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Posted by: Kim_Hamilton on 12/15/2009 01:23 PM
Updated by: Kim_Hamilton on 12/15/2009 02:18 PM
Expires: 01/01/2014 12:00 AM
:
Californians questioning why their state budget is in perpetual red ink need look no further than the California Public Employees' Retirement System's (CalPERS) implicit forecast in 1999.~by David Crane
Pensions And Partying Like It's 1999...December 15, 2009...By David Crane
"Californians questioning why their state budget is in perpetual red ink need look no further than the California Public Employees' Retirement System's (CalPERS) implicit forecast in 1999 that the Dow Jones Industrial Average would reach 25,000 by 2009, 595,000 by 2049 and 28 million by 2099 and that its investment earnings would rise alongside. Based on that projection of robust investment earnings, the 1999 Legislature and governor massively boosted lifetime pensions for government employees without requiring increased pension contributions.....
Ten years later, the Dow is at 10,500 … and because the state must make up for deficiencies in CalPERS's investment earnings, the most recent state budget diverted $3.3 billion from government programs to pay for pension obligations.
The problem is that CalPERS is still acting like it's 1999, recently telling a journalist (Sacramento Bee, Nov. 20) that now it implicitly forecasts the Dow to double in 10 years and hit 7 million by 2099.
Warren Buffett's … implicit forecast for his own employee pension plans needs the Dow to close the century at only one-twentieth of what CalPERS initially projected and one-fifth of the level CalPERS now projects. … Does it seem reasonable to assume [CalPERS] will perform five to 20 times better than Buffett and his successors … ?
What happens when CalPERS's forecast is wrong? Sadly, the damage is done to innocent bystanders down the road, such as the California State University system, parks and every other program that has its funding cut in order to pay for pension promises that weren't properly funded upfront because of aggressive investment-return assumptions.
This is not just a problem of the recent market collapse. Even if by some miracle the Dow got to 25,000 by the end of this month, the state would still need the Dow to keep growing to 28 million by 2099 and to keep compounding at the same rate for there to be no impact on innocent programs. Simply put, this is what happens when non-cancellable promises are issued based upon mythical assumptions that extraordinary rates of return can be earned on large amounts of money over long periods of time.
This is why pension reform means both reducing the size of pension promises for new employees and limiting investment-return assumptions so that governments are forced to properly fund pension promises.
Next time a public pension fund manager says not to worry about investment-return assumptions, ask them to repeat that same assertion to a child. After all, that's whose money and future they're risking. Better yet, schedule a school field trip to the next CalPERS board meeting at which investment-return assumptions are on the agenda."
(This article can be read at: http://www.signonsandiego.com/news/2009/dec/15/pensions-and-partying-its-1999/)
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