VOICE In Ione 2020 ©


IONE finance committee MEETING

december 16th meeting


Regular Agenda

Police Position

Caselle Updates

CalPERS CEPPT Program - Investment Trusts


Meeting UPDATE: The regularly scheduled meeting of the City of Ione Finance Committee, scheduled for Monday, December 16th was cancelled.

The Finance Committee will resume it’s regular meeting schedule in January, 2020.







Special report - Caiforia pension crisis

Recent stock market losses may spike local pension costs, but not immediately


The recent stock market crash caused by the COVID-19 pandemic threatens to sharply increase pension costs for local cities, school districts and other government agencies.


Those higher pension costs will worsen an already ongoing financial crisis for local governments, which have been grappling with sharp drops in tax revenue because so many parts of the economy have been forced to shut down.


But local governments won’t face increases in their annual pension payments until summer 2021 at the earliest, because pension systems are always a year behind in calculating the annual payments of individual agencies.


And most pension systems are facing less severe losses than they suffered in the stock market crash of 2008 and 2009, because they have lowered long-term performance projections and revamped their portfolios to be less risky.


The crash still threatens to be a significant financial blow to local governments next summer, a time when they seem likely to still be struggling with fallout from the pandemic.

Economic downturns that include stock market crashes are particularly crippling to the finances of government agencies.


That’s because the agencies simultaneously face shrinking tax revenues and spiking pension costs, which go up because the investments of an agency’s pension system lose value when stocks tumble.


Pension systems invest contributions from workers, combined with taxpayer money, into the stock market with the goal of using the proceeds down the road to cover the guaranteed pension payments of government workers when they retire.


Stock market gains, crashes

It’s generally a sound strategy, because investments in the stock market have historically grown at a much higher rate than any other kind of investment. So stock market gains can decrease how much taxpayers must contribute to worker pensions.


But when the market crashes, the pension system’s long-term projections of investment returns take a major hit. That can mean multi-million dollar increases to the annual pension payments of government agencies at a time when they can ill afford such spikes.


“We’ve created a vicious cycle,” said Haney Hong, chief executive of the San Diego County Taxpayers Association. “When things go bad, they go really bad.”

Many local government agencies were already facing increases in their pension payments for other reasons, most commonly to make up for underpayments in the past. So the expected increases next summer could be especially painful.


The portfolio of the California Public Employees’ Retirement System, a state agency known as CalPERS that handles pensions for most state employees and workers in every local city except San Diego, has lost about one-fifth of its value during the recent crash.


The system’s portfolio was valued at $404 billion in late February but had dropped in value to $335 billion one month later.


The portfolio of the California State Teachers’ Retirement System, which handles pensions for all local public school teachers, has suffered similar losses.


And two local pension systems, one covering workers for the county government and one covering city of San Diego workers, also have lost significant value since the pandemic began crashing worldwide markets.


A spokeswoman for the city’s pension system, the San Diego City Employees Retirement System, declined to comment this week. She said telecommuting made responding to media questions a challenge.


No reason to panic

Each of the other pension systems said this week that the recent crash is no reason to panic, noting that the impact of stock losses from any particular year are softened by spreading that impact over five years.


“It’s too early to tell what impact current market conditions will have,” said Rebecca Wilson, chief of staff for the San Diego County Employees Retirement Association.


Wilson also stressed in an email on Friday that the association’s $12 billion trust fund is “prudently invested, well-diversified and positioned to take advantage of market dislocations.”

The teachers’ retirement system says on its website that its portfolio is broadly diversified to withstand periods of turbulence.


Michael Simonson, deputy superintendent and chief business officer for the San Diego County Office of Education, said the stock market crash won’t have an immediate financial impact on pension payments for local school districts.


That’s because they’ve already been forced since 2014 to make escalated payments under policies aimed at accelerating reduction of the pension debt of the teacher’s retirement system. But an increase in the pension’s debt from market losses will eventually impact school district payments.


Simonson said school districts are still expected to face immediate financial consequences from the pandemic, which has reduced the state revenue that covers teacher salaries.


Local cities other than San Diego said they expect to see spikes in their pension payments next summer because of how the recent crash has affected the portfolio of CalPERS, which handles pensions for workers in every local city except San Diego.


Payment spikes

Blair King, city manager of Coronado, said the large investment losses posted by the system last month make a spike in payments seem inevitable.


“We are expecting to see increases,” he said.


On its website, CalPERS says the system is “a long-term investor” that “prudently and patiently” works through all market cycles.


“Our team is focused on working together through the extreme volatility of the markets,” the website says. “We’ve also been planning for an economic downturn for some time. As a result, we are better prepared now than during the financial crisis of 2008.”


One step the system has taken is lowering its long term expected rate of return on investments from 7.5 percent to 7 percent.


The city of San Diego’s retirement system went even further last year, lowering its expected rate of return to 6.5 percent, which is the lowest in the state.


Outside of California, San Diego has the most conservative projected investment returns when compared to nine similar cities: Phoenix, Denver, Seattle, Boston, Detroit, Philadelphia, Milwaukee, Nashville and Austin.


Michael Zucchet, leader of the city’s largest labor union, said this week that such moves mean the recent market crash will have a relatively small impact on the city’s annual pension payment next summer.


Zucchet also notes that the city’s pension system has become less aggressive in recent years to reduce risk. The system’s portfolio is about 50 percent stocks, with the rest invested in safer and less volatile assets.


He said it’s unlikely the recent stock market losses will have nearly the impact of the crash in 2008 and 2009, which decreased the value of the system’s portfolio by 25 percent and increased the city’s pension debt more than $750 million.







Special report - Caiforia pension crisis

CalPERS Reports Preliminary 4.7% Investment Return for Fiscal Year 2019-20


CalPERS today reported a preliminary 4.7% net return on investments for the 12-month period that ended June 30, 2020. CalPERS assets at the end of the fiscal year stood at more than $389 billion. The preliminary 4.7% return topped the fiscal year total fund benchmark of 4.33%.*


Individual asset class returns included Fixed Income, which generated a 12.5% net return, followed by Real Assets and Public Equity net returns of 4.6% and 0.6%, respectively. Despite significant market volatility which included assets under management declining by an estimated $70 billion in late February and March, the CalPERS Public Employee Retirement Fund (PERF) was able to recover nearly all of that value by the end of June.


Based on these preliminary fiscal year returns, the funded status of the overall PERF is an estimated 70.8%.** This estimate is based on a 7% discount rate.


“What started out as a health crisis turned into an economic crisis and severely affected investors everywhere, including CalPERS,” said Yu (Ben) Meng, CalPERS chief investment officer.


“However, we’ve been doing the hard work of preparing for a downturn for some time. When it came, we were in a strong position to reduce its impact on our portfolio and take advantage of new opportunities created by the changing economic climate. I’m proud that our strategy enabled us to navigate volatile markets and end the fiscal year on a strong note.


 “We’ll continue to focus on the long term and execute on our strategy to achieve our 7% targeted return.”


The CalPERS go-forward strategy utilizes its structural advantages and includes increasing investments in private assets over several years, and prudently using leverage to take advantage of market opportunities at the appropriate time.


The 2019-20 fiscal year return brings total fund performance to 6.3% for the five-year time period, 8.5% for the 10-year time period, and 5.5% for the 20-year time period. Over the past 30 years, the PERF has returned an average of 8.0% annually.


Today's announcement includes 12-month asset class performance as follows:






















Returns for real assets and private equity reflect market values through March 31, 2020.


“The preliminary returns for private equity reflect the steep drop in economic activity during a period of unprecedented change,” Meng said. “No doubt significant uncertainty still remains, but with our focus on investing over many years we firmly believe that private equity will help us generate the returns we need to pay retirement benefits.”


Private equity has been CalPERS’ highest returning asset class, with 10-year annual returns of 10.4% and 20-year annual returns averaging 7.5%.


CalPERS' 2019-20 final fiscal year investment performance will be calculated based on audited figures and will be reflected in contribution levels for the State of California and school districts in fiscal year 2021-22, and for contracting cities, counties, and special districts in fiscal year 2022-23.


The ending value of the PERF is based on several factors and not investment performance alone. Contributions made to CalPERS from employers and employees, monthly payments made to retirees, and the performance of its investments, among other factors, all influence the ending total value of the PERF.








Special report - Caiforia pension crisis

What the pension ruling at the California Supreme Court means for retirees & public employees


A major pension decision published by the California Supreme Court on Thursday leaves retirement benefits intact for nearly all public workers in the state.


The case was the second in two years challenging the so-called California rule, the set of legal precedents that has long prevented state and local governments from reducing public pensions without offering new benefits to make up for the losses.


The court’s decision clears from the judicial pipeline any major cases that lawmakers could use to reduce workers’ retirement benefits to try to save money.


The court restricted its decision to specific practices that some county public workers have used to inflate their pensions before retirement, such as figuring bonuses, extra pay for off-hours work and leave balances into their pension calculations.


The Alameda County Deputy Sheriff’s Association filed the lawsuit in 2012 as a challenge to former Governor Jerry Brown’s Public Employees Pension Reform Act, which banned the so-called pension spiking.


The decision means Alameda deputies hired before 2012 won’t be able to go back to counting those types of pay as pensionable, nor will other public workers in similar situations at the 20 counties that run their own pension systems instead of paying into CalPERS.


Are retiree pensions safe?

The ruling has no impact on retirees, current state workers or the majority of current workers in local governments.


Regarding the California rule, the court suggested saving money isn’t a good enough reason to modify workers’ future pension benefits, even when a worker won’t receive those benefits for decades to come.


Will the ruling help employers cut pensions?

Local government attorneys and experts might be looking for suggestions in the 90-page decision that the California rule has been weakened. Even if they find language they believe diminishes the rule, many things would have to happen — starting with the passage of new local or state laws — before any benefits would be affected.


Even then, it’s unlikely retirees would be affected.


As governments deal with hits to their budgets from the coronavirus, the court’s decision likely will act as a deterrent from looking for savings from pension changes.


And even in bankruptcy, the City of Stockton didn’t reduce pension benefits. City leaders decided they had to keep the benefits to remain competitive in hiring public safety workers.








Caiforia pension crisis

El Dorado County’s unfunded obligation to CalPERS exceeds $402 million


Auditor-Controller Joe Harn wrote the El Dorado County Board of Supervisors last week to inform them the county’s unfunded obligation to CalPERS now exceeds $402 million.


“The most recent report of our financial position with CalPERS is as of June 30, 2019. During the year ending June 30, 2019, CalPERS investment earnings were lower than projected and accordingly our unfunded obligation increased by $14 million since our last CalPERS actuarial report,” Harn said.


“Further, in 2019 CalPERS changed its funding policy to require counties to pay down their unfunded obligation from 30 years to 20 years,” continued Harn. “This will require the county to make dramatically higher payments to CalPERS effective in 2021. Balancing the county’s budget and providing critical public safety and road maintenance services will become much tougher in the future because of our unfunded obligation to CalPERS.”  


In 1999, in order to pay back public employee unions for campaign contributions, then Gov. Gray Davis and a super majority of the state Legislature passed Senate Bill 400, which allowed the state, counties, cities and special districts in California to offer employees drastically enhanced retirement benefits retroactively.


Then state Assemblyman Tom McClintock voted against the bill because he said the benefits were unaffordable and the numbers didn’t make sense. At the time McClintock stated the cost projections for the enhanced pension benefits were based on “wildly unrealistic predictions of CalPERS future performance.”


McClintock was right, according to Harn.


“CalPERS gave the county ridiculously low cost estimates in 1999. CalPERS projected the retroactive application of dramatically enhanced retirement benefits would not increase the cost to the county for the next 11 years,” the auditor said.


Ignoring the advice of the auditor-controller and ignoring the judgement of McClintock, county supervisors in 1999 and 2000 accepted the low cost estimates provided by CalPERS and offered county employees dramatically enhanced retirement benefits on a retroactive basis, Harn explained. It should be noted El Dorado Irrigation District and just about all surrounding counties have more lucrative and expensive retirement plans than El Dorado County does, he added.   


“The huge increase in CalPERS costs is going to adversely affect our fire districts as they continue to attempt to provide fire and emergency medical services in our county,” Harn continued.


“The county needs more tools and options that are not currently available to reduce these unaffordable and insurmountable unfunded obligations,” he said. “The Board of Supervisors should seek the assistance of California State Association of Counties, CalPERS and our representatives in the Legislature so that changes in state law and CalPERS policies will provide better options to enable us to reduce these unaffordable obligations. What we can do locally now is work to set aside significantly more funds in our reserves to help cover these costs in the future.”  


Harn also noted that getting out of CalPERS is not an option at this point. Included in CalPERS’ most recent report was the price to withdraw from CalPERS; more than $1 billion.








Special report - Caiforia pension crisis

Post-Coronapocalypse Pension Reform Checklist for California

The new reality of public sector pensions in California:

It is quite possible that CalPERS will collect a lot more from taxpayers


Pensions for state and local government employees in California are literally three to five times as costly as Social Security, and at least twice as costly as the Federal Retirement System.


In a perfect world, California’s state and local public employees would receive exactly the same retirement benefits as federal employees. They would receive a modest defined benefit, a contributory 401K, and they would participate in Social Security.


Unfortunately, in California, while some state and local public employees are offered 401Ks, and many participate in Social Security, all of them rely inordinately on a defined benefit pension. Far from being modest, even the most minimal examples of defined benefit plans for California’s state and local government workers provide roughly twice the value of the typical defined benefit offered federal workers. And where there’s twice the value, there’s twice the cost.


In reality, however, twice the cost would be a bargain. It’s much worse than that, and very little has been done. In 2013, the PEPRA (Public Employee Pension Reform Act) legislation lowered pension benefit formulas in an attempt to restore financial sustainability to California’s public employee pensions. But these revisions, which resulted in defined benefit formulas only about twice as generous as the federal formulas, only applied to new employees.


California’s Pension Systems Were Crashing Before the Coronapocalypse

Two years ago, and after more than eight years of a bull market in the stock market indexes, CalPERS, which is by far the largest pension system in California, had already announced that contributions from participating agencies were going to roughly double. They posted “Public Agency Actuarial Valuation Reports” that disclosed the details per agency.


At the time, in partnership with researchers at the Reason Foundation, the California Policy Center used these reports from CalPERS to summarize the impact on 427 cities and 36 counties (download full spreadsheet). As shown on the table below, two sets of numbers are presented – payments to CalPERS for the 2017-2018 fiscal year, and officially estimated payments to CalPERS in the 2024-25 fiscal year.


The most important distinction one should make when reviewing the above data is the difference between the “normal” and the “catch-up” payments. The so-called “normal contribution” is the amount the employer has to contribute each year to maintain an already fully funded pension system. The “catch-up” or “unfunded contribution” is the additional amount necessary to pay down the unfunded liability of an underfunded pension system.


As can be seen in the example of Millbrae (top row, right), by 2024, the “catch-up” contribution will be nearly six times the amount of the normal contribution. But in the PEPRA reforms, new employees are only required to contribute via payroll withholding to 50 percent of the “normal” contribution.


A separate California Policy Center analysis, also published two years ago, attempted to estimate how much total payments statewide would increase if all of the major pension systems serving California’s state and local public employees were to require similar levels of payment increases. The analysis extrapolated from the consolidated CalPERS projections for their participating cities and counties and estimated that in sum, California’s state and local government employers would have paid $31 billion into the 87 various pension systems in 2018, and by 2024 this payment would rise to $59.1 billion.


As noted at the time, and now more than ever, this was a best case scenario.


A Financial Snapshot of CalPERS Today

The next chart, below, depicts financial highlights for CalPERS – either officially reported or projected – in a format which ought to be publicly disclosed, every quarter, in this format, from every state and local public pension system in California. The first two columns depict data as reported by CalPERS for their most recent two fiscal years, ended 6/30/2018 and 6/30/2019. The final column, which consists of CPC estimates (not provided by CalPERS), shows how their financial condition could appear three months from now.


The first thing to note from the above chart is the fact that CalPERS was only 70 percent funded (“funded ratio,” bottom line) in June of 2019. The next thing to note, and this is crucial, is that the actuarial estimates of the total pension liability lags behind one year. That is, the $504.9 billion reported “actuarial accrued liability” is reported as of 6/30/2018, even though that figure is used to report the funded ratio as of 6/30/2019.


Take a deep breath, because the significance of this delay requires further discussion. From page 122 of CalPERS most recent CAFR, here are the trends for the actuarial accrued liability: 6/30/2009 = $294B, 2010 = $308B, 2011 = $328B, 2012 = $340B, 2013 = $375B, 2014 = $394B, 2015 = 413B, 2016 = 436B, 2017 = $465B, and 6/30/2018 = $504B. Based purely on the trend, is there any reason to believe this liability will not exceed $550 billion by June 30, 2020, two years later? Why isn’t that estimate being made?


There’s more. Why are actuaries permitted to have an entire extra year to complete their estimate of the total pension system liability, when changing single variables will cause the estimate to massively fluctuate? Sure, it is a complex exercise, and at some point an official calculation, based on all known data, should be reported that amends a preliminary estimate. But if, for example, you vary the earnings projection downwards from 7.0 percent to 6.0 percent – which needs to be done sooner not later – using calculations provided by Moody’s Investor Services, the amount of the CalPERS liability soars from $550 billion to $621 billion. You don’t split hairs when you’re being scalped.


And what about the employer contribution (second row of data)? Why did it go down from $20 billion in 2018 to $15 billion in 2019? From the “Basic Financial Statements” in the CalPERS CAFRs for the last few years, here are the totals for payments by employers: 2015 = $10.2B, 2016 (page 38-39) = $11.0B, 2017 = $12.4B, 2018 (page 40-41) = $20.0B. With the payment for FYE 6/30/2019 back down to $15.7B, the trends suggest that the large payment of $20.0 billion in 2018 was an anomaly. But assume that much money will come again from employers in 2020. But based on historical trends, probably not more than that. Yet.


Where does this put CalPERS?

All of this discussion is to explain the reasoning behind the figures in column three on the above chart. What might be materially different? What estimate isn’t best case? Does anyone believe CalPERS will actually break even in the return on their invested assets between 6/30/2019 and 6/30/2020? Does anyone believe the most accurate estimate of the total liability belongs anywhere south of $550 billion, particularly when they’re still using a discount rate that’s too high? And yet this puts CalPERS in what is arguably the worst shape it’s ever been, at 64 percent funded as of this June.


This paints a very grim big picture. CalPERS is on track to collect over $20 billion from taxpayers in the current fiscal year, and CalPERS, while the biggest pension system, only manages just over 40 percent of the state and local government pension assets in California. This suggests that the total taxpayer contribution to California’s state and local government pension systems in 2020 is already up to around $50 billion. And it isn’t nearly enough.


Steps to Reform CalPERS and all of California’s pension systems

1 – Admit the long-term rate of return projection is too high for calculating the value of pension liabilities. Move it down to 6 percent. Increase the required “normal contribution” accordingly, and, in turn, increase the share required from active employees via withholding.


2 – Once a more reasonable long term rate of return projection is adopted by the pensions systems, the goal of pension reform should be to stabilize pension system payments at some maximum percent of total personnel costs. With cooperation from union leadership, agree on what that maximum percent should be, then determine how to spread benefit reductions in an equitable manner between new hires, current employees, and retirees.


3 – For all state and local government employee pension plans in California, start providing consolidated quarterly financial summaries (without gimmicks), using the above chart as an example. Include a footnote indicating how much of the total employer contribution is for the unfunded liability vs the normal contribution.


4 – If a pension system falls below 80 percent funded, agree on an escalating series of remedies to be implemented to bring the funded ratio back up. They would include suspension of COLA, prospective further lowering of the annual multiplier for active workers, retroactive lowering of the annual multiplier for active workers, reduction of the retiree pension payment, and increasing the required payment to the pension plan by active workers via withholding.


5 – Pressure the California State Supreme Court to swiftly hear and rule on the cases Alameda County Deputy Sheriff’s Ass’n. v. Alameda County Employees Retirement Ass’n (filed 1/8/2018), and Marin Ass’n of Pub. Employees v. Marin Cnty. Employees Retirement Ass’n (filed 8/17/2016). These cases may provide clarity on the “California Rule,” which currently is interpreted as prohibiting lower pension benefit accruals, even for future work.


6 – With or without a decisive ruling (or any ruling) on the California Rule, work with government union leadership to revise pension benefits. If union leadership is uncooperative and the courts fail to offer an enabling ruling, than as a last resort, to bring the unions back to the negotiating table, lower salaries, current benefits, and OPEB benefits.


7 – In the long run, move towards a system modeled after the federal system. This would be a logical next step, following in the footsteps of PEPRA. It would create three basic tiers of public sector workers in California, the pre-PEPRA workers (who may submit to lower benefit accruals for future work), the post-2013 hires who are subject to the PEPRA reforms, and new hires starting in, for example, 2021, who would enjoy retirement benefits similar to what Federal employees receive.


The Ripple Effect of Unreformed Pensions

There are two problems with a bullish outlook today. First of all, the great returns of the past few years may have been unsustainable, a super bubble. And then that super bubble was not popped by a pin, but rather by a wreaking ball, the Coronapocalypse. There are tough economic times ahead.


In a severe downturn it is conceivable that annual taxpayer contributions to California’s public employee pensions systems will not merely soar from around $50 billion in 2020 to $60 or $70 billion within a few years. They could go even higher. For example, over the total three year period through June 2020, it is quite possible that CalPERS will collect more from taxpayers – $65 billion – than it will have earned in investment returns – $52 billion.


This is the new reality of public sector pensions in California. And because taxpayers have been increasingly on the hook to bailout these pensions, taxes have increased, services have been cut, and there has been a gradual wearing away of trust by citizens in their local governments. This is why, for the first time in decades, more local taxes and bonds were rejected by voters in March 2020 than were approved. Absent pension reform, this backlash has just begun.


So-called “crowding out” of other public services in order to pay for pensions doesn’t just impel an insatiable drive for higher taxes. It also works its way into higher fees, building fees in particular. Infrastructure investments such as connector roads and parks for new housing subdivisions used to come largely out of municipal operating budgets. It was a fair trade – the city builds the roads, the builders sell the homes, and the new residents pay taxes. But now, all of those costs are paid for by the builders and passed on to the home buyers. The rising cost of pensions can be directly tied to the unaffordable cost of homes.


Pensions for state and local government employees in California are literally three to five times as costly as Social Security, and at least twice as costly as the Federal Retirement System. Ultimately, this disparity divides Americans and undermines what it means to be an American citizen. Why should public employees care if Social Security is inadequate, if they don’t depend on it? Why should they care if all public benefits offered private taxpayers is diluted, or if citizenship itself becomes less meaningful, if their membership within the public sector is the primary source of their security?


America is entering difficult economic times. Maybe one good thing to come out of this will be a willingness on the part of public sector union leadership to make common cause with all of California’s workers, and agree to reasonable concessions on pensions that will help everyone living in this great state.






Text Box:

City Of Ione’s CalPERS Market Pension Debt Through 2018 (All Funds)


Up-To-Date’ Calculated Pension Debt*



*5-Year Weighted Average Using Calpers

2018 Termination Liability Discount Rate Of 3.25%.

Data Provided By Stanford Institute For Economic Policy Research

Ione Mayor Diane Wratten             

Text Box: U.S. National Debt