CalPERS Funding Might Be Only 40 Percent Funded

March 22, 2012 - By admin

John Seiler:

As we’ve been warning here on CalWatchDog.com for more than two years now, CalPERS’ funding is way too low. I’ve written before how CalPERS might only be funded at the 55 percent level.

It turns out that even that is too optimistic. The new level might be just 40 percent, according to CalPensions.com:

“As CalPERS puts a new focus on risk, a funding level that drops to 40 percent is emerging as the red line.

“The worry is that if the funding level of the big pension fund drops too far, it may not be practical to raise annual employer payments enough to regain proper funding.

“The rough estimate (final figures are not in yet) is that CalPERS funding as of last June averaged 74 percent, up from 65 percent the previous year. A spokesman said the average level has never fallen below 55 percent.

“But CalPERS wants some cushion in case the economy slides back into a major recession, punching another big hole in investment earnings expected to provide about two-thirds of pension revenue.”

New Recession?

That’s another thing I’ve been warning about: a new recession. Recessions or depressions strike about every five to seven years. The last one struck in December 2007, almost five years ago.

Moreover, recessions seldom occur in election years (the 1980 and 1992 recessions were exceptions) because the politicians goose the economy to get re-elected. That’s happening this year.

As Wayne Lusvardi has reported on this site, you can’t have long-term growth when interest rates are close to zero, as now. That means people can’t save and invest in new business and jobs creation. Something has to break. And it will — probably next year.

The problem for CalPERS is that its portfolio needs to use recovery periods to make up for what was lost in the previous recession. But that hasn’t happened during the current economic recovery.

On June 30, 2007, CalPERS’ all-time peak valuation was $247.7 billion. According to its Web site, as of March 21, 2012 its valuation was $237.3 billion. So, it’s down 4 percent in nearly five years.

However much you massage the numbers, down is never up, not even 0.000001 percent up.

Here we are, probably at the end of an economic recovery period, and CalPERS still hasn’t recovered from its losses during the Great Recession.

CalPERS recently reduced its expected annual discount rate to 7.5 percent from 7.75 percent. Starting July 1, that’s a new $167 million yearly hit on California taxpayers. And we don’t get anything for it: No new roads, no schools built, no new teachers hired, no parks kept from being shuttered.

The money just goes to the generous pensions of former workers who don’t even work for us anymore, and might not even live in the state. Such as the 9,000 members of the “$100K Club,” who make $100,000 or more in their pensions per year.

Such as retiree Bruce Malkenhorst, who pulls in an incredible $509,664.60 a year for his pension.

And it’s all guaranteed by the California Constitution.

Unless we reinterpret the constitution.

Or change it.

Or ignore it.

March 22, 2012

 

 

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Comments(22)
  1. Tough Love says:

    CalPERS published funding ratio incorporates actuarially “smoothed” asset values, and discounts Plan liabilities at the 7.75% (soon to be reduced to 7.50%) investment assumption for assets returns. If the current “market” value of assets were used, together with discounting liabilities with the interest rate that the US Gov’t forces Private Sector Plan to use, CalPERS funding level would likely be 15-25 percentage point less than it’s published figures.

    There have been many studies (and heated discussion) of the appropriate interest rate to use for discounting Plan liabilities, but almost nobody believes using the high rate currently assumed for asset returns is appropriate. New GASB regulations for Gov’t sector Plan valuations reflect that view. And as to use of “smoothed” asset values, while their use in computing annual contribution levels has some merit, the published funding ratio is meant to be a snapshot picture of Plan’s health TODAY, and as such, using phony asset values in it’s calculation makes no sense. It is analogous to someone who bought $10,000 of stock that is now worth $7,000 saying that they haven’t “lost” anything because it hasn’t been sold yet.

  2. SkippingDog says:

    Even by your extraordinarily low standards of truth, this is a completely inaccurate and misleading headline. The CalPensions story you cite described a “what if” discussion predicated on another economic downturn of at least 20% from today’s values. If such a thing were to happen, it would be possible for CalPERS assets to fall to the 40% funded level.

    Do you really think another 20% drop in market values would affect only CalPERS? That would put us directly on track to exceed the losses of the Great Depression which, as you well know, created the environment for a vast expansion of government policy into private markets and private lives. Do you think the result would somehow be different this time?

    Be careful what you wish for.

  3. Tough Love says:

    Skippy,

    Under a proper valuation (see my earlier comment), CalPERS isn’t far from a 40% funding level NOW.

  4. SkippingDog says:

    According to you, TL, the Contracts Clause of the U.S. Constitution is nothing more than words and our economy is already in a “death spiral” from which we’ll never recover. I suppose your claim about CalPERS and its funding status is as valid as those.

  5. Tough Love says:

    Skippy, As Mary Pat Campbell (the professional, practicing actuary) told you, when “reality” and legality” are at loggerheads, reality wins every time.

  6. gooch mango says:

    Hey SkippingDog: The contracts clause of the constitution does NOT protect fraudulent and mis-represented contracts — those routinely get overturned in court. And since the legislature failed in their role as representatives of the taxpayers (their SOLE job in a contract negotiation with public servants), all these contracts you think are sacred are in fact doomed. It’s called “Breach of Agency… look it up.

    Did the legislature, in their role as agents of the general population during negotiations with public employee unions, give the taxpayers an accurate accounting of these pension pay outs? No. Did they inform the people of the potential costs? No. Did they actively seek to hide the costs? Yes. Are they STILL hiding them. Again, yes.

    Kiss these contracts goodbye. Nobody was representing the taxpayers at those negotiation tables; since the taxpayers were not represented, they cannot be held to these contracts.

  7. SkippingDog says:

    Okay, gooch. As soon as you have any evidence whatsoever to support your claim of contract fraud, I’m sure you’ll share it with us here. In the meantime, I think you’ll find a number of courts in California that have been asked to review such claims and found there to be no merit.

  8. John Smith says:

    I don’t understand why people keep referring to the constitutional protection of contracts suggesting that pensions can’t be changed. All financial contracts are pending the counter-parties’ ability to pay. Look what happened to people that borrowed too much and then defaulted on their mortgages. The banks all had contracts that these loans were going to be paid back, but guess what, nobody counted those contracts at face value because of some constitutional clause that contracts can’t be broken because ultimately those contracts were pending on the borrower’s ability to pay. If the borrower can’t pay, contract is worthless. Another way of thinking about this is imagine that you write a contract that some homeless bum owes you $1m/yr for life, and give him some money to sign it and he does. You now have full protection of the constitution that this contract can’t be broken, but nobody would count on this as a retirement plan because we know that the counter party will never pay. Same thing will happen in california, counterparty failure to pay (i.e. taxayers revolt) will not require voiding contracts.

  9. Tough Love says:

    John, Skippy thinks that the more he repeats that (Constitutional protection quote) the stronger his protection will be.

    …. when “reality” and “legality” are at loggerheads, reality wins every time.

  10. Tough Love says:

    Skippy,

    Perhaps those supporting MATERIAL pension reform (such as myself), know what they are talking about. Below, from an article about from Gina Raimondo, the RI State Treasured (a Democrat !):

    Several states have increased the retirement age or created a new tier of benefits for future workers, but reforms that only affect not-yet-hired employees don’t save much money. A lot of “people say we’ve done pension reform when all they’ve done is tweaked something,” Ms. Raimondo points out. “This problem will not go away, and I don’t know what people are thinking. By the nature of the problem, it gets bigger and harder the longer you wait.

  11. SkippingDog says:

    I know Tough Love and John have a hard time with the concept, but contracts in which the government is a party, at whatever level, are substantially stronger and more enduring than private contracts between individuals. That’s not because the contracts themselves have any greater legal authority, but reflects the fact that governments are an indissoluble and ongoing enterprise. It also reflects the nature of our laws which recognize that contracts between a government and its employees don’t magically strip those employees of their other constitutional rights, including the right to be free from the unlawful seizure of their property (in this case their pension benefits) under the 5th and 14th Amendments.

    Finally, your arguments that the government can’t pay their obligations are foolishness on stilts. Governments retain the power to levy taxes to raise revenues, no matter which of the state constitutions you choose to apply. They are also responsible for the ongoing obligations of their respective states and the federal government in debt obligations.

    Taxpayers, revolting or not, have never had the option of deciding which existing debts will be paid. Our debts to bond holders, pensioners, and holders of government contracts are all wrapped up in one big debt obligation, as are the obligations to those who have earned benefits under Social Security or other government sponsored safety net programs.

    The last time anyone tried to have the kind of revolt you’re suggesting, the U.S. Army was sent in to quell the rebellion and reestablish order. Remember the Civil War?

    A case more on point to your angst about taxes was handled by George Washington during his first term of office. It is known in history as The Whiskey Rebellion or Shays Rebellion, and it involved a group of people who initiated their own “taxpayers revolt” and refused to pay the taxes required on their distilled products. President Washington activated the militias in several states and sent them into the Green Mountains to forcibly impose the authority of the government over such activities.

    Don’t think it couldn’t happen again today.

  12. Claire Voyance says:

    Bend over taxpayers, here comes the public parasites demanding more money for their obscene pensions.

  13. Tough Love says:

    Skippy, Your 1-st paragraph is a repeat of the same…. and reflects your growing fear of REAL reform, reform that not only substantially lower future accruals of actives, but (to be fair to BOTH Taxpayers and those actives), lowers already promised pensions to those already retired. You are not entitled to the promised benefits, not solely because they are excessive, but because they are excessive AND were the result of collusion between your Unions and those that approved these pensions.

    Re your 2-nd paragraph: Increased taxation to fund your excessive benefits isn’t going to happen (especially in CA). The taxpayers have wised up and the politicians know that not only will taxes never be sufficient, but such increases are counterproductive, only chasing away those with the ability to pay.

    Re paragraph #s3, 4, and 5: The Taxpayers won’t revolt in any real sense, but their ardent protest and demands will make the politicians switch sides … with you guys on the losing end.

  14. SkippingDog says:

    Keep telling yourself that if it makes you feel better, TL. The markets are getting better, unemployment is slowly going down, and the short attention span of our fellow citizens has already begun turning to things like what Obama will do during his second term in office, when our Marines and soldiers are coming home from Afghanistan, and what TMZ is doing on TV this week.

    In California, we’re waiting for the Democratic Party to take a two-thirds majority in both houses of our legislature next November. Then we can finally make some real progress on the problems our Republican minority has been dragging its feet on for so long.

    Across the U.S., hispanics are a growing political force that the Republicans have done everything in their collective power to offend as often as possible. Along with other shifting demographics, such as the natural passing of the Greatest Generation and, with it, the reactionary Republican voter base, you’ll see some dying spasms from the right wing. One clear example is the recent report that the Koch brothers are going to buy the Reason Foundation, thereby turning a fringe Libertarian think tank into a mainstream Republican tool for their own power.

    Ardent protest and demands to your politicians will only go so far, and the commitments already made will prove far too disruptive and cumbersome to unwind – kind of like Obamacare.

    It’ll be fun to watch all of the teeth gnashing and angst from people like yourself and the libertarian tools at the OC Register, Reason, Cato, and the various “Watchdog” sites funded by the same old John Bircher interests.

  15. SeeSaw says:

    Yea, Skipper! The only one on these boards who possesses knowledge and humanity, both.

  16. Tough Love says:

    Skippy, 2 of Mary Pat’s (you know the professional actuary with credential up the kazoo) favorites come to mind:

    “reality” always trumps “legality”, and

    “keep plucking that chicken”

  17. n rothschild says:

    All you government parasites – listen up! The dollar is going to vaporize and that means calpers is going to vaporize. You’ll get your $100K/year pension but it won’t buy a cup of coffee.

    You’d better learn to work or you’ll be eating catfood

  18. SeeSaw says:

    Oh, aren’t you so nice, nrothschild! Such a classy commenter! I don’t get a $100,000 pension and neither do most government retirees. You better watch out–you might vaporize in all that hot air your are spouting.

  19. Tough Love says:

    Seesaw, The proper question is not how much you get as a pension (in absolute dollars), but whether your pension (as a % of your pay) is greater than that of a similarly situated Private sector worker.

    When that question is answered affirmatively, then the pension is indeed excessive. And it would be answered affirmatively for virtually ALL Public Sector workers everywhere.

  20. SeeSaw says:

    Sorry TL, that is your hue and cry–doesn’t make you right. I’m not for mixing apples and oranges. The private sector needs to raise its workers up–not bring me or anyone else down. When 32% of a pension goes for medical premiums, it doesn’t leave much, does it. Excessive, its not–you nor anyone else, has any right to judge me or the level of my income.

  21. Tough Love says:

    Quoting …”The private sector needs to raise its workers up–not bring me or anyone else down. ”

    Ah, the classic … raise up the Private Sector, don’t bring us down….

    And where would the money come from …. the “tooth fairy” ?

    The ONLY reason Public Sector pensions are so excessively and unjustifiably high, is because you are stealing the money (via forced taxes) from the Taxpayers, 85% of whom are not Public Sector workers riding this gravy train.

  22. mike mortenson RN RET. says:

    FIRST FOR MOST WE GET 3 TOO 5K A MONTH AND I WOULD AGREE ON A MAXIMUM OF 100K FOR TOP MANAGERS WHO EARN TWICE THAT BUT REMEMBER…WE PAY A SALARY DEDUCTION EVERY YEAR AND THE STATE ADDSTO IT. THIS IS NOT FREE. IF YOU WAN TO CANCEL CONTRIVUTIONS FOR NEW HIRES FINE. IF YOU DO THEN THEY GO INTO SOCIAL SECURITY WHICH IS NOT BETTER. ALSO IF THERE WERE NOT ANY BETTER BENEFITS IN GOVERNMENT GOOD LUCK GETTING OVER WORKED NURSES AND DOCTORS TO DENY PRIVATE EMPLOYMENT TOWORK IN YOUR PRISONS, PSYCH HOSPITALS, GOVERNMENT HOSPITALS AND FOR EMERGENCY SERVICES. IN PRIVATE WORK I WAS FED GREAT FOOD AND GOT A SIMILAR BENEFIT IN POSH HOSPITALS NOT DRAB GOVERNMENT ONES WHERE THERE IS NOFREE LUNCH. SOME PRIVATE CENTERS OFFER FREE SHOWERS, LOUNGES WITH CABLE, DRINKS AND SNACKS. IN SHORT REMEMBER WE DID ALL TAXPAYERS A SERVICE,MY SELF IN A OCCUPATION WITH MORE INJURIES THAN police or FIRE FIGHTERS.MENTAL HEALTH AND EVEN CRIMINALLY INSANE MURDERS. JEALOUS PEOPLE ARE THOSE THAT DID NOT SEEK A DECENT PLAN AND SO HAVE NONE. MY SOCIAL SECURITY PAYS LESS THAN CAL PERS BUT DOES NOT COME CLOSE TO MILITARY OR MOUNT SINAIS HOSPITAL PRIVATE RETIREMENT PLANS OR BENEFITS.CORPORATIONS AND GOVERNMENTS ARE GOOD AT TAKING YOUR MONEY BUT NOW ITS TIME TO PAY AND THEY CRY..CALPERS IS ONCE AGAIN OVER 240 BILLION BY THE WAY.ITS CLEAR THE GOVERNMENT WANTS AND HAS TRIED BEFORE TO GET THAT MONEY INTO THE TREASURY AND THE COURTS BLOCKED THEM THANK GOD BECAUSE ITS NOT THEIRS ANYMORE THAN MY Past paychecks. want those back too?. wow how crooked …YOU CAN PRINT AND GIVE TRILLIONS TO BANKS BUT WANT TO DISCREDIT REAL PERFORMING PENSIONS AND ATTACK RETIREES BENEFITS WHILE YOU KILL OUR CHILDREN AND DEMONIZE OUR SURVIVAL?..BECAUSE YOU HATE THE RICH ONES THAT ARE ALSO LESS THAN 2PERCENTOF OUR SYSTEM?..SCREW THE POOR AND MIDDLE CLASSWORKINGS TO SERVE YOUR BLOOD LUST FOR THE RICH? REDUCE MAXIMUMS AND INCREASE RETIREMENT AGE BUT STOP PICKING ON THE PEOPLE WHO HELPED EVERYONE IN YOUR LIFE AND THERES! WAKE UP!

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