Calpers Dreaming of Dow 28,000,000?

Via Pension Pulse.

David
Crane of the WSJ reports, Dow
28,000,000: The Unbelievable Expectations of California's Pension
System:

In 1999 then California Governor
Gray Davis signed into law a bill that represented the largest issuance
of non-voter-approved debt in the state's history. The bill SB 400
granted billions of dollars in retroactive pension boosts to state
employees, allowing retirements as young as age 50 with lifetime
pensions of up to 90% of final year salaries. The California Public
Employees' Retirement System sold the pension boost to the state
legislature by promising that "no increase over current employer
contributions is needed for these benefit improvements" and that
Calpers would "remain fully funded." They also claimed that enhanced
pensions would not cost taxpayers "a dime" because investment bets
would cover the expense.

What Calpers
failed to disclose, however, was that (1) the state budget was on the
hook for shortfalls should actual investment returns fall short of
assumed investment returns, (2) those assumed investment returns
implicitly projected the Dow Jones would reach roughly 25,000 by 2009
and 28,000,000 by 2099, unrealistic to say the least (3) shortfalls
could turn out to be hundreds of billions of dollars, (4) Calpers's own
employees would benefit from the pension increases and (5) members of
Calpers's board had received contributions from the public employee
unions who would benefit from the legislation. Had such a flagrant case
of non-disclosure occurred in the private sector, even a sleepy SEC and
US Attorney would have noticed.

Eleven years later, things
haven't turned out as Calpers promised. While state employees have been
big winners from the bet, the state budget has been, and will continue
to be, a huge loser. Far from being "fully funded" as promised,
Calpers has already required $15 billion more from the state budget
than projected in 1999 and $3.5 billion is budgeted for this year, a
figure that is more than five times the expense projected by the state
legislature in its SB 400 analysis. Pensions are crowding out important
programs like higher education, parks and health care, and the state
will continue to whack away at those programs because the legislature
refuses Governor Schwarzenegger's request to repeal SB 400 for new
employees.

Of course, all of this
might have been avoided had Calpers disclosed the risks and conflicts
back in 1999. Indeed, legislators might have not passed the lavish
pension pay-out had Calpers simply provided counter commentary from
Warren Buffett and others who were saying its wagers were losing
propositions.

The state's pension funds are still trying to dupe
taxpayers. In response to a recent Stanford University study that
concluded California's pension funds are understating liabilities by
$400 billion, California's pension funds set up "spin" websites and
attacked the study as "shoddy" and "faulty."

Recently, a Northwestern University professor projected that
California's pensions will run out of cash in 2026, threatening even
greater havoc to the state's budget, yet our pension funds have adopted
a "don't worry, all is well" approach and refuse to provide the
information necessary for the taxpayers– i.e., the people actually on
the hook for these bets -- to make an independent analysis.

As
other states consider pension reforms, California's current quagmire
should serve as a reminder of the need to incorporate disclosure
requirements.

Pension shortfalls are already costing California's taxpayers. Cathy
Bussewitz of the Associated press reports, Calif
pension fund asks state for additional $600M:

Facing
massive investment losses, the board of California's giant pension
fund voted Tuesday to make the state increase its contributions to
employee retirement benefits by $600 million in the coming fiscal year.

The
increase comes as California grapples with a $19 billion budget
deficit and a threat by Gov. Arnold Schwarzenegger to eliminate its
welfare program.

The contribution increase would be for one year
starting in July, but the board is likely to require similar increases
in future years. Local school districts, already facing their own
budget struggles, also will see their pension contribution rates grow.

The
development is driven largely by huge investment losses by the
California Public Employees Retirement System, but also because people
are living longer and retiring earlier.

CalPERS, the nation's
largest public pension fund, lost $55.2 billion, or a quarter of its
value, during the 2008-09 fiscal year.

"The biggest reason
why we need increases is the investment losses," said Alan Milligan,
interim chief actuary for CalPERS. "Quite frankly, there's more to
come."

CalPERS sets a state contribution rate every year,
which the state is required to pay. Milligan said the investment
losses will continue to affect the state contribution rate in coming
years because of the "smoothing methods" the board adopted to spread
the losses over a longer period.

The
governor says the pension system is unsustainable and drains money from
other state programs. A Republican lawmaker has introduced legislation
to reform the system, in part by reducing benefits to newly hired
state workers.

CalPERS provides retirement and health benefits to
more than 1.6 million public employees, retirees and families. The
fund's value was $205 billion as of Friday.

California
is on a collision course and there are reasons to be concerned as some
feel the pension liabilities at these giant state pension funds are
grossly understated. Rosy investment projections and reassuring talk of a
"well diversified portfolio" only serve to mask deep structural
problems that will likely get worse over the next decade.

It's
time for Governor Schwarzenegger to "terminate" this nonsense. Cut these
large pension funds in half, introduce better governance and
compensation based on risk-adjusted returns. Pay senior managers who
perform and fire those who underperform. These pension giants have grown
out of control and left unchecked, they will sink California's budget
into oblivion.

Comments

[yipcarl]

They should probably buy some gold coins from you eh Racoon?  LOL.  What's up with your precious end all be all metal today?

Oh wait it's a manipulated sham like everything else but you didn't get the memo...sorry