Three ways to use money to make money – and other City pension matters 

If you have some money as a “stake” or “bankroll” you can make money by playing poker. You need skill, insight, and courage, but most of all self-discipline. You bet when the odds are in your favor and don’t when the odds are against you -- consistently.

Or gamble on stocks

You can also use your money to buy stock – shares of ownership—in businesses. If the businesses prosper, your money grows. Although you can’t figure the odds when buying stocks, like you can in poker, you can buy stocks from diversified fields. You are hoping that if the stocks you bought in a steel manufacturing company go down, the stocks in an electronics firm will go up and compensate.

You can determine how effective your stock investing is by comparing your results with an index, or sampling, of the stocks in a field.

For example, the Dow-Jones’ Industrial Fund is a representative sample of industrial stocks. If your investments “did better than the Dow-Jones” your investment decisions were better than average. If not, perhaps you need a new stock adviser.

Ponzi dollars 

Finally, an illegal and unethical way of increasing your bankroll is by running a Ponzi scheme. This is a program where the early investors are paid from investments by subsequent investors rather than from increases in the value of the investment. “Send one dollar to the name at the top of the list, scratch it out, put your name on the bottom and send copies to ten people. When your name reaches the top you’ll get $10,000.”

 

Our pension debts

Now let's move to Costa Mesa’s employees’ pensions. Employees are guaranteed a fixed amount for the rest of their lives after they retire. Actually, their retirement checks are increased with the cost of living, but not decreased during depressions or other drops in the cost of living.

How does Costa Mesa meet these pension promises? We send a periodic payment to CalPers for each employee. Some of the money is Costa Mesa’s; a lesser amount comes from employees’ pay. CalPers invests the money hoping to grow it enough to pay the retirees’ pensions.

Worked when it began

When CalPers was started the employees contributed most of the money and the investments were conservative and designed to protect and grow the funds. Presently most of the money going to CalPers comes from employers – Costa Mesa – not from the employees.

The fund’s goals have evolved from growth into a number of other fields. (See this article). The fund is now used to promote social causes, but with growth also listed as important. So, it buys stock in green energy, fair trade agriculture, and such, but avoids investing in “bad” businesses like tobacco companies or companies that don’t use unions.

Sell at a loss and Ponzi out of embarassment

CalPers sometimes had to sell stocks at a loss to get cash for its pension obligations. And, it has sold off shares that were growing rapidly in value (such as the tobacco company stocks). It has also bought stocks in companies that had little chance for success but were “politically correct” such as solar energy manufacturers that had shiny brochures but weak business plans.

And, like a Ponzi scheme, the fund sometimes relied on meeting pension obligations in the short term with fees from increasing numbers of employees. A stabilized workforce will block further CalPers Ponzi schemes, though.

We share good results but . . .

As CalPers investments grew and declined the employees shared in the gains with increased benefits and the City paid for the losses. That will continue as long as Costa Mesa remains solvent because increased cost of living increases pensions, but lowered costs don't.

(It’s likely that cities which go bankrupt will have most of their debts erased, which is stealing from the citizens and businesses to whom it owes money. However, their pension burdens will probably be shifted to the solvent cities, driving them closer to insolvency. That is, when Bell goes bust, Costa Mesa pays more into CalPers.)

How're they doing

So how well has CalPers done?

Their goals are returns of around 7.5% to 7.75% per year, which they think will allow the pensions to be paid without demanding extra fees from Costa Mesa’s government.

Other investment funds anticipate a return of 4-5% for successful investing. CalPers then must do about twice as well as other funds to reach its objectives. Clearly, it hasn't.

Our investments gained value -- this week 

CalPers recently made a “smoke and mirrors” announcement that so far this year its investments have grown 13% or 14%. That’s like a gambler bragging that he’s won the last three big pots and doubled his bankroll for the evening.

If he had been losing for a few weeks, he’d have a smaller bankroll to double. Anyway, it’s performance over time that matters for gamblers and for pension funds. During its last full fiscal year CalPers earned 0.14%; that is, it earned 1/53 of its stated goal for the period.

To compare investing success

Some investment funds, called index funds, invest in stocks tracked by an index such as the Dow-Jones. So, as a minimum, a successful fund should return about as much as a Dow-Jones Index fund.

How to value CalPers’ returns is hysterically debated, and usually at full-shriek. We won’t attempt a comparison. We’ll just suggest that a Dow-Jones Index fund be used to compare returns when evaluating CalPers investments.

We believe that CalPers hasn’t been successful in earning the needed 7.5-7.75% on their investments over a significant period (such as 10, 20, or 30 years). This is at least partially due to their strategy of investing in shaky but politically correct companies. Incompetence might also be a factor.

How do we pay for everything

Obviously we’re going to have to pay more into CalPers as time goes on. But we still need street repairs, and other infrastructure growth and improvement. Where are we going to get the money for our needs as well as for our increasing CalPers assessments?

Two possible solutions 

Maybe Costa Mesa needs a “Department of No Limit Hold ‘Em Poker” since Ponzi schemes are against the law. 

Or maybe we should consider changing the “guaranteed payments for life” public pension system.