Tag Archives: California

California Is Teetering On The Edge Of Financial Ruin Again

For years, it had been speculated that California’s state-wide model of heavy regulation, expensive education, high taxes and bloated spending would eventually drive the state into financial ruin, according to a new Bloomberg Opinion piece. Over the last 15 years, the state also has had to deal with widespread blackouts and an unemployment rate that ballooned to 12% after the financial crisis.

After deficits exploded under Governor Schwarzenegger, the state eventually got back on track. Under Governor Jerry Brown, the state raised taxes again (surprise) and bumped up its sales tax. These tax hikes, combined with a recovery in housing and in the stock market, helped swing the state’s budget back into the black.

But now, the symptoms of larger problems in California are bubbling to the surface yet again. For instance, the recent “planned blackouts” by power provider PG&E to try and prevent wildfires are indicative of a crumbling energy infrastructure across the state.

Losses from recent wildfires in California have been “staggering”, totaling upwards of $400 billion in 2018. This figure represents about 1/7th of the state’s total GDP and is comprised of health costs, lost property, lost jobs and asset prices falling. It also takes into account migration out of the state. 

PG&E has said that the “safety” blackouts will continue, which means that the state isn’t going to have reliable year-round electricity. This will inevitably take its toll on property values and slow migration inflows into the state. 

While wildfires rage across the state, another issue is plaguing California: homelessness. The state’s homeless population has increased by 5.3% from 2010 to 2018. California is already home to almost half of the country’s homeless. We have documented, at length, the homelessness issues in areas like San Francisco, where the epidemic is reaching a fever pitch. 

At the same time, government pension costs are rising across the state; faster in California than in the rest of the nation. The cost saving measures being put in place to offset this problem are degrading the state’s education system. 

And so, the inevitable has happened: people are leaving the state.

In fact, a recent paper by economists Joshua Rauh and Ryan Shyu found that out-migration of top-bracket taxpayers accelerated after the state’s 2012 income tax hike. 

“Among top-bracket California taxpayers, outward migration and behavioral responses by stayers together eroded 45.2% of the windfall tax revenues from the reform,” the paper’s abstract says. 

With Democrats back in the saddle, holding a super majority in the state, California seems doomed to repeat its dysfunctional history from the early 2000’s. Making matters worse, an initiative called Proposition 13 is making it difficult for California to alleviate its burdens by raising property taxes, the op-ed notes:

But California’s political system is making it hard to respond to these pressures. Thanks to a 1978 ballot initiative called Proposition 13, California cities have stringent limits on raising revenue from local property taxes. That forces the state to provide many services, financing them with hefty income taxes. Those are inherently more unreliable than property taxes, since wealthy taxpayers can move away (while property can’t move), and since California’s income taxes fluctuate a lot because they depend so much on the profits residents earn on volatile stock prices.

“Proposition 13 must be repealed, and property taxes raised,” the piece continues, in order for the state to avoid what it calls another “dark path”. It also suggests that the state legislature pass bills to allow greater housing density and more construction throughout the state.

Only time will tell whether these proposed solutions, if implemented, would even work. But one thing is for sure: if California doesn’t do something soon, the state could become (further) living proof that creating a liberal utopia by hiking taxes and adding regulation is nothing more than a pipe dream, if not a full blown recipe for exactly how to drive an economy into the ground. 

Contrast with SoCal, early 1950’s…

 

Orange County California Q1 Home Sales Off To Coldest Start Since Great Recession

Welcome to the Land of… Jumbo mortgages and All-cash! Aka, Orange County, home of surfing legend (and Realtor) Bob “The Greek” Bolen.

https://confoundedinterestnet.files.wordpress.com/2019/06/screen-shot-2019-06-08-at-12.35.47-pm-1.png

 

But Orange County has just experienced their slowest start to a year in terms of home sales since The Great Recession.

https://confoundedinterestnet.files.wordpress.com/2019/06/orange-county-1st-quarter-home-sales-1.png

And home prices in Orange County are falling despite mortgage rate declines.

https://confoundedinterestnet.files.wordpress.com/2019/06/santaane.png

Now Ain’t that a kick in the head! 

https://confoundedinterestnet.files.wordpress.com/2019/06/cropped-the-greek-surfboard-orange-pintail.png

Source: Confounded Interest

Is This A Solution To California’s Housing Crisis, Or Threat To Single Family Homes?

Could this be the end of single-family zoning in California?

Changes to the comprehensive housing measure Senate Bill 50 – already hotly debated – allow property owners broad rights to turn single-family homes and vacant lots into two-, three- and four-unit homes and apartments.

Continue reading

C.A.R. Report: California Housing Market Sputtered In November

California Association Of Realtors Report, Absent Seasonal Adjustments

– Existing, single-family home sales totaled 381,400 in November on a seasonally adjusted annualized rate, down 3.9 percent from October and down 13.4 percent from November 2017.

– November’s statewide median home price was $554,760, down 3.0 percent from October and up 1.5 percent from November 2017.

– Statewide active listings rose for the eighth straight month, increasing 31 percent from the previous year.

– The statewide Unsold Inventory Index was 3.7 months in November, up from 3.6 months in October.

– As of November, year-to-date sales were down 4.6 percent.

 

LOS ANGELES (Dec. 18) – California home sales remained on a downward trend for the seventh consecutive month in November as prospective buyers continued to wait out the market, according to the CALIFORNIA ASSOCIATION OF REALTORS® (C.A.R.).  

Closed escrow sales of existing, single-family detached homes in California totaled a seasonally adjusted annualized rate of 381,400 units in November, according to information collected by C.A.R. from more than 90 local REALTOR® associations and MLS’ statewide. The statewide annualized sales figure represents what would be the total number of homes sold during 2018 if sales maintained the November pace throughout the year. It is adjusted to account for seasonal factors that typically influence home sales.

November’s sales figure was down 3.9 percent from the revised 397,060 level in October and down 13.4 percent from home sales in November 2017 of a revised 440,340. November marked the fourth month in a row that sales were below 400,000.

“While many home buyers continue to sit on the sidelines, serious buyers who are in a position to purchase should take advantage of this window of opportunity,” said C.A.R. President Jared Martin. “Now that interest rates have pulled back, home prices have tapered, and inventory has improved, home buyers’ prospects of getting into a home are more positive.”

The statewide median home price declined to $554,760 in November. The November statewide median price was down 3.0 percent from $572,000 in October and up 1.5 percent from a revised $546,820 in November 2017.

“The slowdown in price growth is occurring throughout the state, including regions that have strong economic fundamentals such as the San Francisco Bay Area,” said C.A.R. Senior Vice President and Chief Economist Leslie Appleton-Young. “The deceleration in home price appreciation should be a welcome sign for potential buyers who have struggled in recent years against low inventory and rapidly rising home prices.” 

Other key points from C.A.R.’s November 2018 resale housing report include:

  • On a region wide, non-seasonally adjusted basis, sales dropped double-digits on a year-over-year basis in the San Francisco Bay Area, the Central Coast, and the Southern California regions, while the Central Valley region experienced a relatively small sales dip of 3.9 percent.
  • Forty-one of the 51 counties reported by C.A.R. posted a sales decline in November with an average year-over-year sales decline of 16.8 percent. Twenty-six counties recorded double-digit sales drops on an annual basis.
  • Sales for the San Francisco Bay Area as a whole fell 11.5 percent from a year ago. All nine Bay Area counties recorded annual sales decreases, with Marin, San Francisco, San Mateo, and Sonoma counties posting double-digit annual declines.
  • The Los Angeles Metro region posted a year-over-year sales drop of 10.1 percent, as home sales fell 11.2 percent in Los Angeles County and 14.4 percent in Orange County.
  • Home sales in the Inland Empire decreased 6.7 percent from a year ago as Riverside and San Bernardino counties posted annual sales declines of 9.0 percent and 3.2 percent, respectively.
  • Home prices in the San Francisco Bay Area are no longer climbing at the double-digit pace that occurred throughout much of this year. On a year-over-year basis, the Bay Area median price ticked up 0.6 percent from November 2017. While home prices in Marin, San Francisco, San Mateo, and Santa Clara counties continued to remain above $1 million, all but San Mateo County recorded a year-over-year price decline.
  • Statewide active listings rose for the eighth consecutive month after nearly three straight years of declines, increasing 31 percent from the previous year. November’s listings increase was the largest since April 2014.
  • The unsold inventory index, which is a ratio of inventory over sales, increased year-to-year from 2.9 months in November 2017 to 3.7 months in November 2018. The index measures the number of months it would take to sell the supply of homes on the market at the current sales rate.
  • The median number of days it took to sell a California single-family home edged up from 22 days in November 2017 to 28 days in November 2018.
  • C.A.R.’s statewide sales price-to-list-price ratio* declined from a year ago at 98.9 percent in November 2017 to 97.9 percent in November 2018.
  • The average statewide price per square foot** for an existing, single-family home statewide was $282 in November 2018, up from $277 in November 2017.
  • The 30-year, fixed-mortgage interest rate averaged 4.87 percent in November, up from 3.92 percent in November 2017, according to Freddie Mac. The five-year, adjustable mortgage interest rate also increased in November to an average of 4.11 percent from 3.24 from November 2017.

Key Graphics (click links to open):

Note: The County MLS median price and sales data in the tables are generated from a survey of more than 90 associations of REALTORS® throughout the state and represent statistics of existing single-family detached homes only. County sales data are not adjusted to account for seasonal factors that can influence home sales. Movements in sales prices should not be interpreted as changes in the cost of a standard home. The median price is where half sold for more and half sold for less; medians are more typical than average prices, which are skewed by a relatively small share of transactions at either the lower-end or the upper-end. Median prices can be influenced by changes in cost, as well as changes in the characteristics and the size of homes sold. The change in median prices should not be construed as actual price changes in specific homes.

*Sales-to-list price ratio is an indicator that reflects the negotiation power of home buyers and home sellers under current market conditions. The ratio is calculated by dividing the final sales price of a property by its last list price and is expressed as a percentage.  A sales-to-list ratio with 100 percent or above suggests that the property sold for more than the list price, and a ratio below 100 percent indicates that the price sold below the asking price.

**Price per square foot is a measure commonly used by real estate agents and brokers to determine how much a square foot of space a buyer will pay for a property.  It is calculated as the sale price of the home divided by the number of finished square feet.  C.A.R. currently tracks price-per-square foot statistics for 50 counties.

Leading the way…® in California real estate for more than 110 years, the CALIFORNIA ASSOCIATION OF REALTORS® (www.car.org) is one of the largest state trade organizations in the United States with more than 190,000 members dedicated to the advancement of professionalism in real estate. C.A.R. is headquartered in Los Angeles.

# # #

November 2018 County Sales and Price Activity
(Regional and condo sales data not seasonally adjusted)

November 2018 Median Sold Price of Existing Single-Family Homes Sales
State/Region/County Nov.

2018

Oct.

2018

  Nov.

2017

  Price MTM% Chg Price YTY% Chg Sales MTM% Chg Sales YTY% Chg
Calif. Single-family home $554,760 $572,000   $546,820   -3.0% 1.5% -3.9% -13.4%
Calif. Condo/Townhome $465,770 $476,440   $451,250   -2.2% 3.2% -19.1% -17.4%
Los Angeles Metro Area $512,000 $516,000   $500,500   -0.8% 2.3% -14.0% -10.1%
Central Coast $672,500 $669,500   $685,000   0.4% -1.8% -15.9% -18.0%
Central Valley $320,000 $320,000   $310,000   0.0% 3.2% -11.7% -3.9%
Inland Empire $363,620 $359,000   $340,000   1.3% 6.9% -12.2% -6.7%
San Francisco Bay Area $905,000 $958,800   $900,000 r -5.6% 0.6% -12.7% -11.5%
                   
San Francisco Bay Area                  
Alameda $900,000 $900,000   $880,000   0.0% 2.3% -10.9% -6.7%
Contra Costa $641,000 $657,000   $615,000   -2.4% 4.2% -5.8% -8.0%
Marin $1,172,940 $1,450,000   $1,230,000   -19.1% -4.6% -25.7% -26.8%
Napa $683,500 $709,500   $682,000   -3.7% 0.2% -11.5% -6.1%
San Francisco $1,442,500 $1,600,000   $1,500,000   -9.8% -3.8% -14.0% -12.2%
San Mateo $1,500,000 $1,588,000   $1,486,000   -5.5% 0.9% -22.1% -13.7%
Santa Clara $1,250,000 $1,290,000   $1,282,500   -3.1% -2.5% -10.9% -9.9%
Solano $450,000 $430,000   $410,000   4.7% 9.8% -2.7% -3.6%
Sonoma $612,500 $650,000   $655,000   -5.8% -6.5% -25.5% -29.1%
Southern California                  
Los Angeles $553,940 $614,500   $530,920   -9.9% 4.3% -17.5% -11.2%
Orange $795,000 $810,000   $785,000   -1.9% 1.3% -7.5% -14.4%
Riverside $400,000 $400,000   $383,000   0.0% 4.4% -14.8% -9.0%
San Bernardino $299,450 $289,000   $280,000   3.6% 6.9% -8.0% -3.2%
San Diego $626,000 $635,500   $619,900   -1.5% 1.0% -8.4% -11.0%
Ventura $643,740 $650,000   $640,000   -1.0% 0.6% -18.8% -11.7%
Central Coast                  
Monterey $630,000 $620,000   $618,120   1.6% 1.9% -6.1% -11.2%
San Luis Obispo $624,000 $586,000   $615,000   6.5% 1.5% -14.4% -17.5%
Santa Barbara $550,000 $659,000   $742,000   -16.5% -25.9% -20.3% -18.8%
Santa Cruz $862,500 $885,000   $870,000   -2.5% -0.9% -24.0% -26.1%
Central Valley                  
Fresno $265,750 $272,000   $264,000   -2.3% 0.7% -6.4% -2.9%
Glenn $225,000 $253,000   $232,000   -11.1% -3.0% 12.5% -5.3%
Kern $235,250 $240,000   $235,000   -2.0% 0.1% -14.8% -1.8%
Kings $222,000 $229,000   $230,000   -3.1% -3.5% -3.4% 6.3%
Madera $265,000 $254,950   $245,000   3.9% 8.2% 2.1% -2.0%
Merced $261,930 $271,850 r $255,000   -3.6% 2.7% -22.5% -13.0%
Placer $461,000 $470,000   $450,000   -1.9% 2.4% -5.1% -13.6%
Sacramento $365,000 $360,000   $349,900   1.4% 4.3% -10.2% -7.1%
San Benito $583,200 $597,000   $649,880   -2.3% -10.3% -4.3% 10.0%
San Joaquin $365,000 $369,200   $360,500   -1.1% 1.2% -20.1% 17.5%
Stanislaus $310,000 $319,000   $298,750   -2.8% 3.8% -17.2% -9.2%
Tulare $237,400 $232,000   $215,000   2.3% 10.4% -16.2% -2.5%
Other Calif. Counties                  
Amador NA NA   $348,950   NA NA NA NA
Butte $326,940 $318,000   $315,000   2.8% 3.8% -7.1% 8.3%
Calaveras $325,000 $302,500   $318,000   7.4% 2.2% -33.6% -31.9%
Del Norte $250,000 $223,000   $214,000   12.1% 16.8% -20.0% -42.9%
El Dorado $461,750 $500,000   $470,000   -7.7% -1.8% -28.6% -27.5%
Humboldt $310,000 $315,000   $310,000   -1.6% 0.0% -24.0% 3.2%
Lake $255,000 $265,250   $262,000   -3.9% -2.7% -11.4% -23.5%
Lassen $184,000 $148,000   $189,000   24.3% -2.6% -40.0% -48.3%
Mariposa $355,000 $305,500   $250,000   16.2% 42.0% -12.5% 180.0%
Mendocino $414,000 $420,000   $374,500   -1.4% 10.5% -13.1% 6.0%
Mono $725,000 $599,900   $400,000   20.9% 81.3% -47.1% -35.7%
Nevada $399,000 $401,500   $405,750   -0.6% -1.7% -30.6% -13.9%
Plumas $289,500 $310,000   $302,000   -6.6% -4.1% -44.7% -42.2%
Shasta $283,000 $261,000   $250,000   8.4% 13.2% -17.2% 7.1%
Siskiyou $226,000 $181,500   $189,500   24.5% 19.3% -19.6% -15.9%
Sutter $296,000 $290,000   $270,000   2.1% 9.6% -16.9% -14.7%
Tehama $199,000 $233,250   $224,500   -14.7% -11.4% -38.1% -46.9%
Tuolumne $288,500 $304,000   $325,000   -5.1% -11.2% -15.4% -9.6%
Yolo $429,500 $443,750   $440,000   -3.2% -2.4% -12.5% -26.3%
Yuba $263,000 $282,000   $285,000   -6.7% -7.7% -1.3% 14.5%

r = revised
NA = not available

November 2018 County Unsold Inventory and Days on Market
(Regional and condo sales data not seasonally adjusted)

November 2018 Unsold Inventory Index Median Time on Market
State/Region/County Nov. 2018 Oct. 2018   Nov. 2017   Nov. 2018 Oct. 2018   Nov. 2017  
Calif. Single-family home 3.7 3.6   2.9   28.0 26.0   22.0  
Calif. Condo/Townhome 3.4 3.1   2.2   25.0 21.0   17.0  
Los Angeles Metro Area 4.2 4.0 3.3   32.0 30.0   27.0  
Central Coast 4.4 4.1   3.4   34.0 30.0   30.0  
Central Valley 3.3 3.3   2.9   25.0 21.0   18.0  
Inland Empire 4.7 4.3   3.9   37.0 35.0   31.0  
San Francisco Bay Area 2.3 2.5   1.5   23.0 19.0   15.0  
                     
San Francisco Bay Area                    
Alameda 1.9 2.1   1.2   17.0 15.0   13.0  
Contra Costa 2.2 2.6   1.7   19.0 16.0   14.0  
Marin 3.0 3.0   1.6   35.0 22.0   36.0  
Napa 4.6 5.0   3.8   49.0 41.0   57.5  
San Francisco 1.7 1.9   1.1   16.5 15.0   16.0  
San Mateo 1.9 1.9   1.2   16.0 12.0   12.0  
Santa Clara 2.1 2.4   1.2   18.0 14.0   9.0  
Solano 3.0 3.4   2.4   41.0 39.0   32.5  
Sonoma 3.8 3.3   1.7   49.0 47.5   44.0  
Southern California                    
Los Angeles 3.9 3.7   2.9   27.0 25.0   22.0 r
Orange 3.9 4.1   2.8   28.0 29.0   24.0  
Riverside 4.9 4.3   3.9   36.0 34.0   29.0  
San Bernardino 4.3 4.3   3.9   42.0 35.0   34.0  
San Diego 3.9 3.9   2.7   22.0 24.0   17.0  
Ventura 5.4 5.1   4.4   53.0 51.0   51.0  
Central Coast                    
Monterey 4.3 4.4   3.8   25.0 25.0   28.0  
San Luis Obispo 4.6 4.3   3.7   40.0 29.0   30.0  
Santa Barbara 5.2 4.5   3.7   41.0 40.0   35.0  
Santa Cruz 3.2 3.1   2.2   30.5 21.0   22.5  
Central Valley                    
Fresno 3.5 3.6 r 3.0   19.0 19.0   18.0  
Glenn 4.8 4.9   3.8   73.5 22.5   45.0  
Kern 3.1 2.9   3.3   26.0 21.0   25.0  
Kings 3.5 3.8   3.5   23.5 26.0   16.0  
Madera 5.1 5.7 r 4.4 r 34.0 30.0   28.0  
Merced 4.8 3.7   3.6   23.0 22.0   25.0  
Placer 3.0 3.4   2.3   27.0 25.0   17.0  
Sacramento 2.7 2.8   2.3   24.0 19.0   17.0  
San Benito 3.1 3.6   4.1   41.5 23.0   23.5  
San Joaquin 3.6 3.1   2.9   24.0 22.0   14.0  
Stanislaus 3.3 3.1   2.6   25.0 21.0   18.0  
Tulare 4.1 3.6   3.9   35.0 28.0   29.5  
Other Counties in California                    
Amador NA NA   5.4   NA NA   69.0  
Butte 2.9 3.3   2.8   24.0 21.0   18.0  
Calaveras 6.5 4.7   4.3   53.0 43.5   60.0  
Del Norte 5.6 5.0   4.0   110.0 95.0   111.0  
El Dorado 4.4 3.6   2.7   41.5 48.0   40.0  
Humboldt 5.8 4.9   5.3   24.5 27.0   28.0  
Lake 7.0 6.7   4.7   60.5 51.0   54.0  
Lassen 8.6 6.1   5.0   110.0 109.0   85.0  
Mariposa 4.8 4.6   12.2   147.0 24.0   6.0  
Mendocino 7.9 7.3   5.7   66.0 87.0   63.5  
Mono 8.4 4.8   4.9   127.0 115.0   153.5  
Nevada 5.7 4.3   3.9   41.0 40.5   33.0  
Plumas 9.8 6.1   5.1   152.0 87.0   143.0  
Shasta 4.4 3.9   4.3   26.5 34.5   33.0  
Siskiyou 7.1 6.6   5.5   60.5 20.0   60.5  
Sutter 2.9 3.1   3.0   29.5 34.0   32.0  
Tehama 9.2 5.4   4.0   49.5 48.5   63.0  
Tuolumne 5.8 5.6   3.9   58.5 47.0   42.0  
Yolo 3.7 3.7   1.9   27.0 22.0   22.0  
Yuba 2.9 3.0   3.4   30.0 33.0   17.0  

r = revised
NA = not available

Source: California Association Of Realtors

Proposal To Split California Into Three States Earns Spot On November Ballot

3 Californias? Billionaire’s Plan to Split California Into 3 Separate States Clears First Hurdle

California’s 168-year run as a single entity, hugging the continent’s edge for hundreds of miles and sprawling east across mountains and desert, could come to an end next year — as a controversial plan to split the Golden State into three new jurisdictions qualified Tuesday for the Nov. 6 ballot.

If a majority of voters who cast ballots agree, a long and contentious process would begin for three separate states to take the place of California, with one primarily centered around Los Angeles and the other two divvying up the counties to the north and south. Completion of the radical plan — far from certain, given its many hurdles at judicial, state and federal levels — would make history.

It would be the first division of an existing U.S. state since the creation of West Virginia in 1863.

“Three states will get us better infrastructure, better education and lower taxes,” Tim Draper, the Silicon Valley billionaire venture capitalist who sponsored the ballot measure, said in an email to The Times last summer when he formally submitted the proposal. “States will be more accountable to us and can cooperate and compete for citizens.”

Source: by John Myers | Los Angeles Times

Jerry Brown Forbids Landlords from Cooperating with ICE to Deport Illegal Aliens

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California Gov. Jerry Brown signed a pair of new laws Thursday designed to protect illegal alien tenants from being threatened with deportation by making it illegal for landlords to report a tenant’s immigration status to Immigrations Customs Enforcement (ICE).

The bills were part of a package of laws pushed by the Democrat majority and signed by Brown ostensibly to protect illegal aliens from any increased enforcement measures under theTrump administration.

According to the Los Angeles Times,

One proposal by Assemblyman David Chiu (D-San Francisco) would bar landlords from disclosing information about immigration status in order to intimidate, harass or evict tenants without following proper procedures. It also would allow immigrant tenants to file civil claims against their landlords if they do.

Another bill by Assembly Majority Leader Ian Calderon (D-Whittier) would ensure that no state office or entity in California could compel a landlord to obtain and disclose information on a tenant’s immigration status.

The rationale behind the latest package of bills protecting illegal aliens, according to the Sacramento Bee, is fear of enforcement by ICE under President Trump, and fear that unscrupulous landlords might use a tenant’s illegal status to harass, intimidate or abuse them.

Chiu argues that tenants should not have to “live in fear” because they’re immigrants or refugees. He cited the legal uncertainty over young immigrants who were brought to the country illegally but have been educated here and hold down jobs as one of several reasons for the legislation.

“Trump’s escalating war on immigrants is ripping apart families and mass deportations could be our new reality,” Chiu said recently.

“This bill will deter the small minority of landlords who unscrupulously take advantage of the real or perceived immigration status of their tenants to engage in abusive acts.”

With the package of bills signed into law Thursday—including SB54 making California a “Sanctuary State” for criminal aliensCalifornia Democrats have kept their word to put the interests of illegal aliens first, ahead of legal, law-abiding California citizens.

By Assemblyman Tim Donnelly | Breitbart

Required Pension Contributions of California Cities Will Double in Five Years says Policy Institute: Quadruple is More Likely

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The California Policy Center estimates Required Pension Contributions Will Nearly Double in 5 Years. I claim it will be much worse.

In the fiscal year beginning in July, local payments to the California Public Employees’ Retirement System will total $5.3 billion and rise to $9.8 billion in fiscal 2023, according to the right-leaning group that examines public pensions.

The increase reflects Calpers’ decision in December to roll back the expected rate of return on its investments. That means the system’s 3,000 cities, counties, school districts and other public agencies will have to put more taxpayer money into the fund because they can’t count as heavily on anticipated investment income to cover future benefit checks.

Including the costs paid by cities and counties that run their own systems, the fiscal 2018 tab will be at least $13 billion to meet retirement obligations for public workers, according to the analysis, which is based on actuarial reports and audited financial statements.

Barring any changes to pensions, “several California cities and counties will find themselves forced to slash other spending,” the group wrote in its report. “The less fortunate will simply be unable to pay the bills they receive from Calpers or their local retirement system.”

Quadruple is More Likely

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The California Policy Center Report details 20 cities and counties reporting pension contribution-to-revenue ratios exceeding 10%. San Rafael, San Jose, and Santa Barbara County head the list at 18.29%, 13.49%, and 13.06% respectively.

The report “reflects the impact of CalPERS’ recent decision to change the rate at which it discounts future liabilities from 7.5% to 7%.

Lovely.

A plan assumption of 7.0% is not going to happen. Returns are more likely to be negative than to hit 7% a year for the next five years.

As in 2000 and again in 2007, investors believe the stock market is flashing an all clear signal. It isn’t.

GMO 7-Year Expected Returns

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Source: GMO

*The chart represents local, real return forecasts for several asset classes and not for any GMO fund or strategy. These forecasts are forward‐looking statements based upon the reasonable beliefs of GMO and are not a guarantee of future performance. Forward‐looking statements speak only as of the date they are made, and GMO assumes no duty to and does not undertake to update forward looking statements. Forward‐looking statements are subject to numerous assumptions, risks, and uncertainties, which change over time. Actual results may differ materially from those anticipated in forward‐looking statements. U.S. inflation is assumed to mean revert to long‐term inflation of 2.2% over 15 years.

Forecast Analysis

GMO forecasts seven years of negative real returns. Allowing for 2.2% inflation, nominal returns are expected to be negative for seven full years.

Even +3.0% returns would wreck pension plans, most of which assume six to seven percent returns.

If we see the kinds of returns I expect, even quadruple contributions will not come close to matching the actuarial needs.

by Mike “Mish” Shedlock