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Can Carbon Capture Technology Prosper Under Trump?

Carbon capture equipment at the Petra Nova plant southwest of Houston. Credit Michael Stravato for The New York Times
Carbon capture equipment at the Petra Nova plant southwest of Houston. Credit Michael Stravato for The New York Times

THOMPSONS, Tex. — Can one of the most promising — and troubled — technologies for fighting global warming survive during the administration of Donald J. Trump?

The technology, carbon capture, involves pulling carbon dioxide out of smokestacks and industrial processes before the climate-altering gas can make its way into the atmosphere. Mr. Trump’s denial of the overwhelming scientific evidence supporting climate change, a view shared by many of his cabinet nominees, might appear to doom any such environmental initiatives.

But the new Petra Nova plant about to start running here, about 30 miles southwest of Houston, is a bright spot for the technology’s supporters. It is being completed essentially on time and within its budget, unlike many previous such projects. When it fires up, the plant, which is attached to one of the power company NRG’s hulking coal-burning units, will draw 90 percent of the CO2 from the emissions produced by 240 megawatts of generated power. That is a fraction of the roughly 3,700 megawatts produced at this gargantuan plant, the largest in the Lone Star State. Still, it is enough to capture 1.6 million tons of carbon dioxide each year — equivalent to the greenhouse gas produced by driving 3.5 billion miles, or the CO2 from generating electricity for 214,338 homes.

From a tower hundreds of feet above the Petra Nova operation, the carbon capture system looks like a fever dream of an Erector set fanatic, with mazes of pipes and gleaming tanks set off from the main plant’s skyscraping smokestacks and busy coal conveyors. Petra Nova uses the most common technology for carbon capture. The exhaust stream, pushed down a snaking conduit to the Petra Nova equipment, is exposed to a solution of chemicals known as amines, which bond with the carbon dioxide. That solution is pumped to a regenerator, or stripper, which heats the amine and releases the CO2.

The gas is drawn off and compressed for further use, and the amine solution is then cycled back through the system to absorb more CO2.

Coal is unloaded at the NRG power plant in Thompson, Tex., where a carbon capture system will soon be operating. Credit Michael Stravato for The New York Times
Coal is unloaded at the NRG power plant in Thompson, Tex., where a carbon capture system will soon be operating. Credit Michael Stravato for The New York Times

Petra Nova, a billion-dollar joint venture of NRG and JX Nippon Oil and Gas Exploration, will not just grab the CO2, it will use it, pushing compressed CO2 through a new pipeline 81 miles to an oil field. The gas will be injected into wells, a technique known as enhanced oil recovery, that should increase production to 15,000 barrels a day from about 300 barrels a day. And since NRG owns a quarter of the oil recovery project, what comes out of the ground will help pay for the carbon capture operation.

The plant, which has received $190 million from the federal government, can be economically viable if the price of oil is about $50 a barrel, said David Knox, an NRG spokesman. The company expects to declare the plant operational in January, Mr. Knox said. Aware of problems with carbon capture projects around the country and of the risks of hubris, he said: “We’re not going to declare victory before it’s time.”

If the price of oil stabilizes or rises, and if tax breaks for developing the technology continue and markets for carbon storage develop, he said, utilities might ask, “why would I not want to put a carbon capture system on my plant?”

But developing large-scale carbon capture has been neither straightforward nor easy. So far, problems have bedeviled major projects, often costing far more than projected and taking longer to complete. The federal government has canceled projects like Future Gen, which was granted more than $1 billion by the Obama administration.

Carbon capture systems are not just expensive to build; they tend to be power-hungry, and make the plant less efficient over all — a problem known as “parasitic load.” The Petra Nova carbon capture process gets its energy from a separate power plant constructed for the purpose, which NRG says makes the system more efficient than it would otherwise be, and frees up all of the capacity of the main power plant to sell all of the electricity it produces. The company estimates that the next plant it builds could cost 20 percent less, thanks to lessons learned this time around.

If Petra Nova succeeds, it means a boost for carbon capture. Despite carbon capture’s problems, its supporters, including the Intergovernmental Panel on Climate Change and the International Energy Agency, call the technology, known as carbon capture sequestration, crucial for meeting emissions standards that can prevent the worst effects of climate change.

“If you don’t have C.C.S., the chance of success goes down, and the cost of success goes up,” said Julio Friedmann, an expert at the Lawrence Livermore Laboratories in California and a former Energy Department official. “If you do have C.C.S., the chance of success goes up and the cost of success goes down.”

Carbon capture is proving itself, said David Mohler, the deputy assistant secretary for clean coal and carbon management at the federal Energy Department.

Developing technologies often involves delay and cost overruns initially, he said. “You cannot engineer all the bugs out from inside a cubicle — you really have to do this stuff in the real world,” he said.

Driving down costs, he noted, is what engineers and businesses do through research, development and production. He cited the plummeting cost of initially expensive technologies like solar power. “We do figure things out as we go,” he said.

What the Trump administration will do with carbon capture is, at this point, anyone’s guess. “The technology only makes sense in a world where you are seeking to avoid putting CO2 into the atmosphere,” said Mark Brownstein, a vice president for the climate and energy program at the Environmental Defense Fund.

But some supporters of the technology see reasons for hope.

“I actually think it’s a moment of optimism,” said Senator Heidi Heitkamp of North Dakota, who met with Mr. Trump last month as a potential agriculture secretary. Ms. Heitkamp co-sponsored legislation with another Democrat, Senator Sheldon Whitehouse of Rhode Island, to expand and extend tax breaks for carbon capture projects. “What I saw with the president-elect was a laserlike focus on jobs,” she said. “I think he was intrigued” about the economic opportunity that carbon capture could provide to keep coal power generation in the national mix, she added.

A crane hauls a 70-ton turbine in La Porte, Tex. A consortium of companies aims to produce electric power efficiently by driving the turbine with superheated carbon dioxide. Credit Michael Stravato for The New York Times
A crane hauls a 70-ton turbine in La Porte, Tex. A consortium of companies aims to produce electric power efficiently by driving the turbine with superheated carbon dioxide. Credit Michael Stravato for The New York Times

One of the pillars of Mr. Trump’s campaign was his intention to revive the fortunes of the coal industry through support of so-called clean coal. And while the exact meaning of the much-used phrase is open to interpretation, it generally includes not just technologies that remove soot and smog-causing pollutants, but also carbon dioxide.

Ms. Heitkamp said that businesses, too, were likely to continue development of carbon capture technology, since they planned their plant investments on a curve of decades and are loath to change course because of a single election. “The decision they are making is not, what does the political outlook look like today? What’s it look like over the life of this plant?”

Although she concedes that a full-scale revival of coal’s fortunes is unlikely, carbon capture could be a way to extend the life of current facilities while keeping the nation’s energy mix diverse.

Jeff Erikson, general manager at the Global C.C.S. Institute, which promotes the technology, said he did not expect to see a great number of new coal plants on the way. “I wouldn’t say carbon capture is going to rescue the coal industry,” he said, but pointed out that there is great potential for applying carbon capture to diverse natural gas plants and to industrial applications. Captured carbon can be used not just for oil production but a widening range of industrial processes, or can even be pumped into the ground.

One of the most innovative approaches to carbon capture is being tried 50 miles east of the Petra Nova plant, in La Porte, Tex., where a consortium of companies is trying an entirely new approach to low-carbon power generation.

In a $140 million, 50 megawatt demonstration project, the company, Net Power, will use superheated carbon dioxide in much the same way that conventional power plants use steam to drive turbines. This system, invented by a British engineer, Rodney Allam, eliminates the inefficiency inherent in heating water into steam and cooling it again. The power plant produces a stream of very pure, pressurized carbon dioxide that is ready for pipelines without much of the additional processing that conventional carbon capture systems require.

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US Earth scientists plan for uncertain future under Trump

Former Texas governor Rick Perry is Donald Trump's choice to lead the US Department of Energy.
Former Texas governor Rick Perry is Donald Trump’s choice to lead the US Department of Energy.

Concerned by president-elect’s choice of advisers, researchers take steps to defend their fields.

Incoming US president Donald Trump’s government is beginning to take shape, and Earth scientists are getting nervous.

Trump’s latest Cabinet appointments include former Texas governor Rick Perry, a climate sceptic, for energy secretary, and ExxonMobil chief executive Rex Tillerson for secretary of state — a position that would make him the United States’ lead emissary on climate change. The pair helps to fill out a roster of advisers with strong ties to industry and a distaste for government regulation. Trump’s transition team also asked the Department of Energy (DOE) for the names of employees who had worked on climate-change issues, further unsettling researchers.

“It feels like a war on science, and on climate science in particular,” says Alan Robock, a climatologist at Rutgers University in New Brunswick, New Jersey. “That’s very upsetting.”

Scientists won a small battle on 14 December, when Trump’s team disavowed the memorandum it sent to the DOE seeking information on climate-change programmes. The request sparked widespread outrage and drew a rebuke from the department after it was leaked on 9 December. At the Fall Meeting of the American Geophysical Union (AGU) last week in San Francisco, California, some researchers billed the episode as a blueprint for how they might defend their interests after Trump takes office on 20 January.

“There is power, even with an administration that never admits a mistake, in bringing things to light,” says Andrew Rosenberg, who heads the Center for Science and Democracy at the Union of Concerned Scientists in Cambridge, Massachusetts.

Other researchers are copying government climate-data sets, to preserve them in case the Trump administration and the Republican-controlled Congress follow through on proposals to cut back Earth-science research at NASA or otherwise restrict studies of global warming. One rescue effort had archived 11 of 91 data sets on its list for preservation as of 16 December; these include a global temperature record maintained by NASA and palaeoclimate archives held by the National Oceanic and Atmospheric Administration (NOAA).

Marcia McNutt, president of the US National Academy of Sciences, says that private foundations have expressed interest in “funding up to the order of billions of dollars” for climate-change research if the Trump administration reduces support for such work. But McNutt — who directed the US Geological Survey (USGS) from 2009 to 2013 — is not ready to give up on government science. “I don’t want that to be an excuse for the government to pull away — to say private philanthropy can do this, the government doesn’t need to fund it,” she told journalists at the AGU meeting.

The road ahead for scientists looks tough. Perry dealt with energy issues as governor of Texas, but he lacks experience with key areas of the DOE portfolio, says John Deutch, a chemist at the Massachusetts Institute of Technology in Cambridge. Deutch, who leads the department’s advisory board, says that Trump should identify a deputy energy secretary who understands the agency’s programmes on basic science, nuclear weapons and national security.

And Perry is not the only climate sceptic poised to join Trump’s inner circle. Trump’s pick to lead the US Environmental Protection Agency is Oklahoma attorney-general Scott Pruitt, who has sued the federal government to overturn greenhouse-gas and air-quality rules.

The president-elect has not announced whom he would like to run NASA, NOAA or the USGS, among other science agencies. McNutt says that the National Academies of Science, Engineering, and Medicine have provided his transition team with a list of potential candidates, but none of those people has been contacted by Trump staff.

Some scientists argue that even if policies to fight climate change are weakened or struck down under Trump, his latest nominations hint that there may be ways to promote clean energy. Tillerson has said that a carbon tax is the best way to address global warming. And although Perry is a strong proponent of fossil fuels, Texas’s wind-power production grew significantly during his governorship.

“Those are places to insert a progressive agenda into an otherwise kind of ugly and cloudy landscape,” says Daniel Kammen, an energy researcher at the University of California, Berkeley.

McNutt advises scientists to stay clear-eyed as they confront whatever challenges the Trump administration brings. “I see so many people in this country freaked out,” she says. “That is exactly what those who want to disrupt science are hoping to achieve.”

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America’s Largest Pension Fund: A 7.5% Annual Return Is No Longer Realistic

The offices of the California Public Employees' Retirement System in Sacramento, Calif. PHOTO: BLOOMBERG NEWS
The offices of the California Public Employees’ Retirement System in Sacramento, Calif. PHOTO: BLOOMBERG NEWS

A reduction in Calpers’s investment target would be first since 2012

Top officers of the largest U.S. pension fund want to lower their investment targets, a move that would trigger more pain for cash-strapped cities across California and set an increasingly cautious tone for those who manage retirement assets around the country.

Chief Investment Officer Ted Eliopoulos and two other executives with the California Public Employees’ Retirement System plan to propose next Tuesday that their board abandon a long-held goal of 7.5% annually, according to system spokesman Brad Pacheco. Reductions to 7.25% and 7% have been studied, according to new documents posted Tuesday.

The last time the fund known by its acronym Calpers lowered its investment expectation was in 2012 when the rate dropped to 7.5% from 7.75%.

The more cautious stance from Calpers’ investment staff comes just 13 months after the fund agreed to a plan that would slowly scale back its target by as much as a quarter percentage point annually—and only in years of positive investment performance. Now Mr. Eliopoulos and other officials are concerned that plan may not be fast enough because of a mounting cash crunch and declining estimates of future earnings from stocks and bonds.

The fund had an estimated 68% of the assets needed to pay for all future obligations as of June 30.

“There’s no doubt Calpers needs to start aligning its rate of return expectations with reality,” California Gov. Jerry Brown said in a statement provided to the Journal.

A reduction in Calpers’ return target to 7% or 7.25% would have real-life consequences for taxpayers and cities. It would likely trigger a painful increase in yearly pension bills for the towns, counties and school districts that participate in California’s state pension plan. Any loss in expected investment earnings must be made up with significantly higher annual contributions from public employers as well as the state.

If the assumed rate of return fell to 7%, the state and school districts participating in Calpers would have to pay at least $15 billion more over the next 20 years, said spokeswoman Amy Morgan. That number doesn’t include cities and local agencies.

Lowering the assumed rate of return by just a quarter of a percentage point would likely increase annual Calpers payments made by one town, Costa Mesa, Calif., by up to $8 million, said former Mayor Steve Mensinger, who left office Tuesday after losing a bid for another term. That would likely mean budget cuts for Costa Mesa, which already spends more than 20% of its $120 million operating budget on pensions, according to Mr. Mensinger.

A Costa Mesa spokesman said “we will be closely monitoring” what Calpers’ board does and “will be analyzing their proposal when it is provided to us.”

A drop in Calpers’ rate of return assumptions could also put pressure on other funds to be more aggressive about their reductions and concede that investment gains alone won’t be enough to fund hundreds of billions in liabilities. Because of its size, Calpers typically acts as a bellwether for the rest of the pension world. It manages nearly $300 billion in assets for 1.8 million workers and retirees.

“If they [Calpers board members] go to 7% it will be really hard for those plans around the country that are at 7.75 or 8 not to come down as well,” said actuary and economist Jeremy Gold.
Pensions have long been criticized for using unrealistic investment assumptions, which proved costly during the last financial crisis. More than two-thirds of state retirement systems have trimmed their assumptions since 2008, according to an analysis of 127 plans by the National Association of State Retirement Administrators. The average target of 7.56% is the lowest since at least 1989. The peak was 8.1% in 2001.

The Illinois Teachers Retirement System in August dropped its target rate to 7% from 7.5%, the third drop in four years, and the fund’s executive director has said the rate will likely be reduced further next year. The $184 billion New York State and Local Retirement System lowered its assumed rate from 7.5% to 7% in 2015.

Some say pensions’ return expectations are still too optimistic despite the recent reductions. Many corporations already use a more conservative rate for their pension funds, and a recent report from McKinsey Global Institute predicts an end to the robust returns of the past three decades.

Calpers did revise its return expectations last year but decided against a dramatic one-time cut. Instead the board agreed to lower the rate gradually over decades, making incremental reductions only during high-return years.

That approach would insulate local governments against burdensome year-to-year increases. But doubts about that approach emerged after the investment staff began to develop new estimates for returns over the next decade.

At a November board meeting Mr. Eliopoulos said “our forecasts have been lowered quite materially over the course of this last year” and outside adviser Wilshire Associates told the board the fund’s 10-year return would drop to 6.21%.

Andrew Junkin, president of Wilshire Consulting, warned the board that the fund needs to start collecting more contributions from cities because of a mounting cash crunch. In the 2014-15 fiscal year, Calpers paid out more in retirement benefits—by $5 billion—than the $13 billion the fund received in contributions.

“The returns over that 30-year-window don’t matter if you go out of business in year eight,” Mr. Junkin said.

On Tuesday Mr. Eliopoulos, Chief Financial Officer Cheryl Eason and Acting Chief Actuary Scott Terando said in documents released by Calpers that achieving 7.5% annual returns “will be a significant challenge” over the next decade.

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Congress approves water bill seen as a threat to Delta fish

A boat passes Webb Tract as it makes its way through the Sacramento San-Joaquin River Delta near Isleton, Calif., Wednesday, Feb. 28, 2001. (AP Photo/Rich Pedroncelli)
A boat passes Webb Tract as it makes its way through the Sacramento San-Joaquin River Delta near Isleton, Calif., Wednesday, Feb. 28, 2001. (AP Photo/Rich Pedroncelli)

WASHINGTON (AP) — Congress has approved a wide-ranging bill to authorize water projects across the country, including $170 million to address lead in Flint, Michigan’s drinking water and $558 million to provide relief to drought-stricken California.

The Senate approved the $10 billion bill, 78-21, early Saturday, despite complaints from some Democrats that the drought measure was a giveaway to California farmers and businesses. The vote sends the bill to President Barack Obama.

The extended drought has devastated California’s abundant farmland and forced families to cut back on water consumption. In the past two years, 35,000 people have lost jobs, 1 million acres of farm land have gone fallow and 2,400 private water wells have gone dry, while more than 100 million trees on federal land have died.

Sen. Barbara Boxer, D-Calif., was one of the bill’s key authors, but found herself urging senators to vote no because of a last-minute rider that Boxer said puts the interests of big farms over the fishing industry.

Boxer, the senior Democrat on the Senate environment panel, is retiring after 24 years in the Senate and said she never imagined she’d end her career trying to scuttle her own bill.

“It’s bizarre,” she said, before launching into a full-throated attack on a provision brokered by two powerful Californians: Republican House Majority Leader Kevin McCarthy and Democratic Sen. Dianne Feinstein. Boxer called the measure the “Midnight Rider” and said it undermines endangered species protections for threatened salmon and other fish and will severely damage the fishing industry in three states — California, Oregon and Washington.

“It’s a beautiful bill — vote no,” said Boxer, who boasted that the measure included no fewer than 26 provisions to help California.

Feinstein, who has worked on the drought measure for more than a year, said the bill will increase water deliveries to farms and businesses devastated by the years-long drought, which she said has cost the state’s economy nearly $5 billion over the past two years.

Feinstein disputed Boxer’s claim that the bill would have a negative effect on fish and the environment. The measure merely requires state and federal agencies to use the best available science to control water flows to protect fish while ensuring water deliveries to the San Joaquin Valley and southern California, she said.

“After three years and dozens of versions of legislation, I think this is the best we can do,” Feinstein said.

The water-projects bill also includes language authorizing aid for Flint and other cities afflicted by lead in water, although money for the bill was included in a short-term spending bill given final approval late Friday.

Flint’s drinking water became tainted when the city switched from the Detroit water system and began drawing from the Flint River in April 2014 to save money. The impoverished city was under state control at the time.

Regulators failed to ensure the water was treated properly and lead from aging pipes leached into the water supply.

“It’s past time for Congress to put partisan politics aside and help the people of Flint, who are still without access to clean, safe drinking water from their taps,” said Sen. Gary Peters, D-Mich.

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Exxon Touts Carbon Tax to Oil Industry

Exxon’s official position has long been the same—a carbon tax is the best way to address the risks of warming temperatures—but it has done little to actively advocate for that goal in recent years. PHOTO: REUTERS
Exxon’s official position has long been the same—a carbon tax is the best way to address the risks of warming temperatures—but it has done little to actively advocate for that goal in recent years. PHOTO: REUTERS

World’s largest publicly owned oil company faces pressure to show concern about climate change

Exxon Mobil Corp. is ramping up its lobbying of other energy companies to support a carbon tax, marking a shift in the oil giant’s approach to climate change as the industry faces growing pressure to address the politically charged issue.

Exxon’s official position has long been the same—a carbon tax is the best way to address the risks of warming temperatures—but it has done little to actively advocate for that goal in recent years. Lately, Exxon has been making the case with its U.S. counterparts to support a carbon tax, arguing that the industry must not oppose all climate policies, according to people familiar with Exxon’s thinking.

Top Exxon officials have been more vocal about their support for a carbon tax and have met with Capitol Hill offices about related legislation, according to the company’s recent lobby disclosure forms.

For the past six months, Exxon has been asserting its position more in meetings within trade associations, including the American Petroleum Institute and American Fuel and Petrochemical Manufacturers, according to multiple reports from people who have attended meetings with Exxon officials.

“Of the policy options being considered by governments, we believe a revenue-neutral carbon tax is the best,” Suzanne McCarron, the company’s vice president of public and government affairs, wrote in May in the Dallas Morning News.

A straightforward carbon tax that is revenue-neutral—meaning other taxes should be lowered to offset the impact—is far preferable to the patchwork of current and potential regulations on the state, federal and international levels, according to Exxon spokesman Alan Jeffers.
Mr. Jeffers said Exxon’s position hasn’t changed and pointed to a recent House vote on a resolution condemning a carbon tax and the global climate deal in Paris agreed to last December as reasons for the increased debate within the industry.

A carbon tax would put a price on each ton of carbon emitted. Where in the production and consumption process the tax would be levied depends on individual proposals.

“Previously Exxon’s positioning on a carbon tax had been passive—‘Hey, we’re not loving it, but we’re not going to get in the way of it,’ ” said Michael McKenna, president of the energy lobbying firm MWR Strategies, whose clients include oil and refining companies, but not Exxon. “In just the last six months, there’s been an uptick in how they are asserting themselves in meetings about how to address this issue.”

Exxon, the world’s largest publicly owned oil company, arguably faces more pressure than other firms to show concern about climate change. At least two Democratic state attorneys general are investigating whether the oil giant has conspired to cover up what it knows about the impact of global warming.

The U.S. Virgin Islands attorney general agreed to withdraw its subpoena, according to a legal filing Wednesday. Exxon is challenging these investigations and has described them as politically motivated attacks that violate its constitutional rights.

In actively pushing for a carbon tax behind the scenes, Exxon becomes the first major American energy company to move closer to the positions of European energy firms, including Royal Dutch Shell PLC and BP PLC, which have publicly advocated for a price on carbon.

Congress has made it clear it is unlikely to consider a carbon tax soon, especially under Republican control. But some in the energy industry believe a serious debate on additional climate measures isn’t far off, especially if Democrat Hillary Clinton wins the White House in November.

The House vote in early June to condemn a carbon tax accentuated a widening rift within the industry over how, or whether, to engage on climate policy. The split is pitting smaller companies, especially domestic refiners, against multinational and European firms.

One senior U.S. oil executive said Exxon, like some other oil and gas companies, could also have a financial motive for supporting a carbon tax. Such a tax would make coal more expensive compared with natural gas. Exxon, beyond its oil business, is the U.S.’s largest natural-gas producer.

Mr. Jeffers, the Exxon spokesman, said his company has invested in gas in anticipation of climate policies that make coal more expensive.

Few, if any, U.S. companies other than Exxon have called for a carbon tax, and many oppose any plan designed to cut emissions. Chevron Corp. CEO John Watson, for example, is one of several outspoken opponents of a carbon tax.

Exxon’s shift is unfolding against the backdrop of a landmark deal to cut greenhouse gas emissions struck by roughly 200 nations last December in Paris. Energy companies are also facing increasing pressure from federal regulators, and their own shareholders, to disclose potential business risks from the global efforts to reduce greenhouse gas emissions. Exxon shareholders in May narrowly voted down a resolution calling for a stress test to determine the risk that efforts to curb climate change pose to its business.

Exxon first publicly supported a carbon tax in 2009, presenting it as preferable to cap-and-trade, a market-based system for controlling carbon emissions that the Democratic-controlled Congress then appeared ready to enact. Cap-and-trade died in the Senate, the Republicans later captured Congress, and President Barack Obama has since pursued regulations to cut carbon emissions instead.

Some advocates of strong climate policy are skeptical Exxon’s shift signals a deeper change. “We’ve seen so little movement out of any of their lobbying front groups,” said Sen. Sheldon Whitehouse (D., R.I.), who introduced a bill last summer to impose a carbon tax. The measure hasn’t advanced in the Senate.

Mr. Whitehouse’s staff recently met with Exxon lobbyists, but the senator said, “The meeting was more just an exploratory feeler to see about further conversations.”

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Thanks to heavy rains, state may increase water delivery allocations

A "bathtub ring" marks the former water level in Millerton Lake near Fresno on Oct. 1, 2015. (Los Angeles Times)
A “bathtub ring” marks the former water level in Millerton Lake near Fresno on Oct. 1, 2015. (Los Angeles Times)

Dozens of water agencies in drought-weary California may receive only 20% of their requested deliveries in 2017, state officials said Monday.

But the Department of Water Resources’ initial allocation forecast is double what was announced a year ago.

Officials said winter storms in coming months may boost the first 2017 allocation, but they point out that California’s deep drought lingers.

Initial allocations almost always change. This year’s 10% allocation ultimately gave way to a 60% allotment.

The rainy season has had a strong start, with snow in the Sierra Nevada and rain in parched Southern California. But officials say one wet year won’t make up for the long drought.

“October’s storms and subsequent rainfall have brightened the picture, but we could still end up in a sixth year of drought,” said Mark Cowin, director of the Department of Water Resources. “Our unpredictable weather means that we must make conservation a California lifestyle.”

Much of October’s heavy rainfall was soaked up by the state’s drought-dried soil, although water from subsequent storms will increase runoff into streams and reservoirs, the department said.

The State Water Project supplies 29 public water agencies — from the San Francisco Bay Area to Southern California — that serve nearly two-thirds of California residents and irrigate nearly 1 million acres of farmland.

The drought has left California reservoirs at or near record low levels, and the water shortage has caused farmers to rely heavily on pumping groundwater.

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Dallas Stares Down a Texas-Size Threat of Bankruptcy

Michael S. Rawlings, the mayor of Dallas, said this month that his city appeared to be “walking into the fan blades” of municipal bankruptcy. Credit Cooper Neill for The New York Times
Michael S. Rawlings, the mayor of Dallas, said this month that his city appeared to be “walking into the fan blades” of municipal bankruptcy. Credit Cooper Neill for The New York Times

DALLAS — Picture the next major American city to go bankrupt. What springs to mind? Probably not the swagger and sprawl of Dallas.

But there was Dallas’s mayor, Michael S. Rawlings, testifying this month to a state oversight board that his city appeared to be “walking into the fan blades” of municipal bankruptcy.

“It is horribly ironic,” he said.

Indeed. Dallas has the fastest economic growth of the nation’s 13 largest cities. Its streets hum with supersize cars and its skyline bristles with cranes. Its mayor is a former chief executive of Pizza Hut. Hundreds of multinational corporations have chosen Dallas for their headquarters, most recently Jacobs Engineering, which is moving to low-tax Texas from pricey Pasadena, Calif.

But under its glittering surface, Dallas has a problem that could bring it to its knees, and that could be an early test of America’s postelection commitment to safe streets and tax relief: The city’s pension fund for its police officers and firefighters is near collapse and seeking an immense bailout.

Over six recent weeks, panicked Dallas retirees have pulled $220 million out of the fund. What set off the run was a recommendation in July that the retirees no longer be allowed to take out big blocks of money. Even before that, though, there were reports that the fund’s investments — some placed in highly risky and speculative ventures — were worth less than previously stated.

What is happening in Dallas is an extreme example of what’s happening in many other places around the country. Elected officials promised workers solid pensions years ago, on the basis of wishful thinking rather than realistic expectations. Dallas’s troubles have become more urgent because its plan rules let some retirees take big withdrawals.

Now, the Dallas Police and Fire Pension System has asked the city for a one-time infusion of $1.1 billion, an amount roughly equal to Dallas’s entire general fund budget but not even close to what the pension fund needs to be fully funded. Nothing would be left for fighting endemic poverty south of the Trinity River, for public libraries, or for giving current police officers and firefighters a raise.

Museum Tower, right, was developed by the city’s pension fund for $200 million. It stands over the Nasher Sculpture Center. Credit Cooper Neill for The New York Times
Museum Tower, right, was developed by the city’s pension fund for $200 million. It stands over the Nasher Sculpture Center. Credit Cooper Neill for The New York Times

“It’s a ridiculous request,” Mr. Rawlings, a Democrat, said in testimony this month to the Texas Pension Review Board, whose seven members are appointed by Texas governors, all Republicans for the last 20 years.

The mayor — who defeated a former Dallas police chief to win his office in 2011 — added that he had nothing but respect for the city’s uniformed safety workers, five of whom were gunned down by a deranged sniper during a protest against police shootings in July.

But that does not change the awful numbers. This month, Moody’s reported that Dallas was struggling with more pension debt, relative to its resources, than any major American city except Chicago.

“The City of Dallas has no way to pay this,” said Lee Kleinman, a City Council member who served as a pension trustee from 2013 until this year. “If the city had to pay the whole thing, we would declare bankruptcy.”

Other ideas being considered include raising property taxes, borrowing money for the pension fund, delaying long-awaited public works or even taking back money from retirees. But property taxes in Dallas are already capped, the city’s borrowing capacity is limited, and retirees would surely litigate any clawback.

This month, the city’s more than 10,000 current and retired safety workers started voting on voluntary pension trims, but then five people sued, halting the balloting for now.

The city is expected to call for an overhaul in December. But it has no power to make the changes, because the fund is controlled by state lawmakers in Austin. The Texas Legislature convenes only every other year, and Dallas is preparing to ask the state for help when the next session starts in January.

One state senator, John Whitmire, stopped by the pension building this month and urged the 12 trustees to join the city in asking Austin to scale back their plan.

Downtown Dallas. Hundreds of multinational corporations have set up headquarters in the city. Credit Cooper Neill for The New York Times
Downtown Dallas. Hundreds of multinational corporations have set up headquarters in the city. Credit Cooper Neill for The New York Times

“It’s not going to be pleasant,” said Senator Whitmire, a Democrat in the statehouse since 1973. But without some cuts, “this whole thing will come crashing down, and we’ll play right into the hands of those who would like 401(k)s or defined contribution plans.”

To many in Dallas, the hole in the pension fund seems to have blown open overnight. But in fact, the fuse was lit back in 1993, when state lawmakers sweetened police and firefighter pensions beyond the wildest dreams of the typical Dallas resident. They added individual savings accounts, paying 8.5 percent interest per year, when workers reached the normal retirement age, then 50. The goal was to keep seasoned veterans on the force longer.

Guaranteed 8.5 percent interest, on tap indefinitely for thousands of people, would of course cost a fortune. But state lawmakers made it look “cost neutral,” records show, by fixing Dallas’s annual pension contributions at 36 percent of the police and firefighters’ payroll. It would all work as long as the payroll grew by 5 percent every year — which it did not — and if the pension fund earned 9 percent annually on its investments.

Buck Consultants, the plan’s actuarial firm, warned that those assumptions were shaky, and that the changes did not comply with the rules of the state Pension Review Board.

“The Legislature clearly ignored that,” Mr. Kleinman said. The plan’s current actuary, Segal Consulting, reported in July that 23 years of unmet goals had left Dallas with a hidden pension debt of almost $7 billion.

Back in Dallas, the pension trustees set about trying to capture the 9 percent annual investment returns. They opted for splashy and exotic land deals — villas in Hawaii, a luxury resort in Napa County, Calif., timberland in Uruguay and farmland in Australia, among others.

The projects called for frequent on-site inspections by the trustees and their plan administrator, Richard Tettamant. The Dallas Morning News reported that officials were spending millions on global investment tours, with stop-offs in places like Zurich and Pisa, Italy. Pension officials argued that their travel was appropriate and their investments were successes.

It was an investment right in Dallas that led to the pension fund’s undoing: Museum Tower, a luxury condominium high rise. It went up across the street from the Nasher Sculpture Center, a collection housed in a Renzo Piano building surrounded by manicured gardens. The Nasher, opened in 2003, was integral to a city campaign to revitalize its downtown.

The glare from Museum Tower has threatened to damage artwork at the Nasher. Credit Brandon Thibodeaux for The New York Times
The glare from Museum Tower has threatened to damage artwork at the Nasher. Credit Brandon Thibodeaux for The New York Times

Museum Tower started out modestly, with a $20 million investment from the pension fund. But as the downtown Arts District flourished, the pension fund raised its stake, then doubled the height of the building, and finally took over the whole development for $200 million. Mr. Tettamant became the general manager.

As Museum Tower soared to 42 stories, its glass cladding acted as a huge reflector, sending the sun’s intensified rays down into the sculpture center. Mr. Piano had installed a filtered glass roof, designed to bathe the masterpieces in soft, natural light. The glare from the tower ruined the effect, killed plants in the garden and threatened to damage the sculptures. The center called on the pension fund to reduce the glare. Mr. Tettamant said nothing could be done and suggested the center change its roof.

Mr. Rawlings, the mayor, brought in a former official of the George W. Bush administration, Tom Luce, for confidential mediation. But Mr. Luce resigned after five months, saying Mr. Tettamant had failed to adhere to “the conditions and spirit under which I agreed to serve.”

Before long, The Dallas Morning News published a long exposé of the fund’s real-estate holdings, raising serious questions about its claimed investment success. Some retirees began to clamor for a criminal investigation. The mayor demanded a full audit.

When the audit was done, it showed that the investments were indeed overvalued, and that the fund was in deep trouble.

Mr. Tettamant, who was dismissed in 2014, said he believed he was being blamed for problems he did not cause.

“The Dallas mayor has a vendetta against me,” he said in an interview. “I never made any real estate investments. The board made all the investment decisions, and I was not a board member.”

In April, the Federal Bureau of Investigation raided the offices of CDK Realty Advisors, a firm that helped the pension fund identify and manage many of its investment properties. A spokesman for CDK declined to discuss the raid, but said the firm was working to resolve its differences with the pension fund.

In his meeting with the trustees, Senator Whitmire recalled that in 1993 he had voted enthusiastically for the plan that sent the pension fund on its ill-fated quest for 9 percent investment returns.

“We all know some of the benefits, guaranteed, were just probably never realistic,” he said. “It was good while it lasted, but we’ve got some serious financial problems because of it.”

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These 6 new technology rules will govern our future

A robotic waiter carries food in a restaurant in Kunshan, China. (2014 photo by Johannes Eisele/Agence France-Presse via Getty Images)
A robotic waiter carries food in a restaurant in Kunshan, China. (2014 photo by Johannes Eisele/Agence France-Presse via Getty Images)

Technology is advancing so rapidly that we will experience radical changes in society not only in our lifetimes but in the coming years. We have already begun to see ways in which computing, sensors, artificial intelligence and genomics are reshaping entire industries and our daily lives.

As we undergo this rapid change, many of the old assumptions that we have relied will no longer apply. Technology is creating a new set of rules that will change our very existence. Here are six:

1. Anything that can be digitized will be.

Digitization began with words and numbers. Then we moved into games and later into rich media, such as movies, images and music. We also moved complex business functions, medical tools, industrial processes and transportation systems into the digital realm. Now, we are digitizing everything about our daily lives: our actions, words and thoughts. Inexpensive DNA sequencing and machine learning are unlocking the keys to the systems of life. Cheap, ubiquitous sensors are documenting everything we do and creating rich digital records of our entire lives.

2. Your job has a significant chance of being eliminated.

In every field, machines and robots are beginning to do the work of humans. We saw this first happen in the Industrial Revolution, when manual production moved into factories and many millions lost their livelihoods. New jobs were created, but it was a terrifying time, and there was a significant societal dislocation (from which the Luddite movement emerged).

The movement to digitize jobs is well underway in low-salary service industries. Amazon relies on robots to do a significant chunk of its warehouse work. Safeway and Home Depot are rapidly increasing their use of self-service checkouts. Soon, self-driving cars will eliminate millions of driving jobs. We are also seeing law jobs disappear as computer programs specializing in discovery eliminate the needs for legions of associates to sift through paper and digital documents. Soon, automated medical diagnosis will replace doctors in fields such as radiology, dermatology, and pathology. The only refuge will be in fields that are creative in some way, such as marketing, entrepreneurship, strategy and advanced technical fields. New jobs we cannot imagine today will emerge, but they will not replace all the lost jobs. We must be ready for a world of perennially high unemployment rates. But don’t worry, because …

3. Life will be so affordable that survival won’t necessitate having a job.

Note how cellphone minutes are practically free and our computers have gotten cheaper and more powerful over the past decades. As technologies such as computing, sensors and solar energy advance, their costs drop. Life as we know it will become radically cheaper. We are already seeing the early signs of this: Because of the improvements in the shared-car and car-service market that apps such as Uber enable, a whole generation is growing up without the need or even the desire to own a car. Health care, food, telecommunications, electricity and computation will all grow cheaper very quickly as technology reinvents the corresponding industries.

4. Your fate and destiny will be in your own hands as never before.

The benefit of the plummet in the costs of living will be that the technology and tools to keep us healthy, happy, well-educated and well-informed will be cheap or free. Online learning in virtually any field is already free. Costs also are falling with mobile-based medical devices. We will be able to execute sophisticated self-diagnoses and treat a significant percentage of health problems using only a smartphone and smart distributed software.

Modular and open-source kits are making DIY manufacture easier, so you can make your own products., for example, lets anyone wanting to build a drone mix and match components and follow relatively simple instructions for building an unmanned flying device. With 3-D printers, you can create your own toys. Soon these will allow you to “print” common household goods — and even electronics. The technology driving these massive improvements in efficiency will also make mass personalization and distributed production a reality. Yes, you may have a small factory in your garage, and your neighbors may have one, too.

5. Abundance will become a far bigger problem than poverty.

With technology making everything cheaper and more abundant, our problems will arise from consuming too much rather than too little. This is already in evidence in some areas, especially in the developed world, where diseases of affluence — obesity, diabetes, cardiac arrest — are the biggest killers. These plagues have quickly jumped, along with the Western diet, to the developing world, as well. Human genes adapted to conditions of scarcity are woefully unprepared for conditions of a caloric cornucopia. We can expect this process only to accelerate as the falling prices of Big Macs and other products our bodies don’t need make them available to all.

The rise of social media, the Internet and the era of constant connection are other sources of excess. Human beings have evolved to manage tasks serially rather than simultaneously. The significant degradation of our attention spans and precipitous increase in attention-deficit problems that we have already experienced are partly attributable to spreading our attention too thin. As the number of data inputs and options for mental activity continues to grow, we will only spread it further. So even as we have the tools to do what we need to, forcing our brains to behave well enough to get things done will become more and more of a chore.

6. Distinction between man and machine will become increasingly unclear.

The controversy over Google Glass showed that society remains uneasy over melding man and machine. Remember those strange-looking glasses that people would wear, that were recording everything around them? Google discontinued these because of the uproar, but miniaturized versions of these will soon be everywhere. Implanted retinas already use silicon to replace neurons. Custom prosthetics that operate with the help of software are personalized, highly specific extensions of our bodies. Computer-guided exoskeletons are going into use in the military in the next few years and are expected to become a common mobility tool for the disabled and the elderly.

We will tattoo sensors into our bodies to track key health indicators and transmit those data wirelessly to our phones, adding to the numerous devices that interface directly with our bodies and form informational and biological feedback loops. As a result, the very idea of what it means to be human will change. It will become increasingly difficult to draw a line between human and machine.

This column is based on Wadhwa’s upcoming book, “Driver in the Driverless Car: How Our Technology Choices Will Create the Future,” which will be released this winter.

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A giant reservoir that supplies a California county’s drinking water is nearly empty

Nick Giese heads out to fish on Southern California’s Lake Cachuma. With the reservoir more than 90 percent below capacity, the surrounding region soon will face a water crisis. (Darryl Fears/The Washington Post)
Nick Giese heads out to fish on Southern California’s Lake Cachuma. With the reservoir more than 90 percent below capacity, the surrounding region soon will face a water crisis. (Darryl Fears/The Washington Post)

LAKE CACHUMA, Calif. — At the marina Monty Keller manages amid sloping mountains here, business is down by half. For hours every workday, he stares sadly at the reason.

Lake Cachuma, a giant reservoir built to hold Santa Barbara County’s drinking water, has all but vanished in California’s historic drought. It reached an all-time low this summer — 7 percent capacity, which left a thick beige watermark that circles the hills framing the lake like an enormous bathtub ring. “We’re just amazed,” Keller said.

Under a sky that hardly ever delivers rain, the lake will only continue to fall, putting nearly a half-million county residents in an ugly situation. As early as January, the depth is expected to be too low to distribute water.

Barring a winter miracle of massive snows and rains extending into April, weather that has forsaken Southern California for more than five years, there will be “no water available next year from the reservoir,” said Duane Stroup, deputy area manager for the south-central region of the federal Bureau of Reclamation.

The entire Santa Ynez Valley will then face a future without water. The 3,000-acre reservoir supplies half of what the valley needs to recharge an underground aquifer that nearly every household, business and farm uses to pump water.

“I don’t know what will happen if we get the same amount of [precipitation] we got this winter. The wells will go dry, and they will fail. There are people in agriculture that will be required to fallow crops,” meaning destroy them, said Bruce Wales, general manager of the Santa Ynez River Water Conservation District. He predicts the area could one day resemble the Central Valley to the east. Residents there couldn’t wash or flush after 2,000 wells recently went dry, and the state has been forced to provide huge tanks and water to hundreds of homes.

The cities of Solvang and Buellton are making plans to tap alternative water sources. The community of Montecito is scrambling to buy whatever the state and private vendors can provide. Next door, Santa Barbara is strongly considering a total ban on outdoor water use as it rushes to start operation of a desalination plant that will turn Pacific Ocean saltwater to drinking water at a rate of 3 million gallons per day.

The water woes have curbed the appeal of coastal towns cherished by the rich and famous and eventually will be a drain on the local economy. On Santa Barbara’s hills, movie stars live in houses shaded by colorful citrus trees. In Montecito, where talk show hosts Oprah Winfrey and Ellen DeGeneres both own property, large estates with long driveways are hidden behind gates. Vacationers flock to the valley to enjoy the scenic landscape and wine.

Southern California has long had an aching thirst. The region is nursed by water funneled through a system of aqueducts and pipes from the Colorado River and reservoirs closer to the northern Sierra Nevada.

That wasn’t enough for growing Santa Barbara County, which sits northwest of Los Angeles. After a bad drought in the middle of the last century, Lake Cachuma was created in 1953 behind the Bradbury Dam, with an elaborate tunnel and conduit to move water to intake plants throughout the county and an aquifer in the valley. The reservoir took five years to fill.

Because it’s a major drinking water source, swimming was never allowed, but the lake was stocked with trout, coy and other fish for recreational anglers. Austin Snider remembers the lake “at its highest point,” nearly halfway up the mountains, when he arrived at the marina as the new mechanic in 2011.

Marina manager Monty Keller looks out at Lake Cachuma. There’s little marina business these days as the reservoir keeps dropping during California’s historic drought. (Darryl Fears/The Washington Post)
Marina manager Monty Keller looks out at Lake Cachuma. There’s little marina business these days as the reservoir keeps dropping during California’s historic drought. (Darryl Fears/The Washington Post)

“I’ve watched it go down every year since,” he said recently, standing on a bank about 30 feet below what would have been the water’s surface.

Fearing the worst, local water suppliers ordered everyone to cut 35 percent of their monthly water use a year ago. The strain of strict conservation is starting to show. “Customers describe it as having drought fatigue,” said Fray Crease, the county’s water agency manager.

In Santa Barbara’s San Roque neighborhood, where lemon and orange trees abound, some homeowners also call it an injustice. They say they dutifully cut back, even as lawns went brown, but construction projects that daily use thousands of gallons of water have been allowed to proceed.

The city’s website says dozens of building permits are still being considered. Goleta, a neighboring city of about 30,000, mulled a proposal to build 60 homes worth as much as $1 million before recently rejecting it. Some questioned why such plans are even considered in a drought.

“I understand the frustration,” Crease said. “If you’re doing your best to conserve and a house goes up across the street, it’s difficult . . . to understand that.”

A.K. Sinha, a retired Virginia Tech geology professor who recently moved to Santa Barbara, wonders why state and local officials seem so unprepared. “My major point is, droughts will come and go, and you can’t come up with a solution for it?” he said.

Santa Barbara is spending $61 million to bring the desalination plant online, a move expected to provide 30 percent of its water needs. The plant was built 20 years ago during another drought, but when rains returned it was mothballed before it began operating.

That shouldn’t have happened, Sinha argued as a landscaper prepared his lawn for flowers. “Instead, they should’ve built a second one,” he said. “Look at Israel. They have God knows how many desalination plants.”

Desalination is a marvel of technology, but some scientists say it’s also an environmental hazard. Pipes that pull in saltwater through tiny holes harm marine animals, and the briny water pumped back into the ocean after purification is pollution. In addition, the massive amounts of electricity a plant requires is both costly and a significant source of carbon emissions.

Regardless, Sinha appears to have a point. “The future of water supply in southern California is desalination and conservation and recycling,” Crease said. “I think it’s a little bit of everything.”

Along Lake Cachuma, Keller clings to hope for its rebound. Overall visitation at the Cachuma Lake Recreation Area is down 20 percent. The general store his wife, Beverly, manages is often empty.

“If we end up closing the park, we’d both be out of a job,” he said. “That would really suck.”

A silvery sun hung in a clear blue sky on a recent Monday, but no boats were on the water and there were no sales at the marina. Finally, a single customer, Nick Giese, arrived.

Giese descended the steep stairs to a fishing boat, well past the high-water mark for the lake. “You mean the pond?” he quipped. Rain had better come, “else we’re all in trouble,” he said. “I might have to think about moving.”

A soft drizzle had fallen twice in the previous week, but the bone-dry ground absorbed it before any reached the reservoir.

“Sad little rains,” said Snider, the marina mechanic, as he kicked dirt that should have been deep underwater. “We’ve had sad little rains for six years.”

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Era of Low Interest Rates Hammers Millions of Pensions Around World

Stephen Mensinger, the mayor of Costa Mesa, Calif., worries that retirement payments will soon eat up all the city’s cash. PHOTO: ANDREW CULLEN FOR THE WALL STREET JOURNAL
Stephen Mensinger, the mayor of Costa Mesa, Calif., worries that retirement payments will soon eat up all the city’s cash. PHOTO: ANDREW CULLEN FOR THE WALL STREET JOURNAL

Central-bank moves pull down returns for government-run funds, making it difficult to meet mounting obligations to workers and retirees.

Central bankers lowered interest rates to near zero or below to try to revive their gasping economies. In the process, though, they have put in jeopardy the pensions of more than 100 million government workers and retirees around the globe.

In Costa Mesa, Calif., Mayor Stephen Mensinger is worried retirement payments will soon eat up all the city’s cash. In Amsterdam, language teacher Frans van Leeuwen is angry his pension now will be less than what his father received, despite 30 years of contributions. In Tokyo, ex-government worker Tadakazu Kobayashi no longer has enough income from pension checks to buy new clothes.

Managers handling trillions of dollars in government-run pension funds never expected rates to stay this low for so long. Now, the world is starved for the safe, profitable bonds that pension funds have long needed to survive. That has pulled down investment returns and made it difficult for funds to meet mounting obligations to workers and retirees who are drawing government pensions.

As low interest rates suppress investment gains in the pension plans, it generally means one thing: Standards of living for workers and retirees are decreasing, not increasing.

“Unless ordinary people have money in their pockets, they don’t spend,” the 70-year-old Mr. Kobayashi said during a recent protest of benefit cuts in downtown Tokyo. “Higher interest rates would mean there’d be more money at our disposal, even if slightly.”

The low rates exacerbate cash problems already bedeviling the world’s pension funds. Decades of underfunding, benefit overpromises, government austerity measures and two recessions have left many retirement systems with deep funding holes. A wave of retirees world-wide is leaving fewer active workers left to contribute. The 60-and-older demographic is expected to roughly double between now and 2050, according to the United Nations.


Government-bond yields have risen since Donald Trump was elected U.S. president, though few investors expect a prolonged climb. Regardless, the ultralow bond yields of recent years have already hindered the most straightforward way for retirement funds to recover—through investment gains.

Pension officials and government leaders are left with vexing choices. As investors, they have to stash away more than they did before or pile into riskier bets in hedge funds, private equity or commodities. Countries, states and cities must decide whether to reduce benefits for existing workers, cut back public services or raise taxes to pay for the bulging obligations.

Corien Wortmann-Kool, chairwoman of the Netherlands-based Stichting Pensioenfonds ABP, Europe’s largest pension fund, says low interest rates have put the whole system under pressure. PHOTO: CATS & WITHOOS
Corien Wortmann-Kool, chairwoman of the Netherlands-based Stichting Pensioenfonds ABP, Europe’s largest pension fund, says low interest rates have put the whole system under pressure. PHOTO: CATS & WITHOOS

“Interest rates have never been so low,” said Corien Wortmann-Kool, chairwoman of the Netherlands-based Stichting Pensioenfonds ABP, Europe’s largest pension fund. It manages assets worth €381 billion, or $414 billion. “That has put the whole system under pressure.” Only about 40% of ABP’s 2.8 million members are active employees paying into the fund.

Pension funds around the world pay benefits through a combination of investment gains and contributions from employers and workers. To ensure enough is saved, plans adopt long-term annual return assumptions to project how much of their costs will be paid from earnings. They range from as low as a government bond yield in much of Europe and Asia to 8% or more in the U.S.

The problem is that investment-grade bonds that once churned out 7.5% a year are now barely yielding anything. Global pensions on average have roughly 30% of their money in bonds.

Low rates helped pull down assets of the world’s 300 largest pension funds by $530 billion in 2015, the first decline since the financial crisis, according to a recent Pensions & Investments and Willis Towers Watson report. Funding gaps for the two biggest funds in Europe and the U.S. have ballooned by $300 billion since 2008, according to a Wall Street Journal analysis.


Few parts of Europe are feeling the pension pain more acutely than the Netherlands, home to 17 million people and part of the eurozone, which introduced negative rates in 2014. Unlike countries such as France and Italy, where pensions are an annual budget item, the Netherlands has several large plans that stockpile assets and invest them. The goal is for profits to grow faster than retiree obligations, allowing the pension to become financially self-sufficient and shrink as an expense to lawmakers.

ABP currently holds 90.7 cents for every euro of obligations, a ratio that would be welcome in other corners of the world. But Dutch regulators demand pension assets exceed liabilities, meaning more cash is required than actually needed.

This spring, ABP officials had to provide government regulators a rescue plan after years of worsening finances. ABP’s members, representing one in six people in the Netherlands, haven’t seen their pension checks increase in a decade. ABP officials have warned payments may be cut 1% next year.

“People are angry, not because pensions are low, but because we failed to deliver what we promised them,” said Gerard Riemen, managing director of the Pensioenfederatie, a federation of 260 Dutch pension funds managing a total of one trillion euros.

Benefit cuts have become such a divisive issue that one party, 50PLUS, plans for parliamentary-election campaigns early next year that demand the end of “pension robbery.”

“Giving certainty has become expensive,” said Ms. Wortmann-Kool, ABP’s chairwoman.

That is tough to swallow for Mr. van Leeuwen, the Amsterdam language teacher. Sitting on a bench near one of the city’s historic canals, he fumed over how he had paid the ABP every month for decades for a pension he now believes will be less than he expected.

Japan is wrestling with the same question of generational inequality. Roughly one-quarter of its 127 million residents are now old enough to collect a pension. More than one-third will be by 2035.

The demographic shift means contributions from active workers aren’t sufficient to cover obligations to retirees. The government has tried to alleviate that pressure. It decided to gradually increase the minimum age to collect a pension to 65, to require greater contributions from workers and employers and to reduce payouts to retirees.

A typical Japanese couple who are both 65 would collect today a monthly pension of ¥218,000 ($2,048). If they live to their early 90s, those payouts, adjusted for inflation, would drop 12% to ¥192,000.

The Japanese government has turned to its $1.3 trillion Government Pension Investment Fund for cash injections six of the past seven years. That fund, the largest of its kind in the world, manages reserves for Japan’s public-pension system and seeks to earn returns that outpace inflation. The more it earns, the more it can shore up the government’s pension system.

In February, Japanese central bankers adopted negative interest rates for the first time on some excess reserves held at the central bank so commercial banks would boost lending. The pension-investment fund raised a political ruckus in August when it said it lost about ¥5.2 trillion ($49 billion) in the space of three months, the result of a foray into volatile global assets as it tried to escape low rates at home.

The fund’s target holdings of low-yielding Japanese bonds were cut to 35% of assets, from 60% two years ago, and it has added heaps of foreign and domestic stocks. It is now considering investing more in private equity.

The government-mandated target is a 1.7% return above wage growth. “We’d like to strive to accomplish that goal,” said Shinichiro Mori, a deputy director-general of the fund’s investment-strategy department.

The fund posted a loss of 3.8% for the year ended in March because of the yen’s surge and global economic uncertainty. It was its worst performance since the 2008 global financial crisis. Mr. Mori said performance “should be evaluated from a long-term perspective,” citing returns of ¥40 trillion ($376 billion) since 2001.

Mr. Kobayashi, the former Tokyo government worker, said the government’s effort to boost returns by making riskier investments was supposed to “increase benefits for everyone, even if only slightly. It didn’t turn out that way…And they are inflicting the loss on us.”

Mr. Kobayashi joined roughly 2,300 people who marched in downtown Tokyo in October to protest government plans to cut pension benefits further.

Japanese senior citizens protested cuts to pension benefits, then marched through downtown Tokyo in October. PHOTO: KOSAKU NARIOKA/THE WALL STREET JOURNAL
Japanese senior citizens protested cuts to pension benefits, then marched through downtown Tokyo in October. PHOTO: KOSAKU NARIOKA/THE WALL STREET JOURNAL

In the U.S., the country’s largest public-pension plan is struggling with the same bleak outlook. The California Public Employees’ Retirement System, which handles benefits for 1.8 million members, recently posted a 0.6% return for its 2016 fiscal year, its worst annual result since the financial crisis. Its investment consultant recently estimated that annual returns will be closer to 6% over the next decade, shy of its 7.5% annual target.

Calpers investment chief Ted Eliopoulos’s strategy for the era of lower returns is to reduce costs and the complexity in the fund’s $300 billion portfolio. He and the board decided to pull out of hedge funds, shop major chunks of Calpers’ real-estate and forestry portfolios and halve the number of external money managers by 2020.

“Calpers isn’t taking a passive approach to the anticipated lower return rates,” fund spokeswoman Megan White said. “We continue to reassess our strategies to improve performance.”

Yet the Sacramento-based plan still has just 68% of the money needed to meet future retirement obligations. That means cash-strapped cities and counties that make annual payments to Calpers could be forced to pay more.

That is a concern even for cities such as affluent Costa Mesa in Orange County, which has a strong tax base from rising home prices and a bustling, upscale shopping center.

The city has outsourced government services such as park maintenance, street sweeping and the jail, as a way to absorb higher payments to Calpers. Pension payments currently consume about $20 million of the $100 million annual budget, but are expected to rise to $40 million in five years.

The Downtown Recreation Center in the city of Costa Mesa, which has outsourced government services such as park maintenance to absorb higher payments to California’s public-pension plan. PHOTO: ANDREW CULLEN FOR THE WALL STREET JOURNAL
The Downtown Recreation Center in the city of Costa Mesa, which has outsourced government services such as park maintenance to absorb higher payments to California’s public-pension plan. PHOTO: ANDREW CULLEN FOR THE WALL STREET JOURNAL

The outsourcing and other moves eliminated one-quarter of the city’s workers. The cost of benefits for those remaining will surge to 81 cents of every salary dollar by 2023, from 37 cents in 2013, according to city officials.

The mayor, Mr. Mensinger, is hopeful for a state solution involving new taxes or a benefits overhaul, either from lawmakers in Sacramento or from a California ballot initiative for 2018 that would cap the amount cities pay toward pension benefits for new workers.

Weaker cities across California could face bankruptcy without help, said former San Jose Mayor Chuck Reed, who oversaw a pension overhaul there in 2012 and is backing the 2018 initiative that would shift onto workers any extra cost above the capped levels. “Something is broken,” he said. “The plans are all based on assumptions that have been overly optimistic.”

Costa Mesa resident James Nance, 52, worries the city’s pension burden will affect daily life. “We could use more police,” said the self-employed spa repairman. “I’d like to know the city is safe and well protected, but I know there have been tremendous cutbacks.”

Costa Mesa ended the latest fiscal year with an $11 million surplus, its largest ever. But that will soon disappear, Mr. Mensinger said, as pension costs swallow up $2 of every $5 spent by the city.

“We have this gigantic overhead cliff called pensions.”

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