[PEN-L:28663] Stock prices & CA public pension plans

["Seth Sandronsky" <ssandron@xxxxxxxxxxx>]

An article from The Sacramento Bee on how declining stock prices are
affecting public pension plans in CA.  A hit to the buying power of public
employees in the state, e.g., the "underconsumption undertow," Jim?

Seth Sandronsky

CalPERS: Pensions need help
By Paul Schnitt and Loretta Kalb -- Bee Staff Writers
Published 2:15 a.m. PDT Friday, July 26, 2002
The nation's largest public pension system has told public agencies in
California that they will have to contribute more to employee retirements
starting next year to make up for the fund's huge stock market losses.

Officials with the California Public Employees' Retirement System said
Thursday it remained uncertain which of the more than 1,100 public agencies
whose pensions fall under its management would be most affected.

But cities, counties and special districts that chose to use the gains from
the 1990s stock market rise to improve employee retirement benefits could
face the highest increases.

"It's been a good run, but we've known all along there would be years when
investment returns aren't there to be able to pay the lion's share of
employee benefits," said Pat Macht, spokeswoman for CalPERS.

Because CalPERS was able to accumulate a sizable surplus during the stock
market boom, many local governments did not even have to make contributions
to meet their pension plan obligations.

A letter distributed last month by CalPERS to the local agencies said their
contributions to the pension system beginning next July, for the 2003-04
fiscal year, could rise by as much as 16 percent. Other increases would be
less, perhaps as low as 2 percent.

"We need to brace ourselves and certainly plan for cost increases," said
Leigh Keicher, finance director for the city of West Sacramento.

"Obviously, if you pay more for the employer contribution (for pensions),
you have less money for other services," said Russell Branson, finance
director for the city of Roseville.

The news also is not good for counties, said Steve Keil, legislative
coordinator for the California State Association of Counties.

"Counties are being hit by a variety of forces," said Keil, pointing to weak
revenues from hotel and motel taxes and increased costs for anti-terrorism
efforts.

CalPERS provides health and retirement benefits to nearly 1.3 million state
employees, non-teaching public school workers and public agency employees
and their families, including 370,000 retirees.

According to the CalPERS Web site, the system paid out $5.8 billion in
retirement benefits in the 12 months ending June 30, 2001.

Amid the euphoria of a soaring Dow that built huge surpluses for CalPERS,
labor unions successfully lobbied the Legislature, with the support of the
CalPERS governing board, to enrich members' retirement benefits. Some of the
gains were dramatic.

Under a law enacted last year, for example, a local government worker with
30 years' experience who retired at age 60 would receive a pension benefit
equal to 90 percent of his highest salary. Previously, that same worker
would have received only 60 percent of his highest salary.

Even before that pension improvement took effect, however, the music
stopped. The stock market cratered, wiping out billions in surplus that
CalPERS had built during the unprecedented boom.

The value of CalPERS assets peaked at $178 billion in early 2000. But as the
stock market faltered, CalPERS' assets fell below $145 billion. Annual
returns on investment, which averaged well into double digits annually
during the 1990s, turned negative the last two years.

"My feeling is and has been all along that (CalPERS) should have sat on
their reserves, realizing the fact that the day of reckoning in the stock
market was coming," said David Thompson, retired personnel director with the
Sanitation Districts of Los Angeles County.

"Now employers are going to have to make significant contributions again --
that's taxpayer money that these cities need for other purposes," he said.

Geoff Davey, chief financial officer for Sacramento County, said the stock
market gains were used to justify sweetening public employee pensions
statewide.

"Claims were made that those (pension improvements) were being made at no
cost to the taxpayers because of the investment gains," Davey said. "Now it
would appear the retirement benefits enhancements that PERS and the governor
agreed to for the state ... are going to cost the taxpayers after all."

Macht, the CalPERS spokeswoman, said there was "full disclosure that these
benefits cost money."

"Everybody understood if there were periods of time when the market went
down, it would have an impact," she said.

Also, local governments were not forced to increase employee retirement
benefits, Macht said.

Perry Kenny, president of the California State Employees Association,
acknowledged CalPERS "took excess reserves saved during the good times and
helped elevate the state employees to the level of county and city
employees." The CSEA represents about 260,000 state employees.

State agencies, already grappling with a $23.6 billion budget shortfall out
of a $78 billion general fund, also are likely to pay more in pension plan
contributions for the fiscal year that begins July 1, 2003, said Tim Gage,
director of the state Department of Finance. "It's reasonable to think we'll
see higher costs (in 2003-04), but the question is how much higher," he
said.

The amount state agencies contribute to the fund will increase by more than
$154 million in the current fiscal year, Gage said.

Typically, employers match the amount employees contribute to their pension
-- 7 percent of their salaries. Law enforcement employees contribute 9
percent.

While CalPERS allows employers to reduce contributions in times of plenty or
raise them during market downturns, the California State Teachers'
Retirement System does not.

Sherry Reser, CalSTRS spokesman, said that consistency of contributions has
helped CalSTRS meet its goals for 687,000 teachers, administrators and their
survivors despite fluctuations in the market.

--------------------------------------------------------------------------------
About the Writer
---------------------------

The Bee's Paul Schnitt can be reached at (916) 321-1102 or
pschnitt@xxxxxxxxxxx Bee Deputy Capitol Bureau Chief Dan Smith contributed
to this report.


I wrote:
> >I quoted Epstein & Ferguson to the effect that monetary policy >hadn't
> been applied because of bank influence, agreeing with what >you say below.
> On the other hand, Doug was saying that it was >applied -- since the
> discount rate fell a lot -- but didn't work. As >far as I'm concerned, both
> can be true: I don't think monetary >policy works well at all in situations
> like 1929-32 or 2001-?.

Doug writes:
> I don't think it's a controversial point that the Fed didn't try hard
> enough from 1929-32 - but a 75% decline in the discount rate ain't chopped
> liver, either. The stock market failed to respond to that 75% decline, and
> the decline in market interest rates, because a deflationary collapse was
> underway, and, as JD says, monetary policy can't do much about those
> (though the Fed could probably have mitigated the damage had they been more
> aggressive). The failure of the stock market to revive in the face of much
> more aggressive Fed easing today is pretty scary, given the 1930-31
> precedent; it suggests, though certainly not conclusively, that some kind
> of deflationary unraveling is underway. And since big government makes
> total collapse unlikely, it seems likely that some version of Japan in the
> 90s is happening in the U.S. economy today.

To a large extent, the effects of the Fed's rate cuts have shifted away from
the stock market over to the housing market. The big question is whether or
not there's a bubble in the latter market. If so, the US is definitely
"turning Japanese."

> I'm not convinced by Ferguson-style explanations of the Fed's inaction; it
> could be that central bankers of 70 years ago just didn't know what they
> were doing. Why has the Fed eased so aggressively in this cycle? Is bank
> influence lessened, or do central bankers know just how risky it is not to
> ease in the face of financial implosion? The Fed is clearly taking the
> Japan precedent very seriously, and they were much quicker to ease than the
> Bank of Japan was 12 years ago.

Ignorance is always part of the story of policy, though with any luck
there's less of it now. In 1929, the "conventional wisdom" concerning
recessions was that they should be allowed to take their course, because
they would lead to purgation of imbalances, which would in turn allow
renewed growth. That view has largely faded, producing the late 1990s view
that the Maestro could use the Federal Funds rate to fine-tune the economy,
an equally ignorant view (to my mind). (It's faded until recently when the
late 90s bubble --> imbalances --> recession view, a revival of imbalances
theory, has become increasingly popular, in fact being endorsed by Dubya.)

It's quite possible, however, that the Fed folks are much more knowledgeable
than in 1929. Now, for example, they know that a financial crisis can have
very large spread effects (as in the 1930s, as in Japan). They learned from
experience, I hope, that "letting nature take its course" can be totally
disastrous.

There have been some major political changes, though, that encourage AG to
"wake up and smell the coffee." I think that there's a larger coalition in
favor of keeping stock prices and the economy from falling, since stock
ownership crept down the social pyramid a bit. More importantly, the
"institutions" (such as the California public pension plan) have a lot of
political influence.  During the "bubble years," individuals, companies, and
governments acted based on the economic and political assumption  that the
stock market wouldn't fall and the economy wouldn't collapse. This is a
crucial reason behind the explosion of private-sector debt and large state
spending plans (at least in California). When those assumptions fail, the
consequences are dire. So there's a lot of political pressure that says
"something must be done."

Jim



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