CalPERS Threatens To Slash Pension Benefits By 63% For Some Unfortunate East San Gabriel, California Workers

Tyler Durden's picture

Last October we wrote about the unfortunate situation in Loyalton, California whereby CalPERS was threatening to slash pension payments to a group of retired city workers after their City Council members failed to understand basic pension accounting and the unintended consequences of terminating their plan (see "Pension Benefits In Tiny California Town To Be Slashed As "Ponzi Scheme" Is Exposed").  Now it seems as though retirees of the East San Gabriel Valley Human Services Consortium may be facing a similar fate after their former municipal employer failed to pay their pension dues.

But her former employer, East San Gabriel Valley Human Services Consortium, left a $406,027 unpaid bill to the California Public Employees’ Retirement System, which manages benefits for 3,000 local governments and districts. As Calpers, the nation’s largest public pension, deals with a growing gap between what’s been promised and what’s been set aside, it may slash the checks of Lynch and 190 other workers by 63 percent -- the rate by which the agency has fallen short.

 

"We were always told that it was set in stone. Now to find out that’s not true -- is the sky blue? Is water wet?" Lynch, who lives in a 1994 motor home, said of her pension. "We’ve paid 100 percent of our responsibility into it. I just don’t understand how they can come along and cut so much out."

And while CalPERS will take all the full blame from angry retirees who are about to have their pensions slashed, apparently 4 California cities walked away from their funding obligations after shutting down over an overbilling scandal that surfaced back in 2014.

The case of the former East San Gabriel agency would be felt more broadly. Known locally as LA Works, the service at its height had about 140 employees and an annual budget, funded mainly through government grants, of about $13 million, said Tom Mauk, a consultant hired to help wind down its books. It went out of business after Los Angeles County severed its relationship, citing overbilling by the agency.

 

Calpers had asked the cities that formed the entity -- Azusa, Covina, Glendora, and West Covina -- to pay the debt to the retirement plan because, as staffers said during a February board meeting, of their ethical responsibility.

 

"What’s unacceptable is the fact you have a number of employees who were promised a benefit, nobody is paying to meet that liability and people are walking away from their responsibility," Costigan said in an interview.

 

Municipal officials said they have no legal obligation. Any payment could be considered an illegal use of public funds, said Chris Freeland, West Covina City Manager.

Of course, CalPERS certainly deserves a healthy portion of the blame here as they've been willing participants in perpetuating one of the largest public pension ponzi schemes in the country for years now.  Just last December we noted CalPERS' decision to only modestly decrease their discount rate by 50 bps, a move which their finance committee chairman all but admitted was politically motivated to allow "municipalities and other government agencies some breathing room" rather than lower it to where it should be and take the risk of bankrupting half of the state of California.  Here's what we wrote:

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.

 

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."

Calpers

 

Of course, while CalPERS is the largest public pension in the U.S. it's certainly not the worst off from a financial perspective (yes, we're talking about you Illinois).  In fact, there is roughly $2 trillion in total underfunded state and local pension liabilities around the country.

Pension

 

That said, the situation looks even more dire if you adjust that underfunding amount to reflect an appropriate discount rate rather than the 7.5% "dream rate" that CalPERS and most of America's other pension ponzis use.  In fact, we recently took a stab at calculating the real taxpayer liability outstanding to America's public pensions and found it to be closer to $5 - $8 trillion (see "An Unsolvable Math Problem: Public Pensions Are Underfunded By As Much As $8 Trillion").

We decided to take a look at what would happen if all federal, state and local pension plans decided to heed the advice of Mr. Gross. As one might suspect, the results are not pleasant.  We conservatively assume that public pensions are currently $2.0 trillion underfunded ($4.5 trillion of assets for $6.5 trillion of liabilities) even though we've seen estimates that suggest $3.5 trillion or more might be more appropriate.  We then adjusted the return on asset assumption down from the 7.5% used by most pensions to the 4.0% suggested by Mr. Gross and found that true public pension underfunding could be closer to $5.5 trillion, or over 2.5x more than current estimates.  Others have suggested that returns should be closer to risk-free rates which would imply an even more draconian $8.4 trillion underfunding.

 

  Pension Underfudning

 

But we can kick this can down the road for a while longer...so feel free to keep buying stocks irrespective of how close valuation multiples get to infinity.

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Kidbuck's picture

Who's California gonna pork for the money after succession? Mexico? Movie Stars?

Umh's picture

They will find out there are not enough millionaires to steal from and have to screw over the middle class.

canisdirus's picture

You clearly haven't lived there in the last 30+ years. They've been doing that for decades. In the years before I got out of that cesspool, I paid over 10% of my income in state income taxes. The state I moved to costs roughly 50% as much in state/local taxes, which amounted to quite a bonus on top of the higher pay (because the company makes more, too). If you're not hyper wealthy or on some kind of government program, you're not getting ahead there if you don't have substantial grandfathered-in prop 13 protected property.

The funnier bit is that around a third of our customers are in CA, so we just suck money right out of them.

HuskerGirl's picture

Just like students who think the government (aka the taxpayer) will pay off their student loans, I'm sure public pension participants expect the government to make their pensions whole.  

And knowing how hungry the left will be for votes in 2018 and 2020 it wouldn't surprise me if their politicians will make promises there is no way they can deliver. 

ToSoft4Truth's picture

I'm not even close to retirement age, my house and car are paid off.  I could live very inexpensively. 

 

What did these fools do with their lifetime earnings? 

Deplorable's picture

Meridith Whitney was right.

grizfish's picture

I have the same feelings toward government employees as they had toward me when our government did the same thing to the private sector. 

I retired with Hughes Aircraft Company retirement benefits.  We started out with a promise to fully fund our health benefits from our eligible retirement age until we reached the age of 65.  Our benefits were based on the number of years with the company and our age.  Originally, I would have received nearly the same amount of retirement benefits as I was earning while employed.  

Along comes the US gov't and forced Hughes Medical Foundation to sell Hughes Aircraft to General Motors by passing a new law forbidding any non-profit organization from being funded more than 50% by any one entity.  This was only one of many bail-outs for GM, but the consequences for Hughes employees was devistating.  GM raped Hughes to the point that my total benefit package was reduced to where i could not pay for the same medical benefits I had when employed, with nothing left to live on.  I now live on SS only.

Here is hoping the low-life government employees receive the same benefits those of us in the private sector received.  Many of them had a good laugh when they heard how GM was raping Hughes employees to pay their union employee benefits.

tony bonn's picture

billions for jewish banksters but not one red cent for people

Lost in translation's picture

"Burn it to the ground."

Oath_Keeper's picture

"We’ve paid 100 percent of our responsibility into it. I just don’t understand how they can come along and cut so much out."

 

Paid?Your contribution out of your pocket was zero, what would you expect to happen?

mary mary's picture

"East San Gabriel Valley Human Services Consortium"?

What the heck is that?  Sewers?  Drinking water?  Streets?  Drainage?  Streetlights?  Police?  Or 100% WELFARE PORK?

Gerb00's picture

The koolAid was outstanding, made me take a trip and never left the farm, maybe you should have left the farm and gone to the library and learned how to do some CRITICAL ANALYSIS, dick head, oh wait, you would have had to get the dick head out of your mouth...

Bunga Bunga's picture

Looks like Madoff is getting some new cell mates soon.

rockstone's picture

No. No he's not.

To some, that's the best part!

economessed's picture

Debts are promises made possible by paper money (or nowadays, computer servers) which is in itself a faith-based object.  Uncollateralized obligations never were worth anything and never will be worth anything.

San Pedro's picture

The U.S. economy / wall street are largely built on the same principles. Massive unfunded liabilities in every "entitlement" we have all been paying into on top of massive Public Debt. Nobody is safe. “if you have an economy that implodes, everything else implodes,”..failure will take on a terminal velocity and become unstoppable. QE IV was just a plug in the leak.

Looks like it's going to be necessary for the US Government to go bankrupt and self-destruct before America can be reborn within the limits of our Constitution.

“The US National Debt ($18 Trillion+) will lead to a full government shutdown. The unfunded liabilities are many times above the 18 trillion. And don't forget the unfunded liabilities that are "off the books"...

The National Center for Policy Analysis, whose work is frequently cited by conservatives, last year estimated the total unfunded liabilities at $84 trillion, of which “the public debt plus benefits payable to federal workers and the accrued Social Security and Medicare benefits payable to retirees total $30.3 trillion. ...Oct 23, 2013
Condition 1SQ's picture

Oh hell, there are so many ways they can fix this: 1) Cap pension benefits to $50k/year.  2) Alternatively, just take 4% of the pension investments (4% is a generally accepted safe withdrawal rate), divide that 4% up among pensioners in the same proportion to what they paid in.  It's both fair and self-sustaining.

San Pedro's picture

..in the case of CalPers it may not be that simple. Not so long ago CalPers encouraged Public Employees to meld their 401 / 457 into the fund for "security" and enhanced earnings. So CalPers has a elevated level of responsibility and fiduciary contract obligations which they accepted and signed off on when they recieved the lateral movement of money from the 401 / 457's. The IRS had to sign off on it too.

HRH Feant's picture

This has nothing to do with fair and it can't be fixed. Let me guess you are sucking off the CALPERS tit.

Buckle up. It's going to be a bumpy ride.

shimmy's picture

And the amusing thing is these people will keep voting democrat...and the democrats will just keep laughing their asses off at how easy they can keep financially raping these sheeple and still have support. Talk about being brainwashed.  

lolmao500's picture

It's gonna be hilariosu when the stock market bubble burts.

silverer's picture

That's when the next half of the remaining half disappears. Now they've got one quarter of their pension. Maybe.

HRH Feant's picture

Wait until all of those 401Ks go up in a puff of smoke.

And . . . it's gone.

TrustbutVerify's picture

What? The pension Ponzi that has been known by everyone FOR DECADES to be unsustainable is starting to crumble before our eyes? Shocking! (not) Willful blindness rocks!

silverer's picture

I've warned people for years that this was coming. I'd always hear "That will never happen in my lifetime" or "I'll be long gone before that happens". Oh, really?

Sledge-hammer's picture

I am glad I read this blog.  It appears the great unraveling has begun.  Funny how it seems to have started in earnest just as The Glorious Leader was elected.  One could almost think that these cretinous pension funds waited until Owmyballs left office.

dunce's picture

All employees need individual retirement accounts, not centrally planned and controlled Ponzi pie in the sky assumed rate of return fantasies.

voxale's picture

They could ask their representative, Judy Chu (D) San Gabriel, to use her investment accumen to make up the difference.    I heard she's a hella daytrader.

 http://www.zerohedge.com/news/2016-08-02/something-strange-emerges-when-...

atthelake's picture

I'm surprised, through all of this bs, there has been no vigilanteism.

Megaton Jim's picture

Hopefully, there will be some soon!

Sam Spayed's picture

"We were always told that it was set in stone. Now to find out that’s not true -- is the sky blue? Is water wet?"

Bernie Madoff's victims said the exact same thing.

Megaton Jim's picture

No sympathy at all for anyone in CA. The whole state needs to crash and burn big time!

ThankUGartman's picture

Seeing how I was married to a teacher in said district I say make it an 80% cut so she can suffer like i did for 17 years, Ha!