CalPERS reveals its true colors

Steven Greenhut: When the California Public Employees’ Retirement System — the nation’s largest retirement system, albeit one plagued by scandal — was pushing for massive retroactive pension increases for California government employees in 1999, the system released a report that, as former Arnold Schwarzenegger pension adviser David Crane explained in this 2010 testimony before the California Senate, required investment returns that “implicitly required the Dow Jones to reach roughly 25,000 by 2009 and 28,000,000 by 2099.”

CalPERS, whose main goal is to defend the most absurdly generous pension plans, now insists that excess pension benefits are not the cause of bankruptcy in Stockton, San Bernardino and elsewhere. Officials there insist that the pension situation is just hype, just as union spokespeople such as Treasurer Bill Lockyer insist that those of us who criticize the growing list of $100,000 pension club members are merely showing our “pension envy.” Apparently, the rest of us should be good subjects and simply agree to hand over more tax money to the state officials who created this mess and silently accept the slashes in public services that are taking place so that government workers can retire at age 50 with pensions worth $2 million or more.

But now we really see what CalPERS is all about. After a Bermuda-based bond-insurance company named Assured Guaranty complained about Stockton’s plan to stiff bond holders rather than trim the outsized pensions enjoyed by the city’s current workers and retirees, CalPERS said, in essence, “tough luck.”

Wrote Assured Guaranty: “Chapter 9 was not intended to be used as a sword to prefer one class of similarly situated creditor over another. Among the small number of municipalities to file for bankruptcy (43 since 1981), none of the cases resulted in implementing cuts to principal owed bondholders.  Stockton’s attempt to transfer the cost of lucrative, above-market employee wages and benefits granted when tax revenues were flush to capital markets creditors by haircutting bond principal is unprecedented, a contortion of the bankruptcy process and will foreclose Stockton’s access to the capital markets for the foreseeable future.”

Here’s CalPERS’ response:” The obligations owed to the public workers of the City have priority over those of general unsecured creditors including bondholders. Unlike insurance companies, policemen, firefighters and other public employees are not in a position to evaluate credit risk of their employers. Assured Guaranty is in the business of evaluating these risks. CalPERS is committed to working within the legal system to reach resolution of these difficult issues.”

Here is my Bloomberg column from yesterday about this situation. CalPERS shouldn’t be so arrogant given that its rate of returns were barely over 1 percent last year and it continues to insist that a 7.5 percent rate of return is perfectly reasonable. Then again, whether CalPERS predicts a 29,000 Dow Jones or even 20 percent rates of return are irrelevant. Taxpayers are on the hook to make up for any missed predictions and foolish investments. And, CalPERS believes, bondholders can be stiffed when cities go bankrupt.

Aren’t there any adults in California state government to provide some supervision?

AUGUST 10, 2012

 


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Assured GuarantyBloombergCalPERSDavid Crane

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