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Media is wrongly hyping pensions as a cause of city bankruptcies

Posted 11 years 263 days ago ago by    The Sacramento Bee
By Rob Feckner

If there is one thing I have learned in my time on the CalPERS board it's this – a little perspective goes a long way. This is especially true when it comes to the news coverage of CalPERS' recently announced investment returns for last fiscal year and the criticism of pensions in municipal bankruptcies. Let me offer a little perspective.

Last fiscal year, CalPERS earned a 1 percent return on our investments. The news has caused some people, including the media, to claim that the sky is falling and to demand that CalPERS "get real" and lower our investment assumptions. A few people have even personally blamed our investment staff.

The flurry of news and editorials demonstrates a severe misunderstanding of CalPERS' investment strategy. It also mischaracterizes how a single year return will actually affect pension costs for taxpayers. As one astute financial editor put it, the reporting and short-term views of our investment returns is largely what's wrong with our financial industry and the media who breathlessly cover it.

CalPERS is a long-term investor. This concept is either ignored or misinterpreted by many on a regular basis, and is the greatest source of misunderstanding and misinformation about pensions. As a long-term investor, we fully expect a range of possible returns every year.

Occasionally, returns will be negative, and occasionally, returns will be high, like the previous year's 21.7 percent gain.

Historically, CalPERS has regularly outperformed our long-term 7.5 percent goal over a 20-year average. Our 30-year average even exceeds 9 percent.

If the media and our critics insist on looking at returns on a single-year basis they should tell taxpayers the full story – we posted gains not just in excess, but in significant excess of our goal of 7.5 percent 14 times in the past 20 years.

Last year's 1 percent return will be reflected in local government contribution rates two years from now. But, just like when we have large gains, losses are spread over 30 years to ensure employer rates remain as stable and predictable as possible. Any increases due to last year's returns will likely be very small.

A similar lack of perspective exists over the reporting of recent bankruptcy filings, including Stockton and San Bernardino. Fiscal challenges facing our cities and counties are difficult and worrisome for everyone involved. But pensions, generally, are not the problem. The real culprit is the economy and housing market, along with financial decisions made by city officials.

For example, Stockton borrowed heavily to build a new city hall, a sports and entertainment facility, baseball park and marina. San Bernardino lost major employers when the Kaiser steel plant and Norton Air Force Base closed. Both cities are among the top five housing foreclosure cities in the nation, resulting in high unemployment and reduced consumer spending and sales taxes.

It's true that total employee compensation is the biggest expense for cities, often 70 percent to 80 percent of city budgets. That being said, budgets are built with those employee costs in mind. Budgets are not built around being in the top five foreclosure cities in the nation.

Pension costs are a small piece of the budget. Stockton's pension costs are only about 6 percent of the total city budget. In San Bernardino, pension costs account for 10 percent of the total city budget.

The bottom line is that it's not fair to scapegoat public employees and pensions for the financial woes of our cities or of our entire state for that matter.

When it comes to pensions, the media and our critics should try a little honest perspective. It goes a long way.