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California Pension Fund Is Hotel California

Contributed by Chriss Street. Specialist in corporate reorganizations and turnarounds, former Chairman of two NYSE listed companies. His latest book, The Third Way, describes how to achieve management excellence and financial reward by moving organizations from Conflict and Confrontation to Leadership and Cooperation. He lives in Newport Beach, CA.

The California Public Employees’ Retirement System (CalPERS), which manages most public employee retirement benefits in California raised San Jose’s cost of checking-out of the pension plan by 584%.

When it comes to public employee pension politics, the Eagles got it right with Hotel California: “You can check-out any time you like, but you can never leave!” The San Jose City Council, facing huge budget deficits, tried to honor the will of the people by terminating life-time pension benefits for Council members. But they just learned ending wildly expensive retirement benefits may be wildly more expensive than staying in the plan. The California Public Employees’ Retirement System (CalPERS), which manages most public employee retirement benefits in California raised San Jose’s cost of checking-out of the pension plan by 584%.

Mayor Chuck Reed leads a conservative council majority in San Jose that have been battling to cut operating costs to keep the town of one million people from being forced to declare bankruptcy. The city’s largest and fastest growing liability is cost to fund their public employees’ defined benefit pensions that are invested by CalPERS.

During the hot stock market in the late 1990s and legislation from Sacramento, San Jose and most state and local governments spiked life-time pension benefits for union employees and the city council members by 60%. Thirteen years later, annual pension costs per employee have tripled, burdening San Jose with a $2.9 billion unfunded pension liability. This liability equals $2,900 for every man, woman and child in the city. But since only 46% of residents work, the liability is $6,304 per working Californian.

The city’s pension plan covers 7 current elected officials and 20 former mayors and council members. Ten of the former officials already are drawing retirement benefits. By law if the plan is terminated, the retired officials will continue to receive their pensions and current council members would keep the value of the benefits they have already accrued. Facing staggering budget challenges, the council voted unanimously last January 2012 to terminate their own pension plan as a demonstration of leadership when they asked unionized city employee’s to accept pension benefit reductions.

San Jose voters in June approved a city council sponsored measure reducing pensions for new hires and calling for current employees to pay more each month for their pensions or accept a lower benefit formula for their remaining years on the job. The city’s unions have filed a law suit and both sides expect a battle.

Having voted to terminate city council defined benefit pensions, Mayor Reed appointed the city’s Human Resources Department to handle the paper work. While the council’s pension benefit costs were considered small at less than $100,000 per year, the public voiced strong support for the council’s gesture of moral leadership.

The solvency of San Jose’s city council pensions was reported last year by CalPERS to be 72% funded and had a stated liability of $976,000, based on the agency’s assumption that the pension plan investments would earn 7.5% percent for each of the next 30 years.  But CalPERS told the city council to exit the pension plan would cost between $5 million to $5.7 million, approximately 584% more than the liability CalPERS had been annually reporting to the city. It seems CalPERS’ expected return of 7.5% per year is only for participants that stay in the plan. CalPERS hammers participants when they want to check-out of the plan by whacking their future estimated return down to the U.S. government bond yield, which is 2.4% right now.

San Jose’s city council pension plan only allows full retirement at age 55, pays 2% of salary for every year worked, and adds a 2% cost-of-living raise each year. These benefits generate an annual pension payment of $13,000 per council member. This benefit is only 60% of what a San Jose union employee would receive.

CalPERS manages $262 billion in pension assets for 1,576 local governments pension plans that cover state workers and non-teaching employees in 1,488 school districts and agencies. The pension plan claims in its’ latest financial report that it has an unfunded liability of about $100 billion. But if required to pay at the same rate they demand from San Jose City Council to check-out of the pension plan, CalPERS unfunded liability would be $584 billion. As the Eagles warned when entering the Hotel California: “This could be Heaven or this could be Hell.” Contributed by Chriss Street.

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