55 million Americans — about half of the entire private-sector workforce — have no employer-sponsored retirement plan at all. Many work for small businesses in the low-wage service and hospitality sectors. If they don’t save money independently, they will have nothing when they stop working.
This is very different from four decades ago when most workers retired with a company pension.
The good news is that several states – including Oregon, California, Illinois, Connecticut, and Maryland — now let such workers put money away in state-sponsored retirement plans that allow them to withdraw their accumulated savings, tax free, when they hit retirement.
The bad news is that the investment industry is aggressively seeking to block these plans, fearing the competition.
That’s because the fees charged by most state retirement plans are capped at around 1 percent – much lower than the fees of similar plans operated by banks and investment companies. And state fees are expected to drop even lower as more workers enroll.
If each of America’s 40 million retirees saved on average $50,000 in the state program, they’d have an additional $20 billion in the first year. That’s $20 billion more in the pockets of retirees, not financial institutions.
Right now, the industry’s efforts appear to be winning.
Republicans in Congress – backed by the U.S. Chamber of Commerce and a coalition of Wall Street investment firms – are seeking to block states from implementing these plans at all.
Investment and insurance companies are also spending like mad on election campaigns of friendly state legislators and threatening lawsuits. Which is why many proposed state-run retirement plans are languishing in statehouses around the country.
Folks, the anger and frustration that led to Trump continues to simmer. If we allow the moneyed interests to block common-sense reforms like this, in future years, America could face an even worse fate than Trump.
When you vote in November, vote for legislators who want to allow workers to save for retirement and against legislators who are shills for the financial sector.
Serving in the Military a Lot More Lucrative Than the Peace Corps
by John Lawrence, March 7, 2018
Here are a some of the benefits of Peace Corps service:
Deferment and Cancellation of Student Loans. ...
Foreign Language Instruction. ...
Graduate and Fellowship Opportunities. ...
Expanded Career Opportunities. ...
Pay and Living Expenses. ...
Medical Benefits. ...
Liberal Vacation Benefits. ...
Here are just a few benefits of serving in the military:
Educational Benefits - GI Bill, Tuition Assistance, Servicemember Opportunity Colleges, Education on Duty, etc.
Advanced Technical and Specialty Training
Tax-Free Housing & Food Allowances, or Free Room & Board
30 Days of Vacation per Year
Space A Travel - Free flights between bases
Substantial discounts and deals throughout the private sector (link to Deals center)
The pride and honor of serving your country
Health & Dental Care for you and your family
Special deals on Home Loans (VA Loans link)
Being part of a larger family with a proud history - the military tradition
Why is it that military service is valued so much more than Peace Corps service? There is no pension for serving in the Peace Corps. After just 20 years in the military, you can receive over $20,000 for life. So if you went in just after high school you could retire at age 38 having received an education, free health care and a pension. Then you could work another 30 years at a second career. Here's the skinny:
Active duty military members can retire after 20 years of active duty military service. In exchange, they receive military retirement pay for life. How much retirement pay a member receives is based on years of service, and rank.
The military makes it easy to calculate ballpark breakdown of retirement pay using the online calculator found at the official Military Pay website. Every member's retirement pay will differ to some degree due to their length of service and rank, however if you place in the calculator the retirement of an E-8 with twenty years, you will see that the retirement pay will be roughly $22,000 a year for just waking up in the morning.
However, if you spread that out for another 40 years of living, that military retirement pay has reached a million dollar retirement package.
So if you go into the military, the pay and benefits far outweigh those of participants in the Peace Corps. What's more you can go in the Coast Guard, see the world and be relatively safe from combat. The US is a militaristic nation intent on remaining a hegemon for as long as possible with about 1000 military bases ringing the world. It is not interested in peace. Defense contractors would lose lucrative contracts if peace broke out. They are salivating over the prospects of countering Russia's recently announced advanced missiles.
I would like to see an America in which service in the Peace Corps carried the same or greater benefits as service in the military. Then maybe, just maybe, we might see a more peaceful world. But I'll say this: Going into the military right after high school and getting a free education, health care and pension benefits for life sure beats going to college and getting a ton of student loan debt.
Downtown San Diego, with a view of the convention center. (Shutterstock)
In the years since the Great Recession, there’s been a lot of effort made to ensure a government is sharing its complete fiscal picture. In many cases, this transparency push has resulted in a government’s bottom line going from a surplus to a shortfall thanks to the introduction of things like pension and retiree health benefit liabilities to annual balance sheets.
But some think governments are still leaving a few things off the ledger. Dag Detter and Stefan Folster, co-authors of the new book The Public Wealth of Cities, say localities are failing to realize the true value of the public assets they own, such as airports, convention centers, utilities and transit systems, just to name a few. “The public sector owns a lot of commercial assets,” says Detter, a Swedish investment advisor and expert on public commercial assets.
But, he adds, it doesn’t manage the risk of increased costs associated with those assets very well. Then, “the inclination is to give [management] away to the private sector,” he says. “But when you do that, you also have to give away the upside.”
The solution, according to the authors, is independent management and governance. Detter says cities could realize their hidden wealth potential if their commercial assets were bundled together and managed by a politically independent “urban wealth fund.” Such a structure, Detter says, would allow these assets to be turned into bigger profit-generators for cities.
As an example, Detter points to Cleveland, which reported capital assets of more than $4 billion in 2014. To him, there are several flaws with this estimate. First, thanks to a legal quirk, many assets acquired before 1980 are not accounted for at all. Second, the city reports the value of its assets based on historic costs instead of the likely market value, which Detter estimates could be three or even seven times more. If Cleveland put its assets into an urban wealth fund, a modest yield of 3 percent on a fund with a market value in the neighborhood of $30 billion could amount to an income of $900 million a year. That’s nearly double what the city earned in tax revenue in 2014 and is money that could be spent on infrastructure, health care and other critical needs.
Doing such a thing in the U.S. would require a lot of work. For instance, a city or county would not only have to determine all its assets’ market value, but it would also have to develop a strategy for them. The example Detter and Folster give in their book is Copenhagen, which through a publicly owned, privately driven urban wealth fund revitalized its waterfront and financed a citywide transit system without raising taxes.
Ryan adds that urban wealth funds don’t necessarily have to be as profit-driven as Detter envisions. To him, the larger point is that governments aren’t focused enough on their long-term wealth. Ignoring that part of the balance sheet, he says, causes officials to make short-term decisions about finances.
“If you think all you have to work with to deal with emerging long-term liabilities are short-term cash and whatever assets you have on the shelf, then it will seem that there’s not much choice but to use gimmicks or kick the can,” he says. “But if instead you believe that you have some long-term assets that maybe aren’t so obvious but could be the raw material for good long-term solutions, at least you’ll start to look for better, more sustainable options.”
Jerry Brown has been a strong governor and a moderating force on budget issues. But when it comes to pensions, the new state budget projects that California has nearly $206 billion in “unfunded liabilities” for the state’s two public pension funds.
Over the last eight years, we added $100 billion in unfunded retirement liability for these funds. This is the elephant in the room of state finances, and it is time we got serious about it.
You probably haven’t heard much about the looming pension crisis because elected officials don’t like talking about it and it’s easy for them to kick the can down the road: they can make promises to public employees now that won’t come due until they’re out of office.
But the slow creep of pension costs is crowding out investments in other areas, including education, environmental stewardship, social services, and public transportation. In essence, the state is being forced to default on its social obligations to pay for its pension obligations. If you’re a progressive, fixing this problem may be the most important issue facing the state.
California’s state employees’ pension fund (CalPERS) manages close to $330 billion, making it the largest public pension fund in the nation. Unfortunately, it’s only funded at 65 percent of the amount needed for its commitments to retirees. And this is with the stock market at historic highs. If there is a downturn CalPERS could find itself with a much larger shortfall.
When pension shortfalls occur, Californians are on the hook to cover the unfunded liabilities. That will require us to draw on the state’s general fund: state money that would otherwise pay for education, health care, roads and other public services.
We’re already seeing pension liabilities crowd out other spending. General fund revenues have grown 28 percent over the past six years, but the share available for discretionary spending outside of public safety has declined from 21 percent of the budget to 12 percent. Over the same time frame, spending on pensions increased 99 percent.
We’re also pushing some pension obligations onto the next generation: This year alone, we’re deferring $4.5 billion in obligations. Without changes, millennials and their children will face an enormous tax burden or severe cuts in public services.
The solution is easy to understand but hard to do. Elected officials have three choices: raise taxes, reduce pension benefits or raise the retirement age. These are tough decisions that few politicians want to touch, but we need to make hard choices now. The alternative is finding ourselves with worse options down the road.
Meanwhile, there is a simple first step we can take: lower the assumed rate of return on pension investments. When we lower the rate of return that we expect from investments, we require those who receive pension benefits to pay more up front.
Since taking office, Brown has taken laudable steps to push the assumed rate of return down from 7.75 percent to 7.0 percent. In anticipation of a potential market downturn, however, we should push the rate lower. We would then pay more up front, but we would ensure that we can cover our liabilities down the road.
The 2013 annual report for Detroit’s general retirement system said the city’s pension plan was “stable and secure.” Less than two years later, the system was in default. We can do better in California, if our politicians can show courages—but we need to act now.
Steve Westly is the former California State Controller and served as a fiduciary on the boards of CALPERS and CALSTERS. He lives in Atherton and is Managing Director of the Westly Group, a sustainability venture capital fund. He wrote this for The Mercury News.
Still, that money might not be enough. An analysis released by the city in April indicated that the general fund budget, which pays for police patrols, firefighter response and other basic services, could see a nearly 20% jump in pension and retiree healthcare costs by 2019.
That would push the city’s retirement costs up to $1.3 billion. Councilman Paul Koretz, who heads a committee on personnel issues, voiced fears about the city’s ability to absorb such an increase in hard times.
“If we had a big economic downturn,” he said, “we’d have to fill [the gap] by reducing services and probably laying people off.”
The last time Los Angeles faced a recession, the city’s elected officials were caught off guard.
When the downturn hit in 2008, they had just approved five years of employee raises totaling nearly 25% for most civilian city workers. They also had hired hundreds of new police officers.
What followed were service rollbacks in libraries, parks, the Fire Department and other agencies — and the departure of thousands of city employees. The crisis was exacerbated by major investment losses for the city’s pension funds, which made the budget picture worse.
The city’s pension agencies have seen stronger returns since the recession. But elected officials are about to confront a new round of challenges.
The Looming Pension Threat
In June, the agency that oversees pensions for retired police officers and firefighters cut its “assumed rate of return” — its yearly earnings projection — from 7.5% to 7.25%. The Fire and Police Pensions board concluded that their investments would not produce returns as strong as previously forecast.
When the pension board reduces its investment projections, taxpayers — and the city budget — frequently make up the difference. But the board also updated its long-range forecast to reflect the reality that its retirees are living longer and will need pensions for a greater number of years.
Those actions are expected to increase the city’s employee retirement costs by $84 million next year, according to recent estimates.
A second pension board, which serves civilian city workers, is set to consider a similar set of costly changes. If it follows the lead of Fire and Police Pensions, the city could see at least $38 million in added costs, officials say.
The increased retirement costs are set to hit the city budget next year, when Garcetti and the council are slated to finalize new contracts with two big employee groups: the Police Protective League, which represents rank-and-file police officers, and the Coalition of L.A. City Unions, which represents civilian workers.
Art Sweatman, a tree surgeon supervisor with the Bureau of Street Services, said many city workers are struggling to keep up with rising rents and home prices.
“We need to keep up with the cost of living,” he added.
For every 1% pay increase given to police officers and coalition workers, the city will need to spend an additional $22 million, according to city estimates. And because pension benefits are based on salaries, those raises will ultimately add to the overall retirement burden.
City budget analysts say their pension cost projections could change significantly depending on hiring decisions, the size of raises and the economic performance of the two funds. But if their figures prove to be accurate and retirement costs grow by nearly 20%, the city would have to cut spending, bring in more money or tap reserve funds.
Above: A view of the outside of San Diego City Hall, Jan. 19, 2016.
The city of San Diego's projected budget shortfall for the next fiscal year has ballooned by nearly $10 million because of new data from the municipal employees' pension system, financial management staff reported Tuesday.
The looming deficit could force spending cuts or delays in implementing new projects and initiatives.
In a report issued two months ago, city officials estimated that they would have to close a $37 million gap between revenues and expenses when budgeting for the fiscal year that begins July 1.
Staff told members of the City Council that the initial projection was based on the most recent figures available at the time from the San Diego City Employees Retirement System, which reflected a valuation as of June 30, 2015.
An updated valuation — for June 30, 2016 — has since become available, and the city's contribution to the pension system that will come from the general fund will rise by $9.7 million. That pushes the budget shortfall for the city to around $47 million.
"It's definitely a challenging situation that we're in," said Councilman Chris Ward, who is just beginning his first term on the panel.
Barbara Bry, who also just joined the council, called the news "very sobering."
In the current fiscal year, the city's general fund — which pays for basic services like public safety and recreation centers — contributed around $191 million to SDCERS.
Because the pension system's investments didn't perform up to expectations, and changes to actuarial assumptions by the SDCERS board, that figure was expected to rise by around $36 million for the next fiscal year, to nearly $228 million.
The new estimate, which is scheduled to be presented to the SDCERS board for review on Friday, projects the city's general fund contribution to be $237.6 million. Because some self-funded departments, like water, also contribute to the pension system, the total city payment is expected to be $261.3 million.
City staff have made several suggestions to reduce the impact on the general fund, including spending reductions for city departments and slowing down the planned increase in the amount held in reserves.
Financial staff said the city might end the current fiscal year with an extra $20 million or so, which could be applied to next year's budget. Also, the City Council previously placed $16 million in a new pension reserve account in anticipation of higher-than-expected contributions.
However, the city financial outlook issued in November took a bare-bones approach to reaching some of the bottom-line projections, and separately listed some programs considered to be of high priority. Those items, including replacing city vehicles, fire station costs, replacement of the San Diego Police Department's antiquated computer-aided dispatch system and others, could be in danger with the updated figures.
The city is required to issue a balanced budget each year. Mayor Kevin Faulconer is scheduled to release his proposed spending plan for the next fiscal year in mid-April.
Illinois is teetering on bankruptcy and other states are not far behind, largely due to unfunded pension liabilities; but there are solutions. The Federal Reserve could do a round of “QE for Munis.” Or the state could turn its sizable pension fund into a self-sustaining public bank.
"If Illinois were a corporation, it could declare bankruptcy; but states are constitutionally forbidden to take that route." (Photo: Andrew Harrer/Bloomberg via Getty Images)
Illinois is insolvent, unable to pay its bills. According to Moody’s, the state has $15 billion in unpaid bills and $251 billion in unfunded liabilities. Of these, $119 billion are tied to shortfalls in the state’s pension program. On July 6, 2017, for the first time in two years, the state finally passed a budget, after lawmakers overrode the governor’s veto on raising taxes. But they used massive tax hikes to do it – a 32% increase in state income taxes and 33% increase in state corporate taxes – and still Illinois’ new budget generates only $5 billion, not nearly enough to cover its $15 billion deficit.
Adding to its budget woes, the state is being considered by Moody’s for a credit downgrade, which means its borrowing costs could shoot up. Several other states are in nearly as bad shape, with Kentucky, New Jersey, Arizona and Connecticut topping the list. U.S. public pensions are underfunded by at least $1.8 trillion and probably more, according to expert estimates. They are paying out more than they are taking in, and they are falling short on their projected returns. Most funds aim for about a 7.5% return, but they barely made 1.5% last year.
If Illinois were a corporation, it could declare bankruptcy; but states are constitutionally forbidden to take that route. The state could follow the lead of Detroit and cut its public pension funds, but Illinois has a constitutional provision forbidding that as well. It could follow Detroit in privatizing public utilities (notably water), but that would drive consumer utility prices through the roof. And taxes have been raised about as far as the legislature can be pushed to go.
The state cannot meet its budget because the tax base has shrunk. The economy has shrunk and so has the money supply, triggered by the 2008 banking crisis. Jobs were lost, homes were foreclosed on, and businesses and people quit borrowing, either because they were “all borrowed up” and could not go further into debt or, in the case of businesses, because they did not have sufficient customer demand to warrant business expansion. And today, virtually the entire circulating money supply is created when banks make loans When loans are paid down and new loans are not taken out, the money supply shrinks. What to do?
When Los Angeles Mayor Eric Garcetti unveiled his proposed budget last week, he called a $176-million effort to battle homelessness his top priority, highlighted a $35-million plan to mend broken streets and promised $2 million to clean up graffiti.
He did not mention the expenditure that dwarfs all of those combined: more than $1.1 billion to pay for city employees’ pensions and healthcare after they retire.
The cost of retiree benefits amounts to nearly 20% of the city’s general fund, which pays for basic city services. In 2002, the figure was less than 5%.
“Every municipal government is feeling this pain,” said Joe Nation, a former Democratic state legislator who teaches at Stanford's Institute for Economic Policy Research.
Crash and burn! That’s what happens to a belief system which runs into the harsh wall of reality. Here the term “Harsh wall of reality” means some kind of constraint or logical inconsistency. So ever wonder why there are problems in the economy? Its because we believe in money and ignore the math!
…“math” demonstration showing that money is an ∞ “problem”
5 cents = √ 25 cents = √ (1/4 of a dollar) = 1/2 of a dollar
so without “faith” in money its game over because “math” shows (5 cents ⇔ 1/2 of a dollar)
Now the year of our lord 2017 is upon us and economist say we are well into the recovery stage, yet what does that mean? History its been said never repeats, but it rhymes; so what’s next? How the economic machine works isn’t something that is immediately intuitive, but just as night follows day, there will be another economic downturn. The only unknowns are when will it start and to what degree will people suffer.
Looking back to the turn of the century, we see the dot com bomb involved stocks associated with the internet. As a result the next economic bubble wasn’t associated with stocks because people learned not to trust stocks. Long story short, we have seen economic down turns associated with “tech” that people might buy as teens or twenty somethings. The following economic down turn was associated with “housing” that people might buy when starting families in their thirties or forties. So what’s next? If the pattern continues, my guess is the next down turn in the economy is going to involve something to do with “retirement.”
In order to understand the economic problem associated with “retirement” think of a pension. Basically a pension is money put into a bank during an individuals working years and is suppose to earn interest so that the savings grow to be a big nest egg. The harsh reality is, public pension “sustainability” (as things currently exist) like the idea of a mermaid is just a fantasy. Basically the “big” nest egg, isn’t all that big.
The math is pretty simple to understand, basically the amount(s) saved does not grow large enough to cover the promised pension payments made by $hit for brains politicians. Said another way, the belief in pensions is going to eventually crash and burn because in the long run, more money was promised to be paid out, than is possible to gather.
Politicians who are suppose to be leaders, will do nothing to prevent a pension crisis because they will never receive a vote or any credit to fix, let alone acknowledge the issue. Hence its not a matter of “if” but “when” the proverbial $hit hits the fan and causes a big mess.
Perhaps this might be considered sacrilegious, but looking at the numbers and the trends, this tells me god is eventually going to go medieval on the economy…
The path of the righteous man is beset on all sides by the iniquities of the selfish and the tyranny of evil men. Blessed is he, who in the name of charity and good will, shepherds the weak through the valley of darkness, for he is truly his brother’s keeper and the finder of lost children. And I will strike down upon thee with great vengeance and furious anger those who would attempt to poison and destroy my brothers. And you will know my name is the Lord when I lay my vengeance upon thee.
According to the Wall Street Journal, San Diego County's pension fund manager is using an extreme amount of risky leverage to make up for a shortfall in funding. This is equivalent to the gambler who makes riskier bets to make up for the bad bets he's made in the past. Wall Street Journal reporter Dan Fitzpatrick called San Diego County's investment methods "one of the most extreme examples yet of a public pension using leverage - including instruments such as derivatives - to boost performance." We have seen this kind of risky behavior before. Some jurisdictions like Orange County, CA and Jefferson County, Alabama along with the cities of Detroit, San Bernardino and Stockton, CA have gone bankrupt. The strategy being used by San Diego County Employees Retirement Association ("SDCERA") is drawing a lot of criticism. The pension fund manages about $10 billion on behalf of more than 39,000 active or former public employees.
All this additional leverage comes not that long after many pension funds lost billions in the financial crisis of 2008. The problem is that San Diego County's fund doesn't currently have enough assets to meet its future obligations. The plan is about 79% funded. It gained 13.4% last year. It seems that they can't wait to get back into the game which has turned into a disaster for so many others. Short memories.
Their solution to the fact that they are underfunded is to take on an extremely risky investment strategy to make up for the shortfall. Leverage has increased from 35% to 100% of pension fund assets. That means that, if anything goes wrong, the entire investment fund could go bust leaving retirees with absolutely nothing. The group that is managing the fund, however, Salient Partners, will probably walk away with no consequences having deposited its $10 million yearly management fees in a secure lockbox.
The County's risky approach contrasts with the City of San Diego's which favors low-risk asset allocation. In contrast to San Diego County, many pension funds are getting out of the risky Wall Street gambling casino business. Take California Public Employees' Retirement System (CalPERS), for example. It is taking its money out of hedge funds after other pension funds lost big trying to make up for pension fund shortfalls. As the country's biggest pension fund, it is making changes to its investment portfolio designed to reduce risk. It said on September 15, 2014 that it will pull all $4 billion it has invested in hedge funds because it finds them too costly and complicated.
Also officials at Los Angeles’s fire and police employees pension fund decided last year to get out of hedge funds altogether after an investment of $500 million produced a return of less than 2% over seven years. The hedge-fund investment was just 4% of the pension’s total portfolio and yet $15 million a year in fees went to hedge-fund managers, 17% of all fees paid by the fund.
As of July 1, 2014, Lee Partridge of Salient Partners is authorized to use the county’s $10 billion fund to put at least $20 billion at risk, mostly with options, derivatives and other arcane financial instruments. What could possibly go wrong with that? Lee will be betting on foreign junk bonds, emerging-market stocks, options on the future value of zinc and other speculative financial instruments. Nothing is off the table.
Salient Partners has generated returns of 9.7 percent a year for SDCERA. Meanwhile, the city’s fund has earned 13.6 percent a year and at lower cost. In 2013, San Diego County spent $103.7 million in investment and administrative fees. It is one of the highest-cost pension funds in the entire country.
I am not fond of forecasts, so instead, I will offer one of two likely outcomes: Eventually, San Diego County’s pension fund blows up. The losses are spectacular, and the county taxpayers are saddled with billions in new tax obligations. Alternatively, the townsfolk figure out how much risk is being put on their shoulders, and fires everyone involved, from the pension board to the advisers to anyone who voted for these shenanigans.
I have seen this movie before. I know how it ends.
It's the age old story of lack of prudence and fiscal responsibility leading to gambling the farm in order to save the farm. If you win, you stay on the farm; if you lose, the farm's gone and you're out on the street. The retirees and/or taxpayers will be out on the street while Salient Partners will make sure their management fees are highly protected from lawsuits.
The pension fund's dilemma is brought on partially by the US Federal Reserve's policy of low interest rates. Pension fund managers can't get any kind of a return in conservative investments which basically pay 0% interest. Therefore, they have to go to the Wall Street casino and gamble.
The City of San Diego has skated on thin ice before. After generously upping benefits to current and former employees in 2001, it suddenly found itself short of the money necessary to live up to its promises. So it borrowed $1 billion and gambled it on Wall Street. To its chagrin it lost most of the money. Taxpayers had to make up the difference.
Once burned, twice shy, or you would think. Now it seems like deja vu all over again as Yogi Berra would say.
Pension fund shananigans are nothing new. Back in 1996, Mayor Susan Golding tapped the city pension fund to help pay for the Republican convention. As a reward for tolerating the theft, city employees were given further pension benefits. Susan Golding bragged about the fact that she was a big time player while former Mayor Maureen O'Conner just lost a few piddling millions at the gambling tables:
"Poor Maureen," began Golding. "Public humiliation, and for what? A couple million? That's what she gets for playing small ball. She didn't even have the sense to use public funds, the way I did when I started playing the stock market with all those millions from the city's pension funds. That's where the real action is. God, when we hit, we hit big. There is nothing in the world that can top that feeling - not good governance, not keeping the Chargers in San Diego through ticket guarantees - not even ditching your money-laundering husband. And when we lost - well, it wasn't our money to begin with, so no big whoop."
The hapless treasurer of Orange County, Robert Citron, caused his County to enter bankruptcy in 1994 after he lost billions gambling on Wall Street. Orange County was the largest county to have declared bankruptcy at that time. Gambling on Wall Street in fancy derivatives led to Citron's downfall, and the taxpayers didn't want to make up the difference. Municipal bankruptcy was the only alternative. Citron later pleaded guilty to six felonies regarding the matter. Whether or not a city or a county can get out of its pension obligations by declaring bankruptcy at this time is open to debate.
The San Diego County pension fund is playing with fire according to many knowledgable sources.
Wealth managers like Luis Maizel of LM Capital Group said the strategy is “a little bit more boom-or-bust than is traditional.”
To prove his point, Maizel printed out a copy of the asset allocations of CalSTRS, the state teachers’ retirement investment fund and pushed it in front of me.
CalSTRS’s targets, according to a Sept. 10, 2013, news release, are to have 51 percent of their money in global equity, 16 percent in fixed income, 6 percent in an “inflation sensitive” category, one percent in cash and maybe one-half to one-third of their real estate investments as “traditional.” That leaves the 13 percent they are putting in private equity and maybe four or five percent more from real estate as non-traditional investments.
That means CalSTRS has roughly 17 percent of its money in risky, non-traditional investments. Compare that to SDCERA, which has about 25 percent of its money in these risky investments.
And the problem with leverage is that it can come back to bite them in the ass. Gains and losses are amplified when leveraging your portfolio 2 to 1. This exposes them to serious drawdowns in the future which will make their pension shortfall worse, not better. Where is the governance in this process? What is the funding and investment policy of this fund? It looks like they've got it all figured out but I expect them to get clobbered in the future.
The question is what risk does Salient Partners have if the pension fund goes bust. Do they just walk away without paying any price? It seems that way. They get $10 million per year as long as everything goes well. So they probably have everything to gain and nothing to lose. San Diego County retirees and taxpayers are the ones who will be left holding the bag.
After hours of hand-wringing from trustees and pleadings from retirees to safeguard their livelihoods, the county pension board voted Thursday to formally consider firing their Texas investment consultant.
The decision on the future employment of Salient Partners of Houston was set for Oct. 2, one day after the last of the county’s in-house investment staff was scheduled to go to work for the investment firm as part of a years-long outsourcing push.
In the meantime, Chief Investment Officer Lee Partridge of Salient will no longer be permitted to risk up to five times the amount of San Diego County’s pension money invested under his “risk-parity” strategy.