CalPERS Board Votes To Maintain Ponzi Scheme With Only 50bps Reduction Of Discount Rate

Tyler Durden's picture

A few weeks ago we asked whether CalPERS would rely on sound financial judgement and math to set their rate of return expectations going forward or whether they would 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 (see "CalPERS Weighs Pros/Cons Of Setting Reasonable Return Targets Vs. Maintaining Ponzi Scheme").  The decision faced by CALPERS was whether their long-term assumed rate of return on assets should be lowered from the current 7.5% down to a more reasonable 6%.  Well, we now have our answer and it seems the board erred on the side of maintaining the ponzi with a decision to reduce the fund's discount rate by only 50 bps, to 7%, to be phased in over 3 years.

Of course, this decision should come as little surprise to our readers as we concluded our previous post with the following prediction:

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.

Per The Sacramento Bee, the CalPERS board approved the discount rate adjustment with a vote of 6-1 and the reduction will be phased in over 3 years starting next July. 

CalPERS moved to slash its official investment forecast Tuesday, a dramatic step that will translate into billions of dollars in higher annual pension contributions from the state, local governments and school districts.


Employees hired after January 2013, when a statewide pension reform law took effect, will also have to kick in more money. Older employees could see higher contributions, too, although that would be subject to contract bargaining.


CalPERS’ Finance and Administration Committee voted 6-1 to lower the forecast from 7.5 percent to 7 percent in phases over three years, starting next July. Although the committee’s vote must be ratified by the entire board Wednesday, most other board members indicated they support the move as well.


It would be the first adjustment to the forecast in four years.


The move is a recognition that investment returns are falling and that the California Public Employees’ Retirement System, which is just 68 percent funded, needs higher contributions from government agencies to solve its long-term problems.


“We’re in a low-growth (investment) environment, and it’s expected to remain that way the next five to 10 years,” board member Henry Jones said.

While a 50bps decrease to a 7% discount rate will still trigger roughly $1 billion in incremental annual contributions from various California government entities according to Eric Stern of the California Department of Finance, it is still a long way from the fund's estimated returns of just 6.2% over the next decade which happens to match exactly their returns from the past decade.



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.

Meanwhile, Richard Costigan, chairman of the CalPERS finance committee, who vowed that "this is just a start," more or less admits that the decision was politically motivated to allow "municipalities and other government agencies some breathing room before they absorb the impact."

Board members, however, defended the action as a compromise; it will help stabilize the fund while giving municipalities and other government agencies some breathing room before they absorb the impact. Richard Costigan, chairman of the finance committee, said CalPERS officials will continue to look at the fund’s investment strategies over the next year.


“This is just a start,” Costigan said.

Now all eyes will turn to the 37.6% funded Illinois pension fund, as well as many others, to see if they follow suit. 

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BullyBearish's picture

Kickeeeee Caneeeeeeeeee  Wheeeeeeeeeeeeeeeeeeeeeeeeeee

ParkAveFlasher's picture

Know what will help the Boomers out of this?  MOAR WINE

Déjà view's picture

"MOAR" A$$umptions...

Firefighters' and municipal workers' plans assume an 8.5 percent annual return going forward, while the police plan assumes an 8 percent return. Not only do all three assumptions seem too high, but the first two plans are complete outliers. In a survey done by the National Association of State Retirement Administrators in early 2016, only one out of 127 plans assumed an 8.5% return. So, Houston firefighters and muni workers have an aggressive - my preferred word would be unrealistic - set of assumptions.

ultraticum's picture

Most hedge funds these days would drool at the alpha inherent in 6%. 


Leave it to the State.

LetThemEatRand's picture

If California secedes from the Union, we would not need to bail out their public pension fund when the shit hits the fan.   It's a great place to visit.

G-R-U-N-T's picture

I smell eventual default! Then comes torches and pitchforks to Washington but there's a new Sheriff in town! I can hear Trump now, "Sorry, I have affection for the tax paying private sector, no bail-out for you, I would suggest you go back to your politicians, union reps and State destroying bureaucrats and ask them why they made promises they knew they couldn't keep for votes!"

NoDebt's picture

If you like watching slow motion train wrecks, pensions are fascinating to watch.  We've got TWENTY YEARS MINIMUM of this ahead of us.  One of them goes down, another one takes its place in the dead pool.  

You will see strong pension funds severly strained.  Weak ones will fail utterly.  It's going to be pension fund whack-a-mole as far as the eye can see for the next 2 decades.



7%? Good luck with that. At least they are not guaranteeing negative returns. How fukkin idiotic is NIRP?

Korprit_Phlunkie's picture

I believe I predicted that they would lower it by a quarter point to make it look like they were doing something. Boy did I miss that one.

 Now they will lower by quarters and fed will raise by quarters until one day in a few years they will both be at 4%.

 Fact is nobody knows  what actual returns will be but they have promised everyone in government pensions the moon and the private sector has been promised beans and tortillas.

techpriest's picture

If you are in the "private sector" (silly term IMO), you know that you have nothing but what you build for yourself. Fortunately I'm one of those millenials so I have ~35 years to prepare.

ebworthen's picture

CALpers - enricihing Wall Street at their member's expense since 1932.

Ironic, an omen, or both; you choose.

Aireannpure's picture

California Dreamin. Land of Lincoln math not so good. Shock and auw for whom the bell tolls. 

nmewn's picture

So after getting their investment ass handed to them the big decision is to drop RoR expectations half of one Followed by a quick showing of hands vote to give themselves a 20% annual raise and adjourn no doubt.

Very..."democratic" ;-)

CHoward's picture

Fuck 'em - I actually don't care.

pparalegal's picture

It has been the state criminal theft ring vs local government fighting for dollars since the 80's. So Gov. "bullet train to nowhere" cow fart Jerry Brown and his supermajority Mexican Democrat legislature naturally figure the taxpayer has bottomless pockets for illegal's health care, food and housing and are cheating the government club members by not giving it all to them. Even though Californians pay an extra $1.00 per gallon for gasoline as the roads crumble into 3'rd world status statewide. So Jan 1, 2017 all Cal DMV car fees are also going up $10.00 per car....just because they can.  

So why not - more money taken to fund the state retirees black hole Ponzi that will fail totally soon enough. As long as those at the wheel keep getting the raises and consulting fees for doing a great job. 

socalbeach's picture

Is lowering the assumed rate of return properly referred to as lowering the discount rate? Doesn't seem right.

scoutshonor's picture

I guess this means my retirement papers go in tomorow.  They are big on the grandfather clause in Cali.  I believe I will get grandfathered while the grandfathering is good.

NoPension's picture

What's a pension?

Vichy Chicago's picture

Burn that banana stand down to the ground.

directaction's picture

Dear Putin.
Please test your next gen nukes on California.
Thank you 

silverer's picture

Better to let California do its thing. Didn't they want to break off from the union? Kind of like sliding out into the ocean without the earthquake. Financially.

squid's picture

"Please test your next gen nukes on California."

Why waste a good atomic bomb on CA when they're doing a great job of destroying themselves on their own.


Just make sure there is no bail out.



gregga777's picture

These criminals will be held severely accountable by the American Revolutionary Justice Commission. They will pay a very steep price for their crimes.

squid's picture

"These criminals will be held severely accountable by the American Revolutionary Justice Commission. They will pay a very steep price for their crimes."


Don't we all wish.....

It will get swept under the carpet like everything else.

Like the death of outrage at Bill Clinton, the initial shock at benifits reduction will wear off and then the retired governement plebs will take a 50% bath like everyone else. SS will take a 27% reduction by law (from memory), its at the bottom of your SS statement every month.


Its going to be a deflationary spiral that will make the thirties look like a picnic.



CultiVader's picture

Will,have my calpers withdrawal papers notarized after the holidays and send them in. I asked the rep if they were getting more of these requests for withdrawal lately. She replied that you can't do it while you are still employed by the state, so no. Whatever the fuck that means. BTW it's a 35% haircut between state and federal. Will be using the cash as a down payment on a piece of land in Oregon which the Mrs and I plan to build on and farm.

JailBanksters's picture

As long as a Government gets a cut, a Ponzi Scheme is Peferectly Legal, even encouraged.

It's only when the Government doesn't get their cut where it's a problem.

hooligan2009's picture

Me: Hey, I can get 6% return because of my superb investment skills and the (almost) guaranteed rate of return from the superb stock market that is hugely subsidized by the Fed and taxpayers.

Bank manager: What's your track record?

Me: I have made 6% for the last ten years with my superb investment skills and the superbly rigged market!

Bank manager: I gave you a loan of 10 million bucks (we had to pay a fine for reckless lending based on that) just before the GFC when you told me your superb investment skills would geerate 7.5% That was ten years ago, so you have 1.5 million less capital to pay back the loan with, than what we had planned. You paid yourself a salary based on the 7.5% assumption The ten year bond rate is 2.5%. How are you going to get 3.5% more than that to earn 6% on the original ten million PLUS the 6% on the 1.5 million you have already lost?

Me: Don't worry, although the rest of the market (FANG) stocks will e down 20% over the next ten years, TRUMP stocks will be up 30% so it's a win/win for your bank and for me!

Bank manager: You are indeed a superb investor. Our bank president shares your foreskin, umm foresight, wouldn't you like to borrow another 10 million to double down?

Me: I have nothing I need. My original plan took care of all my spending needs. I am 70 years old after all.

Bank manager: such a prudent person you are. Come back and see me next year when you have spent another 200,000 dollars on your lifestyle decisions. Thank you for the case of Sauvignon Blanc.

torabora's picture

Hundreds of billion$$$$ underwater in CalPers/STRS and they spend billion$$$$ MOAR in train$$$ and Tunnel$$$. And the Erfquake is still going to hit. But WAIT! there is a rainy day fund now, thanks to the fiscally prudent will carry expenses 3 week$. Other bond debt hover$ around 200 billion$. Nearly every internal agency is firewalled as well. Not a single statewide officeholder is anything but a Democrat. BOTH US Senate candidates Democrat$. What can go wrong when thing$ are run so prudently?