California Economy

[sangha]

BTW, if anyone wishes to argue why any of this from CalPERS is wrong, please feel free to elaborate.

CalPERS Response to Stanford Policy Brief on Public Pension Funds
April 6, 2010

Stanford’s Institute for Economic Policy Research released a policy brief “Going For Broke: Reforming California’s Public Employee Pension Systems” that relies on outdated data and methodologies out of sync with governmental accounting rules and actuarial standards of practice. The report fails to take the following into account:

Investments

* Over the past 20 years, we have earned an average annual investment return of 7.9 percent – which includes the past two years when we suffered significant investment losses due to the Great Recession. Thus, our assumptions, from actual experience, have proven valid, relative to the 7.75 percent discount rate.

* The study appears to use the yield of the 10-year Treasury bond as the risk-free discount rate to estimate the present value of liabilities. The duration of the 10-year bond is around 8 years and well below the estimated duration of the CalPERS liability in the study. It would be more appropriate to use the yield of the 30-year Treasury bond as the risk-free discount rate for purposes of such a comparison.

* CalPERS does not believe that using a risk-free rate as suggested in the study is appropriate since the fund can earn a premium over the risk-free rate with high certainty by investing in a diversified portfolio with an acceptable level of risk.

* The study relies on data when the system had $45 billion less in assets than it has today. CalPERS assets are valued at $206 billion – a gain of more than $45 billion since the market downturn.

* Additionally, its findings are based on a mathematical model that uses current interest rates, which are very low and make liabilities appear to be much higher. That method is inconsistent with the Governmental Accounting Standards Board and current actuarial standards.

* The study recommendations are based on bond returns over the past 25 years of 7.25 percent for investment grade corporate bonds, which are only 0.66 percent lower than CalPERS total return of 7.91 percent but with much lower volatility. CalPERS experts believe that this reasoning is flawed. Prospective returns on bonds are much lower today since yields are at an historic low and the return to bonds will equal the current yield to maturity which is around 4 percent for most broad band indices. Also bonds could be more volatile than the past if economic conditions are more uncertain as in the recent period.

* CalPERS is taking steps to modify its asset allocation approach and better allocate assets according to their macro risks and fundamental characteristics. This could result in addressing inflation and interest rates as macro risks.

* It ignores our diversified investment portfolio that has been time-tested during our 78 year history. If CalPERS had followed the recommended approach in the study, we would have given up billions of investment earnings, that have helped finance pensions rather than tax dollars.

Actuarial/Benefit Formula Related

* The study misstated some of the benefit formulas in Table 3 and seems to suggest that CalPERS violate the California Constitution by using surpluses to "reduce state debt." Pension raids were determined to be unlawful during the Wilson Administration.

* To adhere to some of the changes suggested in the report, CalPERS would be violating actuarial standards of practice and undo 50 years of governmental accounting rules in favor of an approach that would be "zero" risk.

* Funded status should not be viewed as a long-term irreversible trend. A pension fund’s funded status – whether a liability or surplus – is constantly changing, depending on current economic circumstances. It is a snapshot in time that can change dramatically over a fairly short period of time due to the health of the overall economy. Funded status snapshots are useful in showing how far or how near one is to full funding. Experts agree that a funded status of 80 percent is the mark of a very healthy plan. CalPERS notes that the Stanford Report acknowledges that using the data selected, CalPERS was more than 80 percent funded.

* Benefit formulas are not set by CalPERS. They are determined through the collective bargaining process, between the employer and the employee representatives. CalPERS recently held the California Retirement Dialogue, and information on the various viewpoints on benefit formulas is available here.

Future Steps

* CalPERS regularly evaluates its assumed rate of return every three years. At our May investment committee meeting, the Board will hold a workshop on capital market assumptions, finalize those assumptions in September, hold an asset-liability workshop in November, and take final action on an asset mix in December. In February, the Board will take the final step in the process by setting the actuarial assumed rate of return/discount rate. These meetings are open to the public and CalPERS is committed to obtaining all viewpoints on these issues. We invite the authors of the study to participate in the discussions.

CalPERS Response to Stanford Policy Brief on Public Pension Funds

Of course CALPERS disputes the study. The managers of CALPERS earn huge fees mismanaging this mess which while being derisked via CA taxpayers.

Once again, a wingnut has no argument to make, so he accuses others of being biased. This comes after citing Breitbart, a proven and admitted liar

 

[Trajan]

The problem with pension forecasting is that returns are structurally cyclical. If you study financial history, you see long periods - 10 to 20 years - of high returns followed by long periods of low returns. We are now in a period of low returns.

Which is why pensions need to be restructured to guarantee nothing more than market returns, not absolute returns.

That's why I think eventually public pensions will become defined contribution plans, at least in part, whereby workers earn market returns.

hey fine by me, I'll be grandfathered in under the present defined pension plan 2.5% a year baby.....


see? I have been infected by pub. employee fever....touches yours. not mine.

 

[sangha]

Which is why pensions need to be restructured to guarantee nothing more than market returns, not absolute returns.

That's why I think eventually public pensions will become defined contribution plans, at least in part, whereby workers earn market returns.

hey fine by me, I'll be grandfathered in under the present defined pension plan 2.5% a year baby.....


see? I have been infected by pub. employee fever....touches yours. not mine.

Umm, the law allows the conversion of defined benefit plans into definied contribution plans. It even allows employers to end the pension plan and pay you a lump sum far less than the value of your pension benefits And that assumes the plan isn't bankrupt.

SO keep on thinking that you got yours.

 

[william the wie]

With deleveraging continuing and costitutional restrictions on reform my money is on state default. Since a bailout of CA would most definitely include IL and a minority of other states funding would not make it through the Senate. Attempted secession would also lead to internal secession within the defaulting states leading not to another civil war (insufficient trained and formed units within the affected areas) but rather a somewhat harsh settlement that would fix the problem. Since this is knowable ahead of time I would expect a somewhat limited and ineffectual secession movement that would adversely affect the secessionist movement for a half century at a minimum.

 

[loosecannon]

With deleveraging continuing and costitutional restrictions on reform my money is on state default. Since a bailout of CA would most definitely include IL and a minority of other states funding would not make it through the Senate. Attempted secession would also lead to internal secession within the defaulting states leading not to another civil war (insufficient trained and formed units within the affected areas) but rather a somewhat harsh settlement that would fix the problem. Since this is knowable ahead of time I would expect a somewhat limited and ineffectual secession movement that would adversely affect the secessionist movement for a half century at a minimum.

I do not think state default is that much of a problem. I imagine it will look a lot like bankruptcy court, or esp the restructuring of GM and Chrysler. It may actually be a GOOD thing as it could break the legal logjams states are stuck in with pension liabilities that are just not current with the times.

The number of nations that have been in default is a long list. And it seldom seems to cause civil war or revolution. In the case of CA the sooner we default on our bonds the sooner we can restructure our economy.

 

[william the wie]

I agree with you on much of CA however it makes a clear example of what is likely to happen with some state. The coastal plain of CA is likely to have enough votes to pull off, I think the term is, an opera bouffe (a Keystone Kops political move). I suspect much of northern, southern, central and eastern CA will counter-secede with voluntary federal assistance and the coastal plain will go into insolvency quickly. New York city and the UP of MI have threatened such actions while Key West actually did so with Texas periodically dusting off its treaty of union that permits either peaceful subdivision into five states or independence. It has been a while since anyone has pulled this stunt so someone will and everyone else will smarten up.

With Obama as president I think it is more likely that CA is the most likely to do the dumb (maybe a 20% probability) but some state is almost certain to try. Admittedly IL is in much worse shape than CA along with NV and MI as second and third I'm not sure CA ranks even 4th or 5th worst but there is much more confidence in the ability to go it alone in CA and HI. Still some state will do the stupid as the economy drifts through the coming lost decade and the rest of the overextended states will default. I am just using CA as the most likely example of what is likely to happen to a coastal state that pulls this kind of crap and I suspect at least one coastal state that believes those skewed transfer payments numbers that conveniently leave out for example defense contracts from their reasoning.

 

[loosecannon]

Well I know a number of VERY smart people who say the same kind of thing, WTW.

We have lasted much longer than most nation states, civil wars and secession movements are not rare, we are a divided state whose "national" identity is hemoraging, etc.

But we survived the civil war. That speaks volumes. And I think that war was 100% immoral and unconstitutional.

Besides the trend is toward bigger federalized units rather than smaller nation states. Russia wants to extend the EU across the Eurasian continent. China wants a Pacific rim confederation. Chavez wants a united central/South American alliance. The Asean unit is slowly gaining ground.

I would love to see the 5 westernmost states secede. Damn right! But I won't hold my breath.

 

[william the wie]

Going countertrend is likely to backfire and hopefully DC will keep its powder dry and only use economic pressure to make its point. The western states are only one of the problem areas. Just pulling bases and defense contracts out of the affected areas should be sufficient to settle the problem whether the problem crops up on the East or West coast.

 

[loosecannon]

California economy still world's eighth-largest, despite recession

California economy still world's eighth-largest, despite recession | Money & Company | Los Angeles Times

 

[william the wie]

California economy still world's eighth-largest, despite recession

California economy still world's eighth-largest, despite recession | Money & Company | Los Angeles Times

That's a real old story to list Japan as larger than China.

 

[loosecannon]

It was posted online today Willie, it used the world bank as it's data source.

Eighth-largest economy in the world, that is.

Despite the worst recession in 60 years and one out of eight workers out of a job, California, if it were its own country, would still be in eighth place with a gross domestic product of $1.9 trillion, according to World Bank figures for 2009.

California is nestled between No. 7, Italy, and up-and-coming No. 9, Brazil.

The United States, with a GDP of $14.1 trillion, has a lock on first place, followed by Japan ($5.1 trillion), China ($5 trillion), Germany ($3.3 trillion), France ($2.6 trillion) and the United Kingdom ($2.2 trillion).

Spain ($1.5 trillion) rounds out the top 10.

"The California economy, while hard-hit by the construction collapse and national recession, remains a world economic powerhouse," said Stephen Levy, director of Palo Alto's Center for the Continuing Study of the California Economy, who put together an analysis comparing California's economic might with other U.S. states and foreign nations.

California's economy is so big that even its major and not-so-major regions rank fairly high on the World Bank's Top 100 list of national economies.

By itself, the economy of the greater Los Angeles basin would rank 15th in the world between Mexico and South Korea.

The San Francisco Bay Area would be 20th between Switzerland and Belgium; San Diego 45th between Nigeria and Pakistan; the San Joaquin Valley 51st between Algeria and Hungary; and Sacramento 55th between Ukraine and Kazakhstan.

 

[Sallow]

I've always thought of California as something of a basket-case, at least politically. I was surprised when I ran the numbers and discovered that during this decade, California has actually outperformed Texas, albeit slightly.

From 2000 through 2009, per capita economic growth in California at 31.6% was slightly higher than Texas at 31.5%. California was disproportionately affected by both the collapse of the Tech Bubble and the Housing Bubble compared to Texas. Also, Texas is a net exporter of energy whereas California is a net importer of energy. You can calculate all the data from these sites.

BEA : Gross Domestic Product by State
California QuickFacts from the US Census Bureau

Texas benefited greatly from a quintupling of oil prices during the decade, was not as affected by the collapse of the Tech Bubble in the earlier part of the decade as much as California, and did not experience the same catastrophic boom/bust real estate cycle as California did. Yet California actually outperformed Texas.

I have an article I will post later.

California's biggest problem is direct democracy.

It will never right itself if it continues to put caps on taxes...while spending on services goes up.

 

[loosecannon]

It isn't services, it is employee benefits. Our public employee unions are dangerously powerful.

 

[Trajan]

People had to check on me at my cube, they thought I had gone bonkers ( well, I am sorta) , I just could not stop laughing...this is so California...a perfect symbol of our dysfunction.......



California Rail Board Approves $4.15 billion "Train to Nowhere"

By Philip Klein on 12.3.10 @ 10:45AM

On Thursday, the California High Speed Rail Authority board unanimously approved the 65-mile "train to nowhere" that would link two tiny towns at a cost of $4.15 billion, all because the state didn't want to lose $2 billion in federal stimulus funds.

The rail line would connect two central California towns, Borden and Corcoran, with a combined population of 25,000. But that's merely an estimate from Democratic Rep. Dennis Cardoza, an opponent of the plan. In reality, the San Jose Mercury News notes, Borden "is an unincorporated community for which the U.S. Census Bureau doesn't even keep official population estimates."

The line is supposed to be the first part of an ambitious $43 billion project aimed at linking San Francisco and Anaheim, but the decision to start in such a low population density area even had members of the rail authority scratching their heads earlier this week.

A Mercury News story originally posted Tuesday, reported:

Even rail authority member Rod Diridon, of San Jose, said he spent four hours on the phone with authority staffers trying to make sense of it.

"I'm still struggling to understand why the originating system wouldn't interconnect to major communities," Diridon said.

But he noted that federal officials have threatened to yank funds if the authority hasn't chosen a starting point by the end of the month, so Diridon has proposed what he calls a compromise: Build the Corcoran to Borden section, with the promise that the rails would extend to Merced and other large cities next.

That was Tuesday, and on Thursday the board voted 7-0 to approve the project, according to the Los Angeles Times.


please read more at-

The American Spectator : AmSpecBlog : California Rail Board Approves $4.15 billion "Train to Nowhere"

 

[Toro]

Yeah, like I said in the OP, my knee-jerk response is to think of California as a basket-case.

 

[william the wie]

Yeah, like I said in the OP, my knee-jerk response is to think of California as a basket-case.

Well as is being demonstrated you can be an economic powerhouse and a fiscal basket-case.

 

[loosecannon]

ergo the USA

as bufoonville as CA may seem the Federal government easily trumps us.

 

[william the wie]

ergo the USA

as bufoonville as CA may seem the Federal government easily trumps us.

Not to mention IL and NY.