This page has been archived and commenting is disabled.
Moody's Cuts CalPERS', CalSTRS' Rating
Submitted by Leo Kolivakis, publisher of Pension Pulse.
Craig Karmin of the WSJ reports that Moody's Cuts Calpers' Rating (hat tip Tyler):
Calpers may be paying a price for its decision to help financially strapped local California governments.
Moody's
Investors Service slashed the triple-A rating of Calpers, formally
known as the California Public Employees' Retirement System, by three
notches to Aa3.
The downgrade, made Thursday, in part reflected
Calpers' recent spike in unfunded liabilities, following the fund's
negative 24% return for the year ended in June. Calpers, the nation's
largest public fund with about $200 billion in assets, last month
delayed its efforts to offset those liabilities by agreeing to defer an
increase in local-government contributions to the fund from 2011 until
2012.
Because Calpers doesn't have
outstanding bonds, the downgrade's impact would be felt through Calpers
credit enhancement program. The pension fund used its triple-A rating
to guarantee the debt of various municipalities from California to New
York City and Chicago in exchange for a fee.
Calpers'
lower credit rating means it may have to reduce its fee. It may even
lose some business if municipalities seek out a guarantor with a
triple-A rating, industry experts said.
"We are confident this
downgrade won't impact our ability to run our credit-enhancement
program," Calpers spokesman Brad Pacheco said of the downgrade. Calpers
has received $20 million in income from the program since its inception
in 2003, he said.
Moody's also cut
the credit rating of the California State Teachers' Retirement System
to Aa3 from Triple-A. Calstrs also has a credit-enhancement program.
Moody's said no other public pension fund has a long-term credit rating
related to these programs. Standard & Poor's rates the short-term
debt of Calpers and Calstrs.
Moody's said the credit-enhancement
programs played a small role in the ratings downgrade. If a
municipality in the program is unable to roll over its debt, Calpers is
obligated to support the debt. A Moody's official said that this had
occurred on more than one occasion for both Calpers and Calstrs in the
past year.
The downgrade underscores the tough choices Calpers
faces. Local governments pay a percentage of their payrolls to Calpers,
based on the amount of benefits their employees receive.
Calpers
is trying to reduce its unfunded liabilities, or the difference between
assets and obligations, which were $35 billion before the 24%
investment loss last year. Yet many California municipalities are
struggling with their own budget pressures and didn't welcome higher
contributions.
Separately, Calpers is weighing rate increases
for state employers, which the board will discuss this week. Gov.
Arnold Schwarzenegger would like the state to pay a large increase in
2010 to avoid paying even more in the future.
Moody's said the
pension fund downgrades were also influenced by the recent
deterioration in California's financial situation, which faces a $21
billion budget shortfall through June 2011. Moody's cut the state's
credit rating by three notches this year to A2 from Aa2.
While
the rating cuts could hurt the large California pension funds, the
rally in equities has helped ease some of the pressure. Mark Carvey of
the San Francisco Business Times reports that CalPERS says pension fund is up $40 billion since March low:
The
California Public Employees’ Retirement System said Monday that it has
earned $40 billion since the Wall Street lows of last March.
CalPERS assets stood at nearly $198 billion at the end of the third quarter, according to a report delivered by Wilshire Associates
to the CalPERS board Monday. Today, assets stand at more than $200
billion, marking a $40 billion gain over CalPERS low of $160 billion in
March.
“We are seeing some strong signs of economic growth that
are having a positive impact on the value of our portfolio,” said
Joseph Dear, chief investment officer for CalPERS. “While we are still
cautiously optimistic, we are seeing some light at the end of the
tunnel.”
CalPERS growth was aided by
a number of factors including the fund’s exposure to U.S. and
international equity and corporate governance investment funds that
seek to turn around ailing public companies.
For the third
quarter, CalPERS U.S. equity investments returned 16.7 percent, while
its international equity investments earned 20.7 percent. Investments
in corporate governance funds saw a 16.6 percent return for the quarter
and fixed income assets drew nearly 9 percent.
Investment
declines in real estate and private equity continue to weigh on
CalPERS’ performance. The fund’s real estate assets declined by more
than 30 percent in the quarter and 49 percent for the one-year period
ended June 30, 2009, as the economic downturn took its toll on all real
estate assets and investors. CalPERS real estate and private equity
returns reported lag one quarter.
CalPERS
Alternative Investment Management program –- or private equity
investments -– reported a decline of more than 24 percent for the
one-year period ended June 30, but showed a turnaround in performance
for the quarter ended June 30 earning a 7.4 percent return.
What
a reversal of fortunes! Only a few years ago, CalPERS and the rest of
the pension fund community were all smitten about alternative
investments. "More private equity, more real estate!" was the mantra of
the day, and now, it's good old liquid public markets that are leading
the charge. And I have a feeling this will be the case for a while.
So,
will the improvement in CalPERS' overall performance mean that its
credit rating will be adjusted back anytime soon? I wouldn't count on
it. Those private market assets are a noose around their neck, and they
better start thinking hard about protecting the gains and minimizing
downside risks as we head into 2010 or else their good fortune will not
last.
»
- advertisements -
**************************************BEHOLD***********************************
The naked Emperor spectacle of failed Keynesian economics!
Got to wonder whether CalPers marks its assets to myth. If so, this pension behemoth is just one of the zombies.
These credit enhancement programs with municipalities are an interesting AIG look-alike insurance program too.
"The pension fund used its triple-A rating to guarantee the debt of various municipalities from California to New York City and Chicago in exchange for a fee."
Kinda like AIG?
tension funds
Pension funds are nothing more than sophisticated Ponzi schemes.
The circumstances that warrant a pension fund getting a AAA rating do not exist.
Its a God Damn Pension Fund! Its not supposed to have any risk at all!!
Losing more than $50 billion in a year is bad enough, but being in a position where they're inching towards insolvency is a disaster.
Millions of people relied on these financial hot shots to make sure their contributions would be safely managed to see them through their old age and the money has been gambled away.
And of course, no chance at all that the geniuses who gambled the money away will have to return their bonuses. The only people taking a hit will be the ones who were relying on their contributions being there in their old age
I was waiting for the pissed off Cali's...there should be a lot of red faces today.
I can see a clearer picture now of how pension funds work. CALPS buys a share for $5.- sells it to CPP for $6.- they sell it to the NY Pension for $7.- real value has been added and everyone reports great results. Then the next week NY sells the share to CALPERs who then sells it to CPP who flogs it to NY - I think I've seen this before. Everyone is up billions and bounus monies flow.. How cool is that.