In a nutshell, Michigan has shifted public school teachers to a defined contribution plan, but allows teachers to opt for a more traditional defined benefit pension, but one that splits the costs 50/50 between workers and the state.  It's an interesting article and worth a read.

Link:
http://www.investors.com/politics/editorials/michigan-just-prevented-a-fiscal-crisis-are-other-states-paying-attention/ 

Reasons for the reduced outlook for private equity returns include an "unprecedented" $1.47 trillion in capital overhang in the private equity market - known as dry powder - which PE firms will use to invest in companies.  As PE firms are expected to invest the capital they raise, this could present a problem as PE firms compete for deals, increasing entry prices.

Another interesting point in the article is that Calpers has had negative cash flow for the five of the past seven years, which is leading to a shortfall forecast at $9.2 billion by fiscal 2032.  What's troubling is that this forecast is based on a 7.5% annualized return from Calpers' investments, when a prominent consultant has projected a more conservative 6.0% annual return rate.  If the 6% annual return rate is accurate, the shortfall could be much higher.

Link:
http://www.bloomberg.com/news/articles/2016-10-07/calpers-sees-next-headache-in-slowing-private-equity-cash-gusher

There's an interesting opinion piece in today's The Wall Street Journal "David Skeel: Facing Up to America's Pension Woes" that explores the argument that Chapter 9 federal bankruptcy law does not permit any changes to pension benefits.  The author concludes that this argument is most likely wrong, and spells out the legal case made in support and opposed to the argument.  The author David Skeel teaches bankruptcy law at the University of Pennsylvania Law School.

Link:  http://online.wsj.com/article/SB10001424127887324110404578625904218607438.html?

The recent article in the New York Times "Surpluses Help, but Fiscal Woes for States Go On" is an interesting read that explains the causes of the surpluses and their possible one-off nature, and the ongoing issues surrounding underfunded state pension and health obligations.  The bottom line is while these one-off surpluses are better news than continuing deficits, state legislators should exercise restraint and focus on long-term fiscal issues, such as massively under-funded pension plans and rising health care costs.  Here's the link:  http://www.nytimes.com/2013/06/01/us/surpluses-help-but-fiscal-woes-for-states-go-on.html?

There's an interesting article posted today on Time.com titled "Why Pension Funds Are Hooked on Private Equity" which discusses the relationship between pension funds, as investors in the private equity asset class, and the funds themselves which can provide outsized returns to the pension funds.  The article also touches on the carried interest tax issue as well as how pension funds are underfunded which is driving the search for returns.  Here's the link:  http://business.time.com/2013/04/15/why-pension-funds-are-hooked-on-private-equity/

Andy Kessler, author and former hedge fund manager, posted an interesting opinion piece yesterday on WSJ.com titled "The Pension Rate-of-Return Fantasy."  He discusses some of the issues faced by municipalities regarding pension liabilities and questions the rate of return assumptions used to determine liabilities.  An informative read.

Links:
WSJ Opinion Piece:  
http://online.wsj.com/article/SB10001424127887324100904578403213835796062.html?

Andy Kessler's website:  http://www.andykessler.com

The Wall Street Journal's recent front page article "Pensions Bet Big With Private Equity" explores the approach used by Teacher Retirement System of Texas with respect to its allocation to private equity.  According to the article, the $114 billion fund has committed about 30 billion to private equity, or roughly a 26% allocation to private equity, giving it the highest allocation among the ten largest pension funds in the United States, where the average allocation is 21%.  The returns from private equity for the pension fund have been 7.4% , 4.8% and 15.6% over the past ten year, five year and three year periods, respectively.  The pension fund is 82% funded, compared to the average funding level of 76% among large pension fund nationally.


It's an interesting article, but I feel it could have been more interesting if it had included specific comparisons to California's CalPERS and CalSTRS plans.  Here's the link:  
http://online.wsj.com/article/SB10001424127887323485704578258242293295894.html

If you are following the pension crisis in California, here's a link to a Reuters special report on the San Bernardino bankruptcy:  http://www.reuters.com/article/2012/11/13/us-bernardino-bankrupt-idUSBRE8AC0HP20121113

The article identifies a host of issues that doomed San Bernadino, including:

• Dysfunctional city government
• Financial mismanagement
• Murky accounting disclosures
• Housing market crash
• Overly-generous compensation and retirement packages to fire and police employees
• Overly-generous pension benefits
• Investment bankers facilitating the use of pension-obligation bonds
• Influence of unions on city council members and council votes on pay and benefits

The article says no single element caused the bankruptcy but all contributed.  It's an interesting read and a cautionary tale of conflicts of interest and fiscal mismanagement.

The article "California Muni Bankruptcies a Growing 'Disease,' Kotok Says" explores the difficulties encountered by California municipalities trying to meet their financial obligations in an environment of increasing costs and declining revenues.  According to the article, the California city of Atwater, with a population of 28,000 located in California's central valley, is about to declare a fiscal emergency, which is the first step towards declaring municipal bankruptcy.  Here's a link to the article:  http://www.sfgate.com/default/article/California-Muni-Bankruptcies-a-Growing-3916615.php

Paul Moreno, professor of history at Hillsdale College in Michigan, has published an informative opinion piece "How Public Unions Became So Powerful" in the Wall Street Journal.  The opinion piece describes the history of public unions and how over time they have gained power.  Here's the link:  http://online.wsj.com/article/SB10000872396390444017504577645550224040874.html

There's a good op-ed piece in today's SF Examiner on the recent bankruptcies by California cities.  In "City bankruptcies ignite finger-pointing frenzy," the viewpoints of the political left and right are explored, and the impact on pensions in a bankruptcy proceeding is examined.  Here's the link:   
http://www.sfexaminer.com/opinion/op-eds/2012/08/city-bankruptcies-ignite-finger-pointing-frenzy 

The recent Bloomberg article "Police Chief's 204,000 Pension Shows How Cities Crashed" is a look at how some California cities are struggling with the costs of generous pension packages.  The example given is that of a former police chief of Stockton, CA who was on the job for less than three years and now receives an annual pension of more than $204,000, which is paid even though this person now has another job.  Link to the article:  
http://www.bloomberg.com/news/2012-08-01/police-chief-s-204-000-pension-shows-how-cities-crashed.html

As expected, San Bernadino, California has filed for municipal Chapter 9 bankruptcy.  San Bernadino is the third California city to file for bankruptcy this year, after Stockton and Mammoth Lakes.  There are several other California cities that have significant unfunded pension liabilities and are viewed as candidates for future bankruptcies, including Fairfield, Inglewood, Pomona and Compton.  Other cities have declared fiscal emergencies, including La Mirada, Culver City and Stanton.

Link to my prior post on San Bernadino, which discusse:  
http://www.allenlatta.com/1/post/2012/7/san-bernadino-to-file-bankruptcy.html

Links to articles:
http://www.bloomberg.com/news/2012-08-02/san-bernardino-california-files-for-bankruptcy-protection-2-.html
http://latimesblogs.latimes.com/lanow/2012/08/san-bernardino-officially-files-for-bankruptcy-protection.html 
http://www.timesheraldonline.com/news/ci_21198822/struggling-california-cities-including-fairfield-looking-tax-hikes 

Governing, a magazine and website covering state and local governments, has a good map of the country showing municipal bankruptcies.  California leads the nation with four bankruptcies, followed by South Carolina with three.  Here's a link to the map:   http://www.governing.com/gov-data/other/municipal-cities-counties-bankruptcies-and-defaults.html

Two California cities, Stockton and Mammoth Lakes, have filed bankruptcy in the past several weeks.  Another California city, Vallejo, recently emerged from bankruptcy.  San Bernadino has authorized a bankruptcy filing.  In the New York Times article "Bankruptcy in California Isn’t Seen as a Trend," the bankruptcies of these California cities isn't having a big impact on the municipal bond market and is not seen as a national trend.  The issues confronting California cities include falling revenue, fiscal mismanagement (or over-optimistic financial planning), and rising pension and healthcare costs.  Here's the link:  http://www.nytimes.com/2012/07/13/business/bankruptcy-in-california-isnt-seen-as-a-trend.html?_r=2 

San Bernadino, California, has voted to file for bankruptcy.  San Bernadino, a city of roughly 210,000 residents, is located about 65 miles east of Los Angeles.  It will become the third California city to file for bankruptcy this year, following Stockton and Mammoth Lakes.  According to the city's report on the problem, the insolvency is due to a variety of issues including:

• Accounting errors
• Deficit spending
• Lack of revenue growth; and 
• Increases in pension and debt costs.

Links to articles on the bankruptcy:

San Bernadino Sun:  http://www.sbsun.com/ci_21044462
Los Angeles Times:   
http://latimesblogs.latimes.com/lanow/2012/07/san-bernardino-bankruptcy-only-150k-bank-accounts.html 
Reuters:  http://www.reuters.com/article/2012/07/11/us-sanbernardino-bankruptcy-idUSBRE86A05320120711 

Link to the budget analysis report by the City of San Bernadino:  
http://www.ci.san-bernardino.ca.us/civica/inc/displayblobpdf2.asp?BlobID=13757 

Stockton, California's 13th largest city with a population of 290,000, yesterday filed for Chapter 9 bankruptcy protection.  Stockton is the largest city by population in the United States to file for bankruptcy, but the 2011 bankruptcy filing by Jefferson County in Alabama is the largest municipal bankruptcy in terms of debt outstanding.

Here are links to articles on the bankruptcy:
Reuters:  
http://www.reuters.com/article/2012/06/29/us-stockton-bankruptcy-idUSBRE85S05120120629 

San Francisco Chronicle:  
http://www.sfgate.com/news/article/Stockton-bankruptcy-filing-makes-history-3671895.php 

Here's a link to my prior post on Stockton:  
http://www.allenlatta.com/1/post/2012/06/stockton-is-on-the-verge-of-bankruptcy.html 

Josh Barro's opinion article on Bloomberg View "Why Better Reporting Won't Lead To Healthier Pensions" provides an interesting view of the accounting rules regarding pension disclosures approved yesterday by the Government Accounting Standards Board.  The new accounting rules require many state and municipal pension funds to use more conservative assumptions (a lower discount rate) when valuing their liabilities.  By doing so, the size of the unfunded liabilities of these funds can be highlighted to the general public.  But Barro points out that this disclosure, while a good first step, doesn't require state and local governments to reform their pension systems.  Barro argues that the rules should also deal with the required cash flows, not just the stated liabilities.  In his view, showing the required cash flows could provide needed pressure to states and local governments to take action to address these pension issues.  Here's the link:   http://www.bloomberg.com/news/2012-06-26/why-better-reporting-won-t-lead-to-healthier-pensions.html

Here's a link to my prior post on the GASB pension accounting rules:  
http://www.allenlatta.com/1/post/2012/06/new-accounting-rules-to-highlight-public-pension-shortfalls.html 

Proposed new accounting rules for public pension plans could highlight the massive shortfalls faced by public pension plans.  In the WSJ.com article "States Face Pressure on Pension Shortfalls" the new accounting rules, expected to be approved by the Government Accounting Standards Board, will force governments to change the way they calculate and account for unfunded pension liabilities.  Here's a link to the article:   http://online.wsj.com/article/SB10001424052702304441404577483021888092422.html?

The State of California and many of its cities and municipalities are facing spiraling costs from pension and retiree health benefits.  The University of California is also caught in this crisis.  In today's AP article "University of Calif. Faces Mounting Pension Costs" the article examines the system's nearly $10 billion unfunded liability, the causes of this crisis and some of the steps the University of California system has taken to address this crisis.  Unfortunately, one of the steps has been dramatic increases in tuition for students of the UC system.  Some of the take-aways from the article:

• $10 billion in unfunded liability
• 56,000 current retirees, and another 116,000 employees near retirement
• Employees can begin collecting pensions at age 50 and receive maximum benefits at 60
• Pensions are based on the average of their top-earning years
• There are 2,129 UC retirees drawing annual pensions of more than $100,000, 57 with annual pensions exceeding $200,000, and 3 with annual pensions in excess of $300,000.

Here's the link to the AP article:  
http://hosted.ap.org/dynamic/stories/U/US_CALIFORNIA_UNIVERSITY_PENSIONS?SITE=AP&SECTION=HOME&TEMPLATE=DEFAULT

Here's a link to the UC Retirement Benefits website, which has information about the steps UC is taking to address the issues:  
http://ucrpfuture.universityofcalifornia.edu/
 

The recent Bloomberg View opinion piece "California's Bad Bet Makes JPMorgan's Look Minor" by David Crane, President of Govern For California, is a good history lesson of how California adopted the pension legislation that is causing so many problems now.  A worthwhile read.  Here's the link:   http://www.bloomberg.com/news/2012-06-17/california-s-bad-bet-makes-jpmorgan-s-look-minor.html

In critical voting in San Jose and San Diego, pension reform measures passed in both cities.  According to a Bloomberg Report, the pension reform measures passed by wide margins.

Here are links to articles on the voting:
Bloomberg:
http://www.businessweek.com/ap/2012-06/D9V7F4I80.htm 

San Jose Mercury News:
http://www.mercurynews.com/elections/ci_20790991/early-returns-san-jose-voters-approving-pension-reform 

Here are links to prior posts on pension reform:
http://www.allenlatta.com/1/post/2012/06/the-pension-crisis-that-could-eat-california-and-its-cities.html
http://www.allenlatta.com/1/post/2012/05/how-california-cities-are-dealing-with-the-pension-crisis.html
http://www.allenlatta.com/1/post/2012/03/if-stockton-is-broke-then-why-isnt-san-diego-bloomberg-op-ed-piece.html
http://www.allenlatta.com/1/post/2011/11/reforming-the-california-public-pension-system.html
http://www.allenlatta.com/1/post/2012/02/californias-pension-crisis-a-collection-of-recent-articles.html 

The State of California and many of its cities and counties, including San Jose (the 10th largest city in America), San Diego and Stockton, are facing a massive financial crisis relating to pension liabilities.  The Reuters article “INSIGHT-California city's pension vote-a precedent for U.S.?” provides a good analysis of the massive scope of the problem.  The article discusses San Jose’s pivotal vote this Tuesday to reduce public employee pension benefits, and the controversy surrounding rate of return assumptions (which I believe are too high).  In my opinion, this pension crisis could impact most Californians at some point in the future (via higher taxes or reduced funding for critical programs, like education) unless it is addressed very soon.  Here’s the link:  http://www.reuters.com/article/2012/06/02/usa-california-pensions-idUSL1E8GPIL620120602 

Here are links to prior posts on California's financial crisis:
http://www.allenlatta.com/1/post/2012/05/how-california-cities-are-dealing-with-the-pension-crisis.html

http://www.allenlatta.com/1/post/2012/03/if-stockton-is-broke-then-why-isnt-san-diego-bloomberg-op-ed-piece.html

 http://www.allenlatta.com/1/post/2011/11/reforming-the-california-public-pension-system.html

http://www.allenlatta.com/1/post/2012/02/californias-pension-crisis-a-collection-of-recent-articles.html 

A recent article on Calpensions.com entitled "Ballot-box Pension Reform Wins First Court Test" provides an interesting look at how several California cities are handling pension reform: through the ballot box.  It's worth a read.  Here's a link to the article:  
http://calpensions.com/2012/05/14/ballot-box-pension-reform-wins-first-court-test/ 

We all know of California's state and local pension crisis (if not, see these posts).  However, there's also an unfunded $62 billion liability for retiree healthcare benefits for California state employees, according to a recent press release issued by the California State Controller's Office.  Because it is unfunded, this means that the State of California pays for these benefits on a "pay as you go" basis.  According to the State Controller, California needs $4.7 billion in fiscal 2011-12 to pay for these unfunded retiree healthcare benefits, when only $1.7 billion was provided for in the state budget.

The State Controller argues that the state should shift to "pre-funding" these healthcare costs, and that by doing so, significant cost savings could be achieved.  However, recognizing the difficult budget environment, the Controller suggests that even partial funding of these costs would significantly reduce the state's liability.

Here's a recent story on NBC Bay Area on the topic:  
http://www.nbcbayarea.com/blogs/prop-zero/Pensions-Public-Employees-Retiree-Health-Care-141453913.html 

Here's a link to the press release by the State Controller's Office:  http://sco.ca.gov/eo_pressrel_11680.html