California Pension Plans Justify Huge Union Benefits By Forecasting The Dow To Hit 28 MILLIONwww.businessinsider.comVincent Fernando, CFA | Jun. 26, 2010, 1:58 PM | 1,276 | 23
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Somehow dotcom mania never ended in California.
After California granted disastrous 20 - 50% benefit increases to unions in 1999, the state's pension plans justified the huge future cost by forecasting bubble-style stock market returns for the next hundred years.
This was most likely done in order to project inflated future asset values which matched the future liabilities.
The Economist:
In 1999 the dotcom bubble was still inflating, and the plans’ actuaries predicted that their retirement funds would gain enough value to pay the increased pensions. By implication, they assumed that the Dow Jones Industrial Average would reach 25,000 in 2009 and 28m in 2099. It is currently at around 10,300.
Thing is, they held to these ridiculous forecasts even well after it was obvious to everyone that the dotcom era's returns were over.
The Dow's pre-crisis peak in 2007 wasn't anywhere near 25,000. It was just above 14,000. Moreover, the Dow is clearly not going to reach 28 million by the end of the century.
Thus everyone related to California's pensions must have known for quite some time that the underlying assumptions were way too high. Yet, absurdly, when someone tried to correct these obviously broken assumptions, he was kicked out:
A few years ago Mr Crane [Mr. Schwarzenegger's economic advisor] tried, as a board member of the teachers’ pension plan (CalSTERS), to make the assumptions more sane.
His fellow Democrats voted him off the board. But since then the stock market has fallen sharply and California has tipped into budget crisis, exacerbated by the additional contributions that taxpayers are obliged to make to top up the public-sector pension funds.On the same day that Mr Schwarzenegger struck his deal with the unions, for instance, CalPERS ordered the state to increase its annual pension payment to almost $4 billion. Two studies estimate California’s unfunded pension liability at about half a trillion dollars, almost seven times its official debt.
So we're stuck with half a trillion dollars of unfunded promises to California's public sector workers, thanks to forecast assumptions so bogus that, rather than merely 'bad' forecasts, they border on being plain lies.
Tags: Economy, California, Pension Crisis
Read more:
http://www.businessinsider.com/california-pension-dow-25000-2010-6#ixzz0s07eResy________________________
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Horray Unions!
