A Stockton attorney had said CalPERS is technically not a creditor, but only a trustee of funds held for retirees. He said there is no big pool of city funds CalPERS could dip into to "backfill" a cut in Stockton's pension debt. U.S. Bankruptcy Judge Christopher Klein asked if that meant every $1 taken from CalPERS would be a $1 taken from actual pensions. "Exactly right," said Norman Hile, the Stockton attorney. The bond insurer attorney, Walsh, disagreed. He said CalPERS debt is based on actuarial projections "years and years" into the future, and with a small change "millions of dollars can be freed up." If the bond insurers, with deep financial pockets and talent from two global law firms, had pursued this line of inquiry they might have taken revealing testimony from CalPERS officials and outside actuaries about how pension debt can be manipulated. It's not a fixed amount like bonds and mortgages. Instead, pension debt varies with earnings forecasts, the actuarial or market value of assets, amortization periods for paying off debt, pay and inflation forecasts, demographic assumptions and other factors. Would the bond insurers have discovered an acceptable actuarial change that would lower Stockton pension costs? Would the inquiry help the judge make a decision about accepting a "plan of adjustment" if Stockton is eligible for bankruptcy?

Andy Kessler's wrote a timely article and a worthwhile read published in the April 9th edition of the Wall Street Journal.  He deals with the rosy annual investment expectations, in the 7.5% to 8%, range underlying most public sector defined benefit pension plans.  As he correctly notes, the important question is not what been achieved in the past but rather what does the future hold?

Even using existing assumptions, the projected liabilities and the related contribution levels of many plans are simply unsustainable.  A related problem is any resulting investment shortfalls are often spread over excessively long periods - some pension systems, such as the major pension plans in Montana have infinite payment durations.

Andy suggests something in the 3% range would be a better benchmark for the following reasons:

"The right number is probably 3%. Fixed income has negative real rates right now and will be a drag on returns. The math is not this easy, but in general, the expected return for equities is the inflation rate plus productivity improvements plus the expansion of the price/earnings multiple. For the past 30 years, an 8.5% expected return was reasonable, given +3%-4% inflation, +2% productivity, and +3% multiple expansion as interest rates plummeted. But in our new environment, inflation is +2%, productivity is +2% and given that interest rates are zero, multiple expansion should be, and I'm being generous, -1%."

One of the most common fallacies confronting pension reformers is the accusation that we are "projecting" low rates of return on public pension investments. This is public pension fallacy #5 in my recent paper, "Nine Fallacies Used to Defend Public-Sector Pensions."

The cliffs-notes response is that we are not projecting anything--we're simply following Financial Economics 101 by incorporating the price of risk into cost estimates. When public pension fund administrators assume their risky investments will achieve the expected return, they are failing to account for the risk that their investments will underperform expectations. Lowering the discount rate measures the cost of that risk, which comes in the form of a contingent liability on future taxpayers.

Most people probably think of America's Red States--where people cling to their guns and religion and clamor for lower taxes--and the Nordic countries--the pacific, secular home of social democracy where people assemble their own furniture and listen to Abba--as antithetical. But there are some interesting connections...