CalPERS Weighs Pros/Cons Of Setting Reasonable Return Targets Vs. Maintaining Ponzi Scheme

Tyler Durden's picture

In just a couple of months, the largest pension fund in the United States, the California Public Employees' Retirement System (CalPERS), will have to decide whether they'll rely on sound financial judgement and math to set their rate of return expectations going forward or whether they'll cave to political pressure to maintain artificially high return hurdles that they'll never meet but help to maintain their ponzi scheme a little longer.  The decision faced by CALPERS is whether their long-term assumed rate of return on assets should be lowered from the current 7.5% down to a more reasonable 6%. 

As pointed out by Pensions & Investments, the decision has far-reaching consequences.  First, a lower rate of return will equate to higher contribution levels for municipalities throughout California, many of which are on the verge of bankruptcy already.  Second, given that CALPERS is the largest pension fund in the United States, a move to lower return hurdles could set a precedent that would have to be followed by other funds around the country in even worse shape (yes, we're looking at you Illinois).

The stakes are high as the CalPERS board debates whether to significantly decrease the nation's largest public pension fund's assumed rate of return, a move that could hamstring the budgets of contributing municipalities as well as prompt other public funds across the country to follow suit.


But if the retirement system doesn't act, pushing to achieve an unrealistically high return could threaten the viability of the $299.5 billion fund itself, its top investment officer and consultants say.


“Being aggressive, having a reasonable amount of volatility and (being) wrong could lead to an unrecoverable loss,” Andrew Junkin, president of Wilshire Consulting, the system's general investment consultant, told the board at a November meeting. CalPERS' current portfolio is pegged to a 7.5% return and a 13% volatility rate.


The chief investment officer of the California Public Employees' Retirement System and its investment consultants now say that assumed annualized rate of return is unlikely to be achieved over the next decade, given updated capital market assumptions that show a slow-growing economy and continued low interest rates.


Still, cities, towns and school districts that are part of the Sacramento-based system say they can't afford increased contributions they would be forced to pay to provide pension benefits if the return rate is lowered.

Of course, the math would seem to imply that a lower return assumption is warranted given low global interest rates and equity markets that are drastically overvalued by almost any historical measure.  Moreover, for 3 out of the past 5 calendar years, CALPERS has missed their 7.5% return threshold and their 10-year cumulative returns are 6.2%, a far cry from their 7.5% projection.

Only a year earlier, CalPERS investment staff and consultants had agreed that CalPERS was on the right track with its 7.5% figure. So confident were they that they urged the board to approve a risk mitigation plan that did lower the rate of return, but over a 20-year period, and only when returns were in excess of the 7.5% assumption.


Two years of subpar results — a 0.6% return for the fiscal year ended June 30 and a 2.4% return in fiscal 2015 — reduced views of what CalPERS can earn over the next decade. Mr. Junkin said at the November meeting that Wilshire was predicting an annual return of 6.21% for the next decade, down from its estimates of 7.1% a year earlier.


Indeed, Mr. Junkin and Mr. Eliopoulos said the system's very survival could be at stake if board members don't lower the rate of return. “Being conservative leads to higher contributions, but you still have a sustainable benefit to CalPERS members,” Mr. Junkin said.




Of course, mathematical realities have to be weighed against the risk of disrupting the ponzi scheme and forcing several California cities to the brink of bankruptcy.

But a CalPERS return reduction would just move the burden to other government units. Groups representing municipal governments in California warn that some cities could be forced to make layoffs and major cuts in city services as well as face the risk of bankruptcy if they have to absorb the decline through higher contributions to CalPERS.


“This is big for us,” Dane Hutchings, a lobbyist with the League of California Cities, said in an interview. “We've got cities out there with half their general fund obligated to pension liabilities. How do you run a city with half a budget?”


CalPERS documents show that some governmental units could see their contributions more than double if the rate of return was lowered to 6%. Mr. Hutchings said bankruptcies might occur if cities had a major hike without it being phased in over a period of years. CalPERS' annual report in September on funding levels and risks also warned of potential bankruptcies by governmental units if the rate of return was decreased.

And, just to confirm the ponzi, P&I points out that for the 2015 fiscal year, CALPERS paid out roughly $5BN more in benefits than they received in contributions.

Compounding the problem is that CalPERS is 68% funded and cash-flow negative, meaning each year CalPERS is paying out more in benefits than it receives in contributions, Mr. Junkin said. CalPERS statistics show that the retirement system received $14 billion in contributions in the fiscal year ended June 30 but paid out $19 billion in benefits. To fill that $5 billion gap, the system was forced to sell investments.


CalPERS has an unfunded liability of $111 billion and critics have said unrealistic investment assumptions and inadequate contributions from employers and employees have led to the large gap.

We've seen this battle between math/logic and politicians played out numerous times in states all across the country.  Somehow we suspect that "math/logic" will continue to lose...better to bury your head in the sand for a couple of more years and pretend there is no problem.

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Raffie's picture

The TOP PEOPLE in charge of the money will not give up their life style, but everyone below will have to change.

I have noticed that the people who say change is good are usually the people who don't have to change.

Peacefulwarrior's picture

If you are correct then I should not have voted to "Drain the Swamp" the entire point is to rid or severely damage the corrupt tyrannous regime

TBT or not TBT's picture

A great moment for the Trump administration to remind CA cities how expensive it will be, in terms of lost federal funding, to continue their lawless "sanctuary city" policies, atop their other growing financial woes.  

Peacefulwarrior's picture

Exactly at some point in a deflationary collapse the top officials backing distorted policy and collecting a big check become obsolete as there is NO money to pay for them. At this moment their  connection to some elite mechanism becomes extinct.

Kidbuck's picture

If you like funding your 9 million illegals you can keep funding your 9 million illegals. It's so cool to be a progressive and vote for Hillary, untill you run out of OPM.

Zarbo's picture

They're also the f-heads that buy books like "Who took my cheese" and distribute them to employees -- just before the layoffs.

pitz's picture

And these returns were achieved in an era where falling interest rates posed a tailwind behind fund returns.  Imagine how bad it will be when rates rise and investments lose value due to the headwind of higher interest rates? 

tarsubil's picture

I don't think rates are going up. Far easier for them to just print and buy. They can bid up stocks and suppress rates to kick the can.

Arnold's picture

I'd like my contributions and company match back now, Please.


asteroids's picture

“At first you go bankrupt slowly, then all at once.”

Rainman's picture

Maybe those asshole libs should sell that $100B bullet train for scrap ... that'll help 

in4mayshun's picture

LOL! CalPers will long be bankrupt before that train ever gets close to being finished.

Kaiser Sousa's picture

if there are any participants in Calpers or any other ponzi retirement plan reading this post i offer the following...

"what cannot be paid back will not be paid back..."

as Public Enemy said....

"consider yourselfs warned...."

SomethingSomethingDarkSide's picture

To get fucked in the ass now, or leave it for the next guy?


Stroke's picture

Mark to Market?....A True Acounting?......Tell the Truth?


I'll believe it when I see it

steelhead23's picture

"what cannot be paid back will not be paid back..."

Obviously.  What should also be obvious is that an employment contract is a contract.  Hence, CalPers is obligated to pay retiree benefits as calculated at termination.  In the event CalPers goes broke, the obligation would persist, to be paid by taxpayers - and/or potentially the liquidation of public assets.  That is, even if CalPers failed, the obligation persists.

Yes, there would be a hue and cry from municipal and state entities, but lowering earnings expectations is an absolute must for CalPers.  This is one of those situations where you do the hard thing (lowering expectations and increasing contributions) to avoid the disaster.  Doing otherwise would be folly.  Still, I'd bet on folly.  Courage, particularly political courage, is rare.

Arnold's picture

Contracts have not been inviolate since the GM Bailout.

Bankruptcy is a Calpers option; Judicial restructuring.

RafterManFMJ's picture

woop! woop! woop!

Abandon California! Attention all private sector employees and employers!! Abandon California!

woop! woop! woop!

buzzsaw99's picture

You'll get nothing (zirp) and like it.  [/Judge Smails]

Jim in MN's picture

ZERO real returns until the rule of corruption is broken.

We'll let you know when that is.

buzzsaw99's picture

The decision faced by CALPERS is whether their long-term assumed rate of return on assets should be lowered from the current 7.5% down to a more reasonable 6%...

more reasonable? too funny.

Peacefulwarrior's picture

LMAO when I read this fine comment I see the Pow and Bam bubbles from the old Batman show following it.

ToSoft4Truth's picture

Ideally, the CalPER's board should buy all Trump properties.


When the inevitable flush comes, Trump will bailout his. 


"skin with skin"


- Roots

Korprit_Phlunkie's picture

Somehow we suspect that "math/logic" will continue to lose...better to bury your head in the sand for a couple of more years and pretend there is no problem.

Sums it up right there. They might decide to make it 7.25% to pretend they did something

HRH of Aquitaine's picture
HRH of Aquitaine (not verified) Nov 29, 2016 4:00 PM

$5 billion in negative cash flow and 68% funded: that sounds toxic. Is that a death rattle I hear?

1777's picture

That's the Reality Freight Train rattle you're hearing and they are standing in front of it saying it ain't so...

Peacefulwarrior's picture

I believe that you missed a decimal point in the amount funded? Isn't it 6.8%?

Korprit_Phlunkie's picture

Should be a law that it is exactly whatever the fed fundes rate is. THen they would pressure the fed to raise rates and stop artificial stimulas.

Nick Jihad's picture

You don't need a law, if you want to do the sensible thing. 

centerline's picture

Calpers is screwed no matter what.  Is just a matter of whether they start to come to grips with reality or prefer to stay in fantasy land as long as possible.  My guess... fantasy land. 

monad's picture

Chicago 7.2, on the Richter scale.

Actuary's picture

They've used the wrong discount rate, underpriced the liabilities and under-contributed forever. It's too late to try over-contributing to catch up, the shortfalls are too big. Like any other loan gone bad, pensioners will suffer haircuts. There really is no other way, barring bailouts. (which I always bar)

youngman's picture

And just think if they leave the union...boy wont that be fun asking for the bailout from just California....

Muad'Grumps's picture

There is a way out. Mandate pensions invest a healthy percentage in gold miners then rev up GOMO.

leeteam's picture

They need to cut salaries, pensions and benefits of employees.

Some pensions are higher than their salary when they were working. The get health benefits and automatic cost of living increases every year too.

hooligan2009's picture

actually, if you take the ten years to december year ends, the rate of return comes down to 5.1% p.a., that is 1.1% p.a. below the ten year for june year ends of 6.2%.

my forecast for the next ten years = bonds -1 p.a. from bonds and -2% p.a. from equities.the negative equity return comes from exposure to non-US equities

a 60 equity:40 bond split gives -1.6% p.a portfolio return

an assumed 7.5% p.a. net return compounds up to 106% over ten years, so every 100 bucks goes to 206 bucks

an assumed -1.6% p.a. net return compounds up to -15% over ten years, so every 100 bucks goes to 85 bucks

if the -1.6% p.a. is correct, CALPERS will be 121 bucks short for every 100 bucks it pledges today.

if I am right, the sooner CALPERS pensioners convert to 401k's invested in real assets (commodities, real estate etc) the more pension they will enjoy, otherwise, they won't get a pension if they leave it in CALPERS.

kind of makes you wonder why they pay Wilshire any money at all



tarsubil's picture

It's like the birth of a black hole as a star collapses in on itself.

hooligan2009's picture

hey maybe al the3 centraql banks are under control of aliens and they said "trillions don't even matter, promises are a redundant concept"!

Muad'Grumps's picture

For shits and giggles, I once perused the CALPERS site. The managers are really kind of handcuffed as to what to invest in. CALPERS is like a supertanker. Any changes in investment philosophy have to be committeed to death. I feel for the pensioners. they are trapped. Check the schedule of investments. There might be a token position in NEM or ABX. 

hooligan2009's picture

latest fund values on its website are 4 month sout of date, but here you go for a trip down memory lane for 31 July 2016

fund was worht 300 billion at 31 July 2016.

it has a funded status of (my estimate) of 76% as at 30 June 2015 on page 3 here- so even more out of date numbers. seriously, you would think these guys that employ 2,500 people might have someone who could plug numbers into a spreadsheet!

anyway, in a number of years between 30 years and who gives a shit years, assuming a 7.5% p.a. return, presumably CALPERS is fully funded.

in the next ten years, if my numbers are correct, it will ony be 30% funded and the state will be broke.

my shit and giggles says that the rest of the US will be selling california back to mexico by then as they will have identical fiscal and pension positions :)


Swamidon's picture

The dollar is collapsing and so is the economy.  Any State or Local retiree who expects a retirement check is on the short end of the stick.

Secret Weapon's picture

The only way these clowns will see 6% is if they invest in marijuana grow houses. 

PhiBetaZappa's picture

'Reasonable return' caught the bus with Elvis a long time ago.

monad's picture

Sufferin succotash. Those deplorable account holders despicably withdrew their funds afore Fauxahauntus's glorious enlightened coven could take their share. For the children, boy! That's un-un-un-, I say, thats mighty unCivilized.

Vardaman's picture

This is a union entity answering to another union entity.  The closest would be President Merkin Muffley to Gen. Buck Turgidson in Dr. Strangelove: "I thought you told me when you instituted the Human Reliability Test that nothing like this could ever happen!"

moneybots's picture

“This is big for us,” Dane Hutchings, a lobbyist with the League of California Cities, said in an interview. “We've got cities out there with half their general fund obligated to pension liabilities. How do you run a city with half a budget?”


Should have thought about that before agreeing to union salary and pension demands. After all, they are supposed to be public servants.

Emergency Ward's picture

Don't worry.  The public-employee unions, taking the public interest into consideration, will demand budget-busting compensation packages at the next bargaining session.  The municipalities, taking the public interest into consideration, will acquiesce to all the budget-busting demands.

dchang0's picture

Well sure, since the Democrats routinely define the "public" as being only Democrat voters. Everybody knows that conservatives and libertarians are sub-human filth, to be treated as 1/10 a person*, not even the 3/5 that slaves got.

* but 1/1 a person when it comes to taxation

Korprit_Phlunkie's picture

Actually whoever is bargaining against the union "in the peoples interest" always gives in because they know that ultimately as the boss of the union, mangerment per say, they will make even more, because we are the boss and "we have to attract the best talent". The fox is watching the henhouse. I think the only reason California hasn't collapsed yet is because facebook google, apple, microsoft all came along and created new business and taxes. It will collapse eventually. THERE IS JUST TOO MANY GOVERNMENT RETIREES WITH PENSIONS BIGGER TAN WHAT THEY WERE GETTING WHEN THEY WERE ACTUALLY WORKING. IM FUCKING POSSIBLE to keep going.