for the rest of California no we we feel for the city of Loyalton we feel for their for retirees we are not trying to make them an example in this situation but the reality is that employers made an obligation and unfortunately they weren't able to fulfill that obligation and so their actions alone have probably made themselves their own example yeah thank you very much

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Length: 21min 56sec (1316 seconds)

Published: Tue Dec 20 2016