Pension Benefits In Tiny California Town To Be Slashed As "Ponzi Scheme" Is Exposed

Tyler Durden's picture

For the tiny little town of Loyalton, California, with a population of only 700, a failure of city council members to understand the difference between the calculation a regular everyday pension liability and a "termination liability" has left 4 residents at risk of losing their pensions from Calpers.  According to the New York Times, the town of Loyalton decided to drop out of Calpers back in 2012 in order to save some money but what they got instead was a $1.6mm bill which was more than their annual budget. 

For those who aren't familiar with pension accounting, we can shed some light on the issue faced by Loyalton.  There are two different ways to calculate the present value of pension liabilities.  One methodology applies to "solvent", fully-functioning pension funds (we call this the "Ponzi Methodology") and the other applies to pensions that are being terminated (we call this one "Reality")

Under the "Ponzi Methodology," pension funds, like Calpers, discount their future liabilities at 7.5% in order to keep the present value of their liabilities artificially low.  That way, pension funds can maintain the illusion that they're solvent and the Ponzi scheme can continue on so long as there are enough assets to cover annual benefit payments. 

Now, the managers of the pension funds aren't actually dumb enough to believe that the "Ponzi Methodology" accurately reflects the true present value of future liabilities because they know that, particularly in light of current Central Banking policies around the world, their actual long-term returns will be much lower than 7.5%.  Therefore, they have a completely separate, special calculation that applies when towns, like Loyalton, want to exit their plan.  This "termination liability", or what we refer to as "Reality", uses a discount rate closer to or even below risk-free rates which means the present value of the future liabilities is much higher. 

As a quick example, lets just assume that Loyalton's 4 pensioners draw $225,000 per year, in aggregate pension benefits, and enjoy a 2% annual inflation adjustment.  Assuming a 7.5% discount rate, the present value of that liability stream is about $2.9mm.  However, if the discount rate drops to 2%, the present value of those liabilities surges to $4.5mm...hence the $1.6mm bill sent to the Loyalton City Council.


Of course the 4 residents of Loyalton currently drawing a pension were outraged by the discovery that their monthly benefits may be slashed.

“I worked all those years, and they did this to me,” said Patsy Jardin, 71, who kept the town’s books for 29 years, then retired in 2004 on an annual pension of about $48,000. Now, because of Loyalton’s troubles, Calpers could cut it to about $19,000.


In Loyalton, Mr. Cussins, the retiree and City Council member, said he was so frustrated about being barred from the council’s pension discussions that he and another former town worker drove to Sacramento to attend Calpers’s last board meeting.


The trustees were cordial, he said, but they held out little hope.


“We had a bunch of them come and shake our hands,” he said. “I said, ‘We need some guidance.’ They told us the city could apply to get back into Calpers next spring. But they made it very clear that they will not allow the city to get back into Calpers until that $1.6 million is paid.”

As Calpers’s chief of public affairs points out "the State of California is not responsible for a public agency’s unfunded liabilities.”  And since Calpers knows that the "Ponzi Methodology" is not an accurate reflection of their true liabilities, towns like Loyalton must pay the difference between the "Ponzi Methodology" and "Reality" when they choose to withdraw.

Public pensions are supposed to be bulletproof, because cities — unlike companies — seldom go bankrupt, and states never do. Of all the states, experts say, California has the most protective pension laws and legal precedents. Once public workers join Calpers, state courts have ruled, their employers must fund their pensions for the rest of their careers, even if the cost was severely underestimated at the outset — something that has happened in California and elsewhere.


Across the country, many benefits were granted at the height of the 1990s bull market on the faulty assumption that investments would keep climbing and cover most of the cost. And that flawed premise is now hitting home in places like Loyalton.


"The State of California is not responsible for a public agency’s unfunded liabilities,” said Wayne Davis, Calpers’s chief of public affairs. Nor is Calpers willing to play Robin Hood, taking a little more from wealthy communities like Palo Alto or Malibu to help luckless Loyalton. And if it gave a break to one, other struggling communities would surely ask for the same thing, setting up a domino effect.


Mr. Davis, the Calpers spokesman, said that since 2011, Calpers had been giving its member municipalities a “hypothetical termination liability” in their annual actuarial reports, so there was little excuse for not knowing that a payment would be due upon exit.  But the former Mayor of Loyalton said the paperwork was simply too confusing.

Ms. Whitley disagreed. “It’s just too confusing,” she said. “I looked at what’s been happening with all the other entities, and I saw that eventually it’s got to collapse. It’s almost like a Ponzi scheme.”

While Whitley was right that her town was trapped in a "Ponzi Scheme," she failed to recognize the critical fact that only willing participants get to participate in the Ponzi...for everyone else, we have to continue living in "Reality."

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LetThemEatRand's picture

I keep trying to convince myself to save more money instead of drinking, but I also keep telling myself that if I drink more it won't matter.  So far, it's working out.  If I could just find a few taxpayers to balance out the risk....

philipat's picture

So why the fuck did they pull out of Calpersi n the first place? They could just have continued playing the Ponzi and received the full amount. Or is that just the usual bureaucratic incompetence? Of course, sooner or later, probably sooner especially when the next market crash is upon us, all Pensions in the US will be in the same state as this..

HedgeJunkie's picture

I once tried pulling out.

Nine months later...


OceanX's picture

I'm sure iti is an isolated icident and won't happen to anyone, anywhere else,

Déjà view's picture
 Account Is Not Available. Contact Your Web Host Provider for Details.


Why was a speck on the map of 700 incorporated in the first place? 4 nice cushy jobs/pensions? Speed trap to pay for overhead? State & 'Feral' grants?

Lorca's Novena's picture



Reminds me of the Town of Mammoth Lakes..... greedy imbeciles.

robertsgt40's picture

Welcome to my world honey. I get  $17k SS with cost of living increase of $16 a month increase over the last 2yrs. Oh my, where to invest it all. Most people don't make 48k a year busting their ass doing real work. 

Mareka's picture

Small towns everywhere are stocked with local politicians who are bad at math.

In my town about half of the county commissioners never went to college.

That is the half that routinely votes to borrow more money to build stuff.

Dipshit county finance officer stood sheepishly in front of the commission to report that he had made a math error in calculating the $64 million school budget and was going to be $10 million short.

Luckily for him they didn’t comprehend what he was talking about so moved onto the next topic.

Arrowflinger's picture

Yeah, they 'trust' that the bond salesman is recommending the best deal in his 'fiduciary' capacity as financial 'advisor'

Fisherman Blue's picture

"College" is not and never has been an indication of the ability to think clearly.

sodbuster's picture

Actually, I consider it to quite often be a handicap.

in4mayshun's picture

Agreed. Some of the most ignorant people I know are college educated. The worst part is that they think they're opinions are faultless.

" it ain't what you don't know that will hurt you; it's what you know for certain that just ain't so"

Mark Twain

TsyFox's picture

The dipshits on the city council pulled out of Calpers based on the short sighted goal of budget cutting. Obviously, they were left unaware of what their withdrawal action would precipitate. Read the post a few up the thread for more detail.

Offthebeach's picture

Come to Massachusetts. It is called "disability". The drinking, that is. You don't need to of even worked, You can be a new Bush/Clinton muslim. Plus because of your "disability" you'll get free Obamacare, dental, housing, Cable, phone, tuition, heating, plus the kiss in the mail every month.

sharonsj's picture

Alcoholism does not qualify for disability benefits.  The rest of your list: nothing is free, not even the phone.  Recipients have to use their monthly payments to cover the costs but can get extra help for heating and health care.  The extra help, particularly for heating, is minimal.  As usual, idiots like you spout off while knowing nothing.

CNONC's picture

We went through that in the late 80's.  Social workers began dragging drunks and drug addicts out of the gutters and signing them up for disability benefits.  After a number overdosed or drank themselves to death after receiving large checks for back disability benefits, the public noticed.  The fact that a large number of these "disabled" had chosen their local liquor store as their financial guardian, meaning the check was sent to the liquor store and then disbursed to the recipient, led to a demand for reform.  The social workers found a loop hole.  Depression and anxiety disorders are qualifying disabilities.  So the diagnoses were changed to Alcoholism, secondary to anxiety disorder.  The public is satisfied, as it is widely reported that drunks and drug addicts are no longer eligible, but behind the scednes, the party goes on.

And the phones are free.  Depending on where you live, each program you participate in may provide a different phone.  So, if you have food stamps, are on TANF, and are on medicaid, in Georgia, you will recieve three phones.  You will pay nothing for them.  The providers hope you will purchase extra minutes at elevated prices, but go to your local trailer park or ghetto and you will find a brisk trade phones with minutes on them.  You will also find a highly efficient economy in acquiring pain meds and Xanax with medicaid benefits and converting those into cash.  Lets not forget the well developed trade in children's social security numbers and EITC fraud.  Did you ever notice the sudden proliferation of tax preparers in the ghettoes?  Let me explain.  Let's say that a guy like me has a 1099 for 200,000 dollars.  Let's then say a bunch of guys like you have a bunch of kids but no jobs.  A tax preparer sets me up as an employer, distributes 1099s from me to you.  You get just enough to maximize your EITC, while my 1099 gets whittled down to zero.  Whoopee!  Everybody's happy.  And let's not forget the fake kids.  No room to explain, but do you ever wonder why in the underclass so many people refer to others as "cousins" or "play brothers?" 


CNONC's picture

And don't get me started on Section 8. All these programs are designed to look responsible to the middle class, but can be gamed to the advantage of the participants, including recipients, vendors, and public employees.

A Nanny Moose's picture

Maybe invest in quality drink? Micro distillers seem to be all the rave.

toady's picture

I'd rather have a bottle in front of me than a frontal lobotomy. 

atomp's picture

At this point, I'll take the lobotomy.

Boris Alatovkrap's picture

Aghast, this must mean that pension promised by political class to be paid for by working class for retired class is not fullfilled!? But, but, but… you are sucker, Amerikansky! Maybe next time purchase calculation device before accept political promise and check math first.

LetThemEatRand's picture

This is where I fucked up.  My TI-55 did not have enough zeros for the liability column.

adanata's picture


Yeah... they're still lying. The author barely mentioned the real cause of pension wipe out: ZIRP

This is quite deliberate. Ditto Social Security. It's the plan man.

sinbad2's picture

Exactly, ZIRP is devastating all pension funds.

People who can get their money out should do it, because their payout is shrinking by the day.

pparalegal's picture

My old neighbor retired from the aircraft industry a long while ago and was doing OK on that retirement plan. The last few years of one dot something returns have destroyed his future gains. So now with federal mandatory taxed 401K disbursements his life savings looks negative. So he & the old lady pulled $20,000 and bought solar panels on the roof to zero out the utility bill. By their calculations it is a better return than they were getting and peace of mind they can cover the ever increasing California utility rates.  


When then Gov Grey Davis signed CalPers 2% or 3% at 50 for the public service retirees in 2000 (or 01) based on highest last 2 or 3 years pay the Ponzi was set, and a bunch retired out near full pay over the next 5 years. Those chickens are now starting to come home to roost right on the taxpayer's ZIRP pocketbook. This little town is a canary in the really big coal mine that by law will fall on the taxpayer, for a while - until it can't.  

When states like MI, IL & CA go the explosion between old people, taxpayers & the young workers paying into much worse looking retirement plans is going to get very ugly. Now add Social Security actually (reality not Ponzi) turning negative in the next 24 months....I give it about 4 or 5 years. Time to party like it's 1999.

Lanka's picture

The solution is obvious: exterminate the old folks.

Arrowflinger's picture

Thus has always been the Boomer destiny. Anyone could look at the demographics and know it. Coupled with the Ponzi finance system we have, it was a certainty.

The Holocaust By All Against All is going to immediately wipe out Boomers.

Take each day before it breaks out as a blessing.

Arrowflinger's picture

Oops.  Stuff happens when you post on ZH from a deer stand overlooking a bearing white oak.

Food Loaf Junkie's picture

Good luck, here in the U.P. we have no deer left, between the natives five deer limit starting in July and the coyotes we have been wiped out.  Now I just try to keep the coyote numbers down.  It is hard to find a rabbit anymore.

Arrowflinger's picture

Thanks. A doe passed by at 25 yards. The limit here is 12.  

I am channeling Karl Denninger's stated purpose to enjoy life as much as possible in such time as is left because going beyond the call got my ass kicked. The revelations near and far are vindication.

My season is going well, so far.

Chet Ricco's picture

Ha!! I"m having venison for breakfast. When it comes to cooking venison my wife is an artist. Cut off all tendon, fat, silver skin, slice real thin, roll in flour, fry in home rendered hog lard, season with garlic and salt. I lift my first piece to you arrowflinger in tribute.

WillyGroper's picture

no doubt that's the plan.

sorry to say, you'll be joining that ride into the happy hunting ground.

OceanX's picture

Back in the old days good companies looked out for their employees.  My Dad had a great job at Chrysler, he worked there for 32 years! He collected a pension for 34 years!  Admittedly, inflation eroded it significantly over the years but his check came every month, Actually, still does, my Mom gets a survivors benefit!

I plan to work until I die.  The trick for me is to find activities that I enjoy in my jobs.  My Dad was happiest when he had something to do.  Idle retirement does not seem to add much quality to life.  Much better for me to be busy and enjoy what I do...

SilverRhino's picture

I can just see this guy trying to foreclose on the town's assets.    Should make an interesting precedent.  

Offthebeach's picture

If loco/stasi/fed gov mafi didn't right now have zero interest, the Ponzi would of exploded now. How do you think they are "paying" their day to day bills? The "recover" is so good, fedgov borrowed 1,5 Trillion US Insane Clown bucks this year.

Pensions are way way way out there. Three years, maybe more. Maybe an election cycle, so for all politically practical purposes

dicksburnt's picture

Your lucky the TI-99 in 1984 didn't even come with a liability column.   Raygunomics!

Belrev's picture

New York Times latest story
with women accusing Trump of sexual assault -
"About 45 minutes after takeoff, she recalled, Mr. Trump lifted the armrest and began to touch her." -

EXCEPT the armrests in 1st class cannot be moved and did not exist until 1980's

DEBUNKED when the woman in the article is caught LYING

Bendromeda Strain's picture

Of course the arms didn't lift up, they had ashtrays in them.

apadictionary's picture

just wait until rest of california and finally whole US join these 4 people.

LetThemEatRand's picture

Thanks to world reserve currency status and central bank control over our economy, we're exporting inflation while debating how much minimum wage should be for kids with six figures in student loan debt.    Said every millenial: "what's a pension?"

HedgeJunkie's picture

Many boomers are asking the same question.  The loss of private pensions and the growth of 401-k's, along with the market manipulations, has retty much killed the idea of retirement.  Now I'm waiting for the bail-in that will wipe what's left that I've already mentally written off. 

There will be no retirement for me.  I'm better off to keep working on the COPD, booze and laziness.  Extreme poverty and homelessness at 75 is not something I want to experience.

At least I won't be alone.  There will be plenty my age begging for scraps.


LetThemEatRand's picture

Jamie Dimon wants our oxygen tanks, too.  Hot air ain't free.

Jethro's picture

Thats what I dont understand.  People that have lost everything and just willing to lay down and die.  If they are at that point of desperation, why dont they kill an adversay in the system (a central banker, a politician, a bureaucrat, a tax collector, a CNN reporter)?  Its not like they have anything left to lose....right?

Arrowflinger's picture

Probably because  those of us who have analyzed things deeply on the local, regional, and state levels know just how pervasive the fraud is and knows there are too many beneficiaries and manipulators to take out.

If you know how to follow the money, the full picture is far worse than ZH portrays.

All human institutions claiming,  or charged with, protection of society have bought into the Ponzi with fervor.

Target selection is impossible.

WillyGroper's picture

perhaps they believe in karma.

fedupwhiteguy's picture

"The army of the last days".


I'm with you. Why walk meekly to your grave?

Arrowflinger's picture

Said every millenial: 'What's a JOB?

VWAndy's picture

  They shoulda voted.