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Strategies & Market Trends : Value Investing

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From: E_K_S	10/30/2010 1:57:57 PM
	3 Recommendations Read Replies (4) of 78812

OT - City of San Jose Pension Liabilities PENSION SUSTAINABILITY: RISING PENSION COSTS THREATEN THE CITY’S ABILITY TO MAINTAIN SERVICE LEVELS–ALTERNATIVES FOR A SUSTAINABLE FUTURE sanjoseca.gov I suspect this is the case across the country but here in San Jose our City pension system is just over $2 Billion underfunded and getting worse every year. They administer their own pension system which covers both the Police, Fireman as well as the other city employees. Over the years benefits have increased to where 90% of their base salary is paid at retirement (15 years ago it was 75%), they are guaranteed a minimum 3%/year COLA, have some sort of credit if at any point the pension plan is over funded (should never happen) and each retiree receives full health & dental benefits (w/ very small deductibles). The typical Police/Fireman retirement compensation after 30 years of service is $119,000.00/year (this includes full health & dental benefits) and is increased a minimum of 3% per year. Based on my calculations, the net present value of this annuity stream is just over $2.4 million (using a 30 year retirement period). If you add in the NPV of the Health and Dental another $135K, the lump sum amount per retiree is valued just over $2.5 million. The City auditor calculated that 50% of their deficit is due to the retirement age being as low as age 50 and proposes that the City raise this minimum age level (55 or even 60?). 45% of the deficit is due to the amount paid is based on the final "last year" salary level (currently at 90% of the base salary) and they propose that this percentage of base salary be lowered (perhaps 80%-85%) and the salary amount be based on at least the average of the last three years of service. Finally the guaranteed 3% COLA only contributes to about 4% of the City's deficit. The COLA fix was to use the CPI with a maximum Cap of no more than 3%. The City is looking at a two tiered plan for new employees but this poses problems for the tier one group as the future employees contribution base could shrink from 5:1 to 1.5:1 (that's workers/retirees) which can not sustain the estimated future outflows of the current structured plan(s). ================================================================= This is one isolated city that was designated as one of the most fiscal conservative major cities in the U.S. only 8 years ago. It's happening across the country at the Federal, State and City levels. A time bomb ready to explode. I am not too sure how this resolves itself or how general market forces fix it (hyperinflation?). It's always easy to increase the future benefits but at some point they will have to decrease benefits or else the whole house of cards will come falling down. There has to be a "Value" theme investment opportunity here some where (maybe be a recipient of such a retirement program). If the market fix is high inflation then one would want to own hard assets. It's back to natural resources in the ground like oil & gas reserves. EKS

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