CalSTRS’s underperformance

By David Crane | For the 12 months ended June 30, 2018, the S&P500 returned  more than 14 percent but California’s State Teachers’ Retirement System (CalSTRS) earned less than 9 percent. Some of the underperformance results from the difference in allocation to equities (the S&P500 is 100 percent invested in equities while CalSTRS is not), but CalSTRS’s underperformance (37 percent) is more than twice its allocation to non-equities (14 percent).

David CraneSome underperformance might be due to CalSTRS’s status as a “mature” system, which means a greater percentage of its pension obligations are attributable to benefits already earned. A research paper contends that “more mature pension plan funds underperform and CalSTRS’s recent Actuarial Report explains that a more mature retirement system “tends to be subject to increased volatility in the contributions needed. For CalSTRS, there may be significant fluctuations in the state contribution rates (and to a lesser extent the employer contribution rates) from year to year due to the actual investment return.” Thus, if CalSTRS is trying to avoid significant fluctuations in contributions, it might be avoiding assets that, though they offer better growth potential, are volatile in pricing, or paying for insurance, or both.

Another cause of underperformance might be fees. Public pension funds like CalSTRS often pay fees to Wall Street firms to help with their investments.

Whatever the cause, CalSTRS’s underperformance is another reason it should be employing a lower return expectation for establishing contributions. CalSTRS pays pensions from a combination of contributions by employees, school districts and the state, plus investment earnings on those contributions. Upfront contributions are a function of expected investment returns. The higher the expected return, the lower the contribution. But if the actual return falls short of the expected return, only school districts and the state make up the balance. That asymmetry leads to self-dealing by government employees on pension fund boards who work for artificially low upfront contributions and to hide the true size of pension promises.

CalSTRS’s board has a long history of inflating investment return expectations. Last decade it employed an 8 percent return assumption. I sat on its board then and argued in favor of something closer to 6 percent. More powerfully, Warren Buffett argued that 8 percent was too high. But CalSTRS didn’t budge (and the State Senate removed me from the board).

Recently CalSTRS reduced its expected return to 7 percent. But that’s still too high. CalSTRS’s asset allocation explains why:

  • CalSTRS seeks to deploy 74 percent of its portfolio to equities (stocks, real estate and private equity) that Buffett says returned 7 percent in the 20th century, and also pays fees to Wall Street firms. A 7 percent yield with 0.5 percent in fees on 74 percent of the portfolio translates into 4.81 percent.
  • CalSTRS seeks to deploy 2 percent of its portfolio to cash and 13 percent to fixed income. Cash earns next to nothing currently and 10 year Treasuries yield ~3 percent. But let’s give them the benefit of the doubt and assume all 15 percent will yield 5 percent, which translates into 0.75 percent.
  • CalSTRS seeks to deploy 2 percent to inflation-sensitive strategies and 9 percent to risk-mitigation strategies. For the entire fund to yield 7 percent, those strategies must earn 13 percent, and that’s after fees!

That’s right. To achieve a 7 percent return with a portfolio of which 15 percent earns 5 percent and 74 percent earns 6.5 percent, the remaining 11 percent must earn 13 percent. That’s not likely. 7 percent even exceeds the return Buffett expects for his much smaller pension fund.

At historical yields and given its portfolio allocations, CalSTRS should not be expecting more than 6.3 percent — and even that rate is generous given their maturity and underperformance.

California schoolchildren are already paying a high price for CalSTRS’s past inflated expectations. CalSTRS should get it right — and now.

[Cross-posted from]

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A new tax that will get a hang-up from legislators

By Joel Fox | Why is a savvy politician like Jerry Brown proposing a new tax increase with only one month to go in the legislative session of an election year? Such a strategy goes against conventional wisdom because legislators up for election don’t want to defend a new tax increase. Yet, Brown argues that the 911 emergency system desperately needs an upgrade and he proposes a tax increase to achieve it.

Joel FoxThe tax increase requires a two-thirds vote and that mark will be difficult to achieve given that Democrats do not hold two-thirds of the state senate and the recall of Sen. Josh Newman over his gas tax increase vote is fresh in the politicians’ minds.

Brown is counting on Republicans’ general concern for public safety to secure some votes from the GOP since improving the 911 system and bringing the technology to modern standards is a safety issue.

In fact, California Department of Finance spokesman H. D. Palmer made that point on the 911 emergency system, “This falls into a fundamental purpose of government, which is protecting public safety.”

Then why not take the money needed to improve the system from the state’s basic revenue pot, the General Fund, which is bursting with a $9 billion surplus? Brown’s plan calls for a $175 million investment, easily covered by the surplus. If public safety is a fundamental purpose of government then money should be prioritized out of the General Fund every year even to the exclusion of other programs. A priority purpose of government doesn’t need a special fund to support it.

Brown will argue that a fee pays for the current emergency system and that the method he proposes is just changing how the fee works—and doubling the revenue from the fee. Few will disagree with the governor that the emergency system is outdated. He’ll argue that the system is in desperate need of modernizing.

The same could be said about the state’s spending and budgeting and this would be a good place to take a stand to make that point. An issue can also be raised why this fundamental safety concern hasn’t been properly maintained over the years if the emergency system is a prime concern of government.

Brown, who pledged that voters would have a say on any state tax increases when he ran to return to the governor’s office, has shunned that promise in his second (or fourth) term.

Of course, Brown is not concerned with running for re-election so he can wave a red cape at the bull of conventional wisdom. He also has the power of his veto pen and the power of appointments to try and sway reluctant legislators.

But, ultimately, it is the voters who have the greatest influence over the legislators and there are signs they are fed up with more taxes.

Posted in Joel Fox, Josh Newman, Taxes | Comments Off

The California Legislature passes the pension buck – again

By Jon Coupal| In truth, Sacramento politicians are very dependable. You can depend on them to raise your taxes, pass meaningless resolutions attacking President Trump and hurt the private sector by eliminating workplace arbitration and enacting even more burdensome regulations. And finally, they are very dependable in avoiding the most important threats to California’s financial solvency, especially dealing with unfunded pension liabilities.

A weekly column by Jon CoupalMuch has been written about California’s unfunded pension crisis. By 2024, normal contribution payments by cities and counties to CalPERS are estimated to total nearly $3 billion, and the unfunded contribution payments are estimated to total $5.5 billion. That shortfall of nearly $3 billion a year will continue to increase unless reforms are enacted – soon.

California’s pension crisis exists in large part due to the very nature of defined-benefit plans. Unlike defined-contribution plans, where the taxpayers’ obligation to each public employee ends with every pay period, defined-benefit plans depend on a projection of future investment returns. And therein lies the problem. California has been horribly wrong in its application of assumed rates of return, leading to hundreds of billions in unfunded liabilities.

And this shortfall is occurring in good economic times when the state of California is relatively flush. A recession will quickly expose this short-sighted thinking, yet the Legislature continues to believe that local municipalities will continue to pass regressive sales tax increases to bail themselves out. Already, 24 cities have sales tax rates at or over 9.5 percent, and more cities are destined to join them.

To read the entire column, please click here.

Posted in CalPERS, Howard Jarvis Taxpayers Association, Jon Coupal | Comments Off

Fullerton City Hall is closed today for another three-day weekend

City Hall Closure Dates and
Observed Holidays

January –1*, 12, 26
February – 9, 19*, 23
March – 9, 23
April – 6, 20
May – 4, 18, 28*
June – 1, 15, 29
July – 4*, 13, 27
August – 10, 24
September – 3*, 7, 21
October – 5, 19
November – 2, 11*, 16, 22*, 23*,30
December – 14, 24*, 25*, 26^,27^, 28, 31*

*Holiday observed
^Winter Closure

Fullerton City Hall

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App-based ridesharing program being tested in business district

According to the City’s website, a 90-day pilot app-based ride-sharing program was launched on June 1 in partnership with established providers Lyft and Uber, as well as with the city’s taxi services.

This pilot program is being used to compile data and statistics relevant to designated Transportation Network Company’s (TNC) pick-up and drop-off locations in the Downtown Business District. This trial period will look to implement a “5-Minute App Based Rideshare Parking Only” program between the hours of 6:00 p.m. and 2:00 a.m. of every day.”

If the pilot program is a success, it would need final City Council approval to become an official ordinance.

Keep an eye out for the green signs in the downtown district. You can download the staff report here (pdf). Questions can be directed to Traffic and Engineering at 714-738-6899. For specifics on pick-up and drop-off zones, as well as potential traffic adjustments, please see the map below.

Rideshare Sign


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Transparent California executive director talks with John and Ken

Robert FellnerRobert Fellner, executive director of the pension data website Transparent California, was a guest yesterday on the  John and Ken Show on KFI Radio. They discussed the latest report in which Transparent California documented a nearly 900% increase in promised CalPERS pension benefits over the past 30 years.

To listen to that audio segment, click here.


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Sen. John Moorlach explains California’s financial crisis at a Huntington Beach Town Hall

On July 12, state Senator John Moorlach (R-Costa Mesa), took part in a panel discussion on social investing for our state pension system (CalPERS) at a Town Hall in Huntington Beach. You can view the video here:

Also participating were Mayor Mike Posey and two executives from CalPERS: Brad W. Pacheco, Deputy Executive Officer, Communications & Stakeholder Relations, and Daniel Bienvenue, Managing Investment Director, Global Equity.

The topics discussed included:

  • The pension spiking 20 years ago that reduced CalPERS’ funding level from 100 percent to 71 percent today.
  • Government Accounting Standards Board accounting reforms that will add $91.5 billion in unfunded medical benefits to the state’s balance sheet for this year, bringing the unrestricted net deficit total to about $250 billion.
  • Reducing CalPERS’ investment assumption (or discount rate) from 8 percent to 7 percent today, meaning government bodies must pay more into the fund.
  • Why even the 7 percent assumption level is still much too high.
  • CalPERS’ investment philosophy.

The discussion lasted an hour, and was followed by half an hour of questions from constituents.

It’s a good, short introduction to the state’s financial position, especially the problems facing California’s taxpayers.

EDITOR’S NOTE: All of Fullerton’s city employees participate in CalPERS.

Posted in CalPERS, John Moorlach, Pensions | Comments Off

The Verdict On Prop 30 — Part II

More than 70% went to retirement costs

David CraneBy David Crane | In January 2012 California Governor Jerry Brown announced he would ask California voters to approve temporary sales and income tax increases. Later that year his proposal was embodied in Proposition 30, projected by the Legislative Analysts Office to raise $6 billion per year for four years and smaller amounts for three years (i.e., $42 billion or less). 40 percent of P30 revenues were to be provided to schools and community colleges*, the balance to the state. Marketed as “Temporary Taxes to Fund Education,” P30 passed. Seven budget years later, the results are in.

As examined in Part I of this series, >100 percent of schools’ expected P30 revenue went to increased school spending on retirement costs. As illustrated below, >70 percent of the state’s expected P30 revenue went to increased spending on retirement costs:

State Retirement and Health Care Contributions

2018–19 Governor’s Budget. Retirement Costs = all columns except “Active Health & Dental.” Estimate of increased retirement spending relative to P30 revenue includes General Fund only.


Net, citizens received less than 20 percent of expected P30 revenues. Of projected revenues of $42 billion, citizens received the benefit of <$8 billion.

Those outcomes were predictable but elected officials chose not to disclose them to voters. The cover-up also allowed the problem to grow worse, which will produce greater retirement spending down the road.

It’s one thing to pay higher tax rates for better services, quite another to pay higher tax rates in order to fund increased retirement costs. Misled again in 2016, voters approved an extension (Proposition 55) of the income tax portion of the P30 initiative. But that revenue will also be absorbed by growth in retirement spending because of already-scheduled increases and $230 billion of unfunded retirement obligations added in the last decade.

Absent reform, governments across California will continue to seek tax increases that won’t improve services. That problem will worsen when the bull market ends and revenues decline while retirement costs keep rising.

To start, the state legislature and governor should eliminate or reduce subsidies for retired employee health costs. Retired state employees don’t need taxpayer-provided health insurance subsidies. Those aged 65-and-over are entitled to Medicare. Those choosing to retire before age 65 can get coverage from California’s Obamacare exchange, Covered California. Reform would save more than $2.5 billion per year, mostly to the benefit of vulnerable programs, as explained here. Examples of reform have already been provided, as explained here. There’s no reason not to act.

* 89 percent to schools, 11 percent to community colleges.

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A multi-pronged attack on Fullerton taxpayers’ wallets begins tonight

City staff’s quest for new revenue sources to balance the budget and perhaps fill a few potholes as employee pension costs continue to escalate begins at tonight’s special public meeting of the Transportation & Circulation Commission (the list of commission members is at the bottom of this post).

The heart of  tonight’s presentation is a huge increase in the charge for employee parking permits from $6 per year to $120 per year over a three-year period. See the detailed Transportation and Circulation Commission Staff Report here (pdf).

In the coming months we will be hearing more from staff on other ideas for squeezing more “revenue” out of residents and businesses, including a potential sales tax increase, a possible parcel tax, formation of assessment districts, the sale of city properties, and another possible water rate increase. (See this memo presented to the council last Tuesday by City Manager Ken Domer outlining “alternative financing sources for street reconstruction / improvement projects.”)

Tonight’s meeting will be held in the Council Chambers and it begins at 6:00 pm. It appears that there is no plan to broadcast it or record it, so if you are interested in this issue you should plan to attend.

T&CC Meeting Notice



1st Term:
Feb 02, 2016 to Dec 31, 2018
Appointing Authority:
City Council At-Large
Vice Chair
1st Term:
Sep 15, 2015 to Dec 31, 2018
Appointing Authority:
Council Member Sebourn
1st Term:
Feb 07, 2017 to Dec 31, 2018
Appointing Authority:
Council Member Chaffee
1st Term:
Jan 17, 2017 to Dec 31, 2020
Appointing Authority:
Council Member Fitzgerald
2nd Term:
Feb 07, 2017 to Dec 31, 2020
Appointing Authority:
City Council At-Large
1st Term:
Jan 17, 2017 to Dec 31, 2020
Appointing Authority:
Council Member Whitaker
1st Term:
N/A Dec 31, 2020
Appointing Authority:
Council Member Silva
Fill remainder of unexpired term 11/6/17
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California’s Property Tax Postponement program aids low-income seniors

A weekly column by Jon CoupalBy Jon Coupal | For Californians who are struggling to pay property tax bills that are rising ever higher due to the increasing number of local bonds and parcel taxes, help may be available.

Property taxes are held in check by Proposition 13, passed by voters in 1978. It limited the annual increase in the assessed value of a property and cut the tax rate to 1 percent statewide. Prop. 13 has helped millions of Californians keep their homes by keeping property taxes predictable and affordable.

But keeping property taxes in check doesn’t always keep property tax bills in check. That’s because extra charges for voter-approved debt or special taxes can be added to property tax bills, and those can really add up. This can become a terrible burden for homeowners who live on fixed incomes, and may even force some to sell their homes because they can’t afford to pay the taxes.

Fortunately, the state of California has restarted the Property Tax Postponement program, allowing homeowners who are at least 62 years old, are blind or have a disability to defer the current-year property taxes on their principal residence if they meet certain criteria.

To read the entire column, please click here.

Posted in Howard Jarvis Taxpayers Association, Jon Coupal, Prop. 13 | Comments Off