Broke cities (including San Diego)

Pension funds are putting money into hedge funds, venture capital, private equity funds

Those euro-zone countries get everything backward — working to live instead of living to work. That’s what we smug Americans think. Take Greece. It has promised too much too soon to its pensioners, whose average retirement age is 61. And there’s excessive generosity in other financially ailing European countries known by the snotty acronym PIIGS, standing for Portugal, Italy, Ireland, Greece, and Spain. Actually, even the so-called stable countries of Europe, such as France, are too indulgent.

But let’s not get too overconfident in our own country, as the New York Times pointed out in a March 12 story. Jagadeesh Gokhale, economist with the Cato Institute, noted in that story that officially Greece’s debt is 113 percent of its total annual economic output. But if its pension obligations were included, Greece’s debt would be 875 percent of output. Bad, huh? Yes. But the comparable ratio for France would be 549 percent and Germany 418 percent. The United States? About 500 percent, says Gokhale, who includes Medicare, Medicaid, and Social Security obligations in his figures.

The Pew Center on the States says there is a $1 trillion gap between what the 50 states have promised workers in retirement benefits and what they have set aside. Some economists say phew to Pew. As noted in the March 15 cover story of Barron’s, finance professors Robert Novy-Marx at the University of Chicago and Joshua Rauh of Northwestern say that the funding gap for state pension plans alone might be more than $3 trillion. Take a deep breath: these professors say that state pension funds as presently set up have only a 1 in 20 chance of paying their obligations 15 years from now, according to Barron’s.

In California, State Treasurer Bill Lockyer says that past pension guarantees are legally cast in cement. The City of Vallejo, in the Bay Area, filed for Chapter 9 bankruptcy two years ago because its employees’ pay and pensions ate up a staggering 90 percent of its budget, according to Barron’s. Vallejo has slashed employment. There have been so many cuts in police that the crime rate has risen sharply. But the root problem — excessive pension promises — has not been touched.

Over the last several decades, government pay and fringes have soared while private sector remuneration sagged. Economist Chris Edwards of the Cato Institute, using figures from the U.S. Bureau of Labor Statistics, points out that the average salary of state and local government workers is $26.01 per hour, compared with $19.39 in the private sector. And there is a yawning gap in benefits: state and local government workers get $13.65 an hour, private sector workers $8.02. If you have been keeping track of this on your calculators, you see that total compensation (wages plus benefits) is $39.66 an hour for state and local government workers and $27.41 in the private sector.

Of those benefits, government workers get $4.34 an hour in health insurance, more than double the $1.99 of folks in the private sector. Government workers rake in $2.85 an hour in defined benefit pensions versus a mere 41 cents in the private sector. (In a defined benefit plan, retirees get a set amount each month, no matter what happens to the fund’s investments. In a defined contribution plan, employees plunk money in monthly, but their pots go up and down with the markets.)

Here’s the punch line: a whopping 80 percent of government workers get that guaranteed defined benefit pension. Only 21 percent of workers in the private sector have defined benefit plans, according to the Bureau of Labor Statistics.

The stark truth is that, increasingly, governments know they can’t meet future obligations. But fearing that they can’t break pension promises, they punish the citizenry by raising taxes and fees and slashing services, maintenance, and urgently necessary infrastructural spending. Sound familiar, San Diegans?

To play catch-up, public sector pension funds are putting money into gamy things such as hedge funds, venture capital, private equity funds, junk bonds, commodities, and the like. Also, they are not slashing the high percentage of their portfolios that they had in stocks in the fat years. Back in 2006, both public and private sector funds had about 60 percent of their assets in stocks, according to the National Institute on Retirement Security.

Now, despite all the mayhem in the stock market, public funds still have 57 percent in stocks. But private sector funds are down to 38 percent equities as they put more into conservative bonds. Some of that is no doubt due to caution, and some relates to a change in the law. The Pension Protection Act of 2006 requires companies with underfunded plans to plunk in more money and write off the shortfalls over a short number of years, explains Brian White, head of the San Diego County Employees Retirement Association. “There is nothing comparable for the public sector,” says White. “We have a longer investment horizon.”

The speculation can backfire. White’s County fund at one time had as much as 20 percent of its portfolio in hedge funds. One of them was Amaranth Advisors. That fund lost $6.5 billion of its $9 billion on futures market speculation, finally closing down. The County’s fund lost $175 million initially and got $90 million back. It expected to recover the rest in a fraud lawsuit against Amaranth, but in mid-March a New York court threw out the suit. The County’s fund is appealing. The chief investment officer resigned under duress as a result of his aggressive strategy. Now, hedge funds are down to 6 to 8 percent of the portfolio.

In some ways, the County’s fund is conservative: stocks are just 43.5 percent of the portfolio, with bonds at 30.8 percent. But junk bonds are 7.7 percent of the total pot, and emerging market debt is 4 percent. Private equity funds (capital pools looking for opportunistic investments) are 4.8 percent of the County’s portfolio. They represent 5 percent of the City’s pension fund, San Diego City Employees’ Retirement System. The City’s fund has 5 percent of the pot in so-called market-neutral strategies that often take both long and short positions, similar to hedge funds. Also, the City’s fund is 53 percent invested in stocks — gamier than the County’s — versus only 26 percent in bonds.

Both funds, along with others all over the country, vastly overstate their expected long-term returns. The City’s fund claims it will make 7.75 percent a year; the County ups the ante to 8.25. But the City’s fund has only chalked up a performance of minus 1.84 percent over three years, 3.3 over five years, and 5.1 over ten. The County’s performance has also badly lagged its bogey.

A government’s annual contribution to its fund is based on these unrealistic expected rates of return. Many scholars suggest using a “risk-free rate of return,” which would be about 5 percent. At a meeting last month, one of the officials of the City fund said that if the expected rate of return were cut to 5 percent, the unfunded actuarial liability would double or triple to $5 billion or $6 billion. Whew! Chief of staff Rebecca Wilson says board members aren’t quite so pessimistic: they think the unfunded liability would double and the required annual contribution rise by 50 percent.

But a 50 percent boost in the City’s required contribution would be backbreaking. So maybe going to 5 percent would lead to reform: the City of San Diego would be forced into bankruptcy, and a judge might challenge the notion that excessive benefits are embedded in the law.

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Wow-there is TOO much good info to even comment on, you pretty much covered it all Don.

Good job.

Response to post #1: Aw, c'mon, SurfPup. This is your favorite topic. We expect you to contribute lots. Best, Don Bauder

Don, A comment as requested on your weekly column.

Governments can and do extend debt responsibilities to future generations. Heck the time horizon at SDCERS is 40 years, and U.S. Government is so far underwater it could be a century or more if the current spending spree is not halted.

In that time Don, you, me and BillyVegasSurfpup will be a distant memory where someone might find us on Ancestry.com if they were looking us up.

With the ability to "extend" the debt endlessly, unlike the taxpayer they are suppose to serve, we can only do an "Obama". HOPE that our future leaders will CHANGE their ways when it comes to ways they find to squander the people's treasury.

Sadly, history repeats itself more often than not, as memories fade with the so called good times, this cycle will repeat itself. Wasn't it only 75 years ago that the age of great indulgence and greed led to the Great Depression.

Response to post #3: The federal government can extend debts and print money. State and local governments are supposed to balance their budgets every year, but many do it with phony accounting (see San Diego). Of course, bonded indebtedness carries on for many years. What is likely to happen in the U.S. is the federal government will bail out broke states such as California, Illinois, New Jersey. Either the federal government or the rescued states will save the technically insolvent cities. It would be so much easier if the government employees with excessive pensions and ridiculously early retirements would take cuts without a fight. If there is no cooperation, the best way to force that would be through massive layoffs of those government employees, but services would then suffer even more. Remember one thing: the coming retirements of baby boomers change everything, making it much more difficult for the federal government to pass debt on to future generations. Best, Don Bauder

Re: # 3:


Of course you are right, but what's the answer to this dilemma?

BTW, I somehow got onto some other part of the Reader website where there was a discussion like this on another subject and I can't find it again. In one of your comments you mentioned a "column," which I took to mean a new column. How many places do you write and where are they? Why doesn't the reader capitalize more on your popularity and put your name nearer the "masthead?" The website is not very well organized IMO.

Response to post #5: I consider my weekly contribution to City Lights, such as the one above, to be a column, not a news story. That's because there is opinion in it. However, sometimes it gets called a news story. I write the weekly column for City Lights, and a blog item almost every day -- often several a day, sometimes none. You can find the blogs by going to the upper right and clicking "Blogs." Go down the list of blogs on the left hand side and mine is titled "Scam Diego." I respond to comments to both my columns and my blog items. Best, Don Bauder

This is a perfect example of op-ed, I was attempting to point that out elsewhere to someone in here in another story, hope they read this and get it.

But Twister's first comment is also mine. If bankrupcy isn't an alternative and the courts aren't going to see reality and ultimate consequence of this, any ideas on how it could be unraveled? Or even, if it can? Otherwise, everyone is pretty much screwed.

Response to post #7: No law is set in concrete. It social conditions change, and the economic survivability of a political jurisdiction is at stake, then laws can be changed, legislatively or by courts. Or by a change in wording. (Remember when the Korean War was called a "police action," not a war?) Eventually, several insolvent cities and/or states will challenge the notion that excessive benefits are frozen in the law, bankruptcy judges will agree, the cases will move up to the Supreme Court, and the law will be changed. Or legislatures will make the change. Or public opinion will be so strong that public employee unions will voluntarily cave in. Best, Don Bauder

RE #8:

Interesting options.

The notion that the Courts will eventually force a change is something I don't expect to see in my lifetime, nor should I expect my nephews and nieces to live that long either. As it is, the Courts move in mysterious ways, depending on which arcane argument happens to win the day. There's nothing in that process that is dependable enough for the people to rely on for any speedy relief.

The same could be said about the California legislature and gridlock... especially when the primary contributors of campaign funds have been and will be corporations, thanks to the Courts as mentioned above.

This pretty much leaves public opinion, where there has been this saying around for a long time that "All politics is local." The question arises: What power do we citizens of San Diego have at the ballot box?

I'm not talking about electing so-and-so for city council or mayor because waiting for major change from that is like watching glaciers race for the coast. I'm talking about mobilizing 10,000 volunteers to gather 100,000+ signatures to bypass the city council and get things put directly on the ballot. There is this assumption that petition-writing and signature-gathering take a ton of money, and if you're PG&E trying to gain perpetual profitability through a state-wide constitutional amendment initiative, $25 million is not the most expensive way to go. No, what I am referring to is bypassing the not-so-strong-and-rather-corrupt relationship between developers and local politicians in favor of reaching out to the general public in the City of San Diego and the surrounding County, where people hopefully got some benefit from their public education.

Of course, this means that we or somebodies like us come up with some initiatives that make sense for (1) keeping necessary and desirable services available to the public and (2) doing that in a way that does not increase pension liabilities. My preferred method is to take advantage of the FEMA NIMS/ICS framework to manage by objectives, with a reliance on training and managing volunteers among the people to whom those services matter most: ourselves. I've labeled this as All-hazard Local Emergency Response Theory or ALERT, where a lot of the hazards we face stem from the inattentive mismanagement done by politicians and bureaucrats at the state and federal levels.

I'll be sharing my thoughts on some of those issues on open forum. Just for the heck of it, I'll be doing this free ICS training thang at City College during the summer for the in-coming student government officers, with hopes of expanding the NIMS/ICS training & integration program across the student bodies of the San Diego Community College District.

The last time I attempted something like this, then-City College President Jeanne Atherton gave me a tuition-free ride to dorms of USD just to keep me away from the City College campus. Sometimes it pays to be the student-activist squeaky wheel.

Response to post #9: The courts will only move if the people move first. There has to be a tsunami -- not just a groundswell. I think there is hope that one will develop. You can help that tsunami gain momentum. Community colleges are a good place to start. Best, Don Bauder

Response to # 10:

People like your readers, by their nature, are not concentrated. Power IS concentration. It's like apathy, but at the other end of the curve. We have to settle for little drops in the bucket, hoping that a sorcerer like you can get the brooms to sweep out the power and wash them away.

Me, I see us as largely impotent or inadequate in the face of coagulated ignorance and apathy, and our very diversity and resistance to demagoguery produces just the kind of division that permit concentrated ideologies to flood the world with bull-kaka.

We are a species marked for extinction. Sucking more and more on limited resources ensures that. What we have to find are the ways we can understand universal (local AND global) priorities and fit our weak energies to them without fiddling whilst San Diego burns and the world is consumed by greed. We can't do that, because we're all hooked on a waste-centered economy and culture. This is a tiger-by-the-tail that merely turning loose of is no solution.

Response to # 6:

Kinda convoluted, but doable. Thanks. I wonder how many other (potential?) readers have the same trouble? Seems that the Reader, if they would go 'round the table, could come up with a better web page design--one that is more reader-oriented and less Reader-oriented.

Response to post #11: I don't think we're impotent. Sure, ignorance and apathy are ubiquitous. But history has some lessons for us. Consider the abolitionists, for example. They were considered radical and uncompromising. Even after the Civil War, they got a bad press. But their persistence won. Best, Don Bauder

Response to post #12: The Reader wants to please its audience. That I know. If you have ideas for how we could improve the site, email Jim Holman, [email protected] He is the editor and publisher. Best, Don Bauder

The notion that the Courts will eventually force a change is something I don't expect to see in my lifetime, nor should I expect my nephews and nieces to live that long either. As it is, the Courts move in mysterious ways, depending on which arcane argument happens to win the day. There's nothing in that process that is dependable enough for the people to rely on for any speedy relief.

As much as I hate to say it-I agree 100%.

The Courts USED to be the great equalizer, where it didn't matter if you were an 800 pound gorilla (corp) or a 100 pound weakling (everyday Joe). Not anymore.

Money rules, and the courts have shown extreme bias towards the weak, poor and middle class. I am still sick to my stomach over the Kelo v City of New London case....it is a perfect example of the problems we have today with the poor and middle class getting their Constitutional rights trampled by the rich and powerful/ special interest groups.

The Courts have been chipping away, bit by bit, piece by piece, our Constitutional rights and protections. They are NOT expanding, but contracting.

Hope the country can recover. I am losing faith in Obama, and I lost faith in our own gov (Arnold) 2 years ago. Had high hopes for both when they were elected.

Response to post #15: Agreed. The current court is not simply conservative. It is simply pro-big business. Roberts, Alito, Scalia, Thomas, others are just puppets of the business lobbies. Best, Don Bauder

DON, Ask jessie ventura about the problem he would have an answer...

Response to post #17: Is he back in the professional wrestling business? Best, Don Bauder

Seen this report, Don?


Fresh data showing that when you compare apples with apples, public employees really are paid less than those in the private sector - that includes the pension benefits.


Response to post #19; I had not seen the study. It contradicts other studies I have seen purporting to show that on a comparable job-for-job basis, public sector pay and benefits beat the private sector. I couldn't tell you the names of those studies, however. Probably the organizations financing the studies tell us much. Best, Don Bauder

I had not seen the study.

That is b/c that BS "study", put out by a public union hack, is just a JOKE! Skippy knows that.

Here, this is from a reputable, unbiased NEWSPAPER- not the "Center for State and Local Goverment EXCELLENCE" ( I almost PUKED!!! saying the word "excellence" when used to describe government employees);

Data compiled by the Commerce Department's Bureau of Economic Analysis reveals the extent of the pay gap between federal and private workers. As of 2008, the average federal salary was $119,982, compared with $59,909 for the average private sector employee. In other words, the average federal bureaucrat makes twice as much as the average working taxpayer. Add the value of benefits like health care and pensions, and the gap grows even bigger. The average federal employee's benefits add $40,785 to his annual total compensation, whereas the average working taxpayer's benefits increase his total compensation by only $9,881. In other words, federal workers are paid on average salaries that are twice as generous as those in the private sector, and they receive benefits that are four times greater.


Response to post #21: The study cited by SkippingDog regards jobs on a comparable basis -- plumbers in the public sector versus plumbers in the private sector, e.g. Previous studies I have seen on this topic -- and, unfortunately, I could not tell you their names or give you a link -- show that even on a comparable-jobs basis, the public sector wins. Best, Don Bauder

The study cited by SkippingDog regards jobs on a comparable basis -- plumbers in the public sector versus plumbers in the private sector, e.g.

There is a good study, recent study, that shows job comparisons between public sector and private sector just as you say-job by job (I am still trying to find it). It showed that in 8 out of 10 categories the public sector was comped more. The lower skilled gov jobs (vast majority) were comped MUCH more than the private sector. In fact the LOWEST comped employee in the UC education system was comped MORE than the AVERAGE employee in this state. Think about that-the LOWEST paid employee at UC was comped MORE than the average private employee in CA;

"Comparisons to the private sector boggle the mind. The lowest rate of pay/comp in the entire massive California system of higher education ($39,765/year) is more than the average income/comp for a private sector worker in this state ($38K)."


Generally speaking the public sector was comped more in every single area except the very top of gov employment, deparmtent head and directors, which account for propably 1 person out of a few hundred/thousand in gov employment.

The MAJORITY of gov employees are non skilled, non professionals. They are semi skilled, blue collar jobs like cop, ff, secretary, park and road workers and the such. In fact cop and ff comp accounts for 50%-80% of employment costs in every muni in this state- and those are both GED jobs.

"The old rationale for the generous benefits was that they were needed to make up for the inferior pay given to public employees. But public employees’ pay has long since passed private employees’ pay. On apples-to-apples comparisons of similar positions in the public and private sector, public workers generally receive far more generous compensation."


Response to post #23: I believe I saw that recent study you allude to. But I wouldn't be able to find it. I should save such things. Best, Don Bauder

Response to post #24: I believe that is correct. Best, Don Bauder

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