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Author: yodaorange Big red star, 1000 posts Feste Award Nominee! Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 459121  
Subject: Calpers loses first round in California Date: 12/21/2012 11:51 PM
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The judge in the San Bernardino bankruptcy case, give a preliminary oral ruling that Calpers did NOT have standing ahead of the other creditors. This means they will have to stand in the same line as all of the other creditors, including the bondholders.

This is probably a ten round fight before it gets to the Supreme Court for the knockout round. So the parties have many more rounds to fight. .

As to Jerry's recommendation that union contracts should require that pensions are paid upfront in cash. The challenge with this is that you assume a long term investment return for all of the money.

For example, let's go back to 2000 and assume that San Bernardino pensions were 100% funded on that date. "Fully funded" back then assumed that the investment returns would average 8.0% forever. From 2000 through 2010, investment returns were very far short of 8%. Let's say they were 2% per year.

To keep the pensions 100% funded every year would require a new, over budget contribution from the city, each and every year. Let's assume the city budgeted $10 million in payments to Calpers. The investment returns are poor and they city has to pay $11 or $12 million, which busts their budget.

This is a large part of the pension problem around the US. With a broad brush, equity returns have been below the assumed rate since ~ 2000. Even municipalities that did contribute reasonably, find themselves in a hole that requires larger contributions that originally budgeted.

BOTTOM LINE is the only way to guarantee 100% funding each and every year is to switch to a defined CONTRIBUTION plan like a 401K/403B instead of a defined BENEFIT plan. Had the municipalities done this, there would NOT be a large disconnect on them being properly funded or not.


Thanks,

Yodaorange
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