Study Of 10-Year State Pension Returns Highlight Full Extent Of Public Pension Ponzi

Tyler Durden's picture

A new study of public pension returns by Cliffwater LLC has found that the median U.S. state pension plan returned just 5.9% annually over the 10 years ended June 30, 2016.  Meanwhile, as Pension and Investments notes, the top performing state pension, the $15.6 billion Oklahoma Teachers' Retirement System, was the only fund that managed to eek out a return over 7% during the same period.

U.S. state pension plans returned a median annualized 5.9% for the 10 years ended June 30, 2016, vs. 6.8% for the 10 years ended June 30, 2015, said Cliffwater's most recent annual state pension performance report.


The average 5.7% return for the 10 years ended June 30, 2016, fell within a wide range of individual pension plan returns (3.7% to 7.1%).


Once again, the two top-performing state pension plans for the period were the $15.6 billion Oklahoma Teachers' Retirement System, returning 7.1%, and the South Dakota Investment Council returning 6.8% for the $10.5 billion South Dakota Retirement System. In third place was the $7 billion Missouri Local Government Employees Retirement System, returning 6.7%. All returns cited are annualized figures.

Of course, as we've noted on numerous occasions, the problem with those returns is that most public pensions in the U.S. have randomly decided to assume a long-term return of 7.5%, or 1.6% higher than what they've actually been able to achieve in practice. All of which only serves to mask the true scale of the pension crisis in the U.S. by discounting future liabilities at an artificially high rate.

As we noted in a post entitled "An Unsolvable Math Problem: Public Pensions Are Underfunded By As Much As $8 Trillion," lowering discount rates from just 7.5% to 6.0% could result in a 65% increase in underfunded liabilities.

Pension Underfudning

But you don't have to take our word for it, even Kentucky's State Budget Director, John Chilton, admitted in a recent letter sent out to the Kentucky Employees’ Retirement System that if pensions were subjected to the same rules governing single-employer private plans that their underfunded level would double and federal law would have already required "that all benefits be frozen and the plans terminated."  Per The State Journal:

“It is well known that all of the Commonwealth’s pension plans are in a crisis. Using the same investment rates of return that corporate plans are required to use – the Corporate Bond Index rate – the aggregate underfunding for all of Kentucky’s eight plans goes from $33 billion to $64 billion,” he wrote in the letter.


“Furthermore, if Kentucky plans were subject to federal standards for single-employer private plans, six of the plans would be designated as having severe funding shortfalls because their funded status is less than 60 percent. As such, federal law would require that all benefits be frozen and the plans terminated. This is true even using the old 2016 actuarial assumptions, rather than the more realistic discount rates and other assumptions required of private plans.


“The need for significant reform is evident to anyone looking at the health of the Commonwealth’s plans within that larger context.”


The letter said total employer contributions for Fiscal Year 2017, which ended June 30, were $857,311,370.  If there is no legislative action, that rises to an estimated $872,677,346 in FY 2018, the current fiscal year, and $1,483,863,927 in FY 2019, an increase of over $611 million, from this fiscal year.


Adding insult to injury, Cliffwater found that well over 50% of public pension funds (adjusted for hedge fund allocations) are invested in public equities...

The alternative investment consultant's report also looked at pension funds' asset allocations and performance by asset class.


As of June 30, 2016, the plans had an average asset allocation of 48% public equities (down two percentage points from 2015), 26% alternatives (up two percentage points), 24% fixed income (up one percentage point), and 2% cash (down one percentage point).


According to Cliffwater, most of the alternatives increase for the year was directed to private equity, private debt and opportunistic investments. Within alternatives, the average allocation as of June 30, 2016 was 36% private equity, 30% real estate, 18% hedge funds, 13% real asset and the remainder in other alternatives.


Looking at alternative performance, the median return for private equity was 9.9% for the 10 years ended June 30, and 5.8% for real estate. Individual pension funds' real estate returns varied the most of any asset class for the 10-year period, Cliffwater noted.

...All of which raises two very important questions: (1) how is it possible that pension underfundings continue to surge when 50% of assets have participated in one of the biggest equity bubbles in history and (2) when the current equity bubble bursts, which in inevitably will, will it result in a cascading failure of retirement systems across the country and finally expose the public pension ponzi for great lie that it has always been?

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Juggernaut x2's picture

Butt Stawks are Sew hi! How can this Bee?

The_Juggernaut's picture

The important thing is that they don't invest in profitable companies that offend the sensibilities of snowflakes.

Paul Kersey's picture

If the ponzi stock market crashes, then all the public ponzi scheme pensions, all of which invest in the stock market, crash along with it. Consequently, if the market and the pensions crash, the Main Street America retail economy, which is already on life support, will flatline.

JRobby's picture

Pffffffttt !!!!

"Oh, you still had an outstanding mortgage from building your "dream retirement home".

"You fucked up, You trusted us."

Mr. Universe's picture

Never one drop of rain on Arrakis.

Tristan Ludlow's picture

"How can this be?" 


For he is the Kwisatz Haderach!


The Alarmist's picture

Well, if they had used a LDI strategy, they might have achieved 10% ... in any case, you can be sure the increase in liabilities dwarfed the asset returns.

YUNOSELL's picture

They should have used Shepwave, LOL, or maybe invested in the guy that earns $14,000 working part-time from his basement

jcaz's picture

They're the same guy.....

robertocarlos's picture

Wait until they start experiencing negative returns.

Stan522's picture

When this blows up expect the torches and pitch fork lined up in front of the doors of the private sector demanding their money.........

Vardaman's picture

Most of those public sector pensioners can't catch their breath long enough to find a pitchfork or light a torch, let alone march anywhere.  Say it with me: Doughnut, desk job, feather bed...

CRM114's picture

True, but you're going to have a LOT of trouble from the military and the cops. Probably not a good idea to piss off the medical or fire guys either.

Union of Paper Clip Supplies Administrators, not so much.

Cloud9.5's picture

Faith in the state is like any other religion.  Faith begins where reason ends.  I was in the union for 43 years and I was on the Insurance Committee for 30.  When Governor Scot began to trim the benefits in the Florida Drop Program, people wailed.  I asked my fellow reps, “Which would you rather have, a great benefits package for a few years and then a failed system or a trimmed packaged and a solvent fund?"  Most of them tuned me out.

I’m doing well in retirement primarily because I am still working.  I’m not working as a teacher, I am renovating houses.  Hard work, but we are buying up the ghetto, one house at a time.



jcaz's picture

...So you replaced one Ponzi with another.....

Always gotta have a ghetto, dude-  just how it works.

Stuck on Zero's picture

Around here public employees retire at 52 with 120% pensions for life. They have plenty of energy to carry pitchforks.

youngman's picture

I bet we find out the fees these guys are getting charged are thru the roof...and under the table too

Vardaman's picture

"Ya fucked up.  Ya trusted us..."

Aubiekong's picture

Chance of a government bail out with newly printed dollars... 100%  We will pay and pay and pay for the stupidity of liberalism and democrats...

Lucky Leprachaun's picture

That's what's going to happen. They're already underwriting PR bond holders.

MrBoompi's picture

So conservatives and republicans had nothing to do with economic or monetary policies the last 100 years?  Were they so weak and powerless they just caved to liberals and democrats?  Don't get me wrong.  Liberalism and the DNC deserve the shit they receive.  But leaving out conservatives and republicans from crtitcism just means you aren't paying full attention.  

Aubiekong's picture

I agree... should have said both parties as there is no difference between them...

GunnerySgtHartman's picture

So conservatives and republicans had nothing to do with economic or monetary policies the last 100 years?

Who said they didn't?  Are they not two sides of the same coin?

Thomas Paine's picture

Maybe...but there is quite a difference in the makeup of their voter base. 

Cloud9.5's picture

When it comes to lining pockets and peddling political favors, it’s a red and blue tag team.  

Aubiekong's picture

These pensions need to run out and just buy bitcoin... Problem solved right?

motoXdude's picture

Hell, I'll even donate my old, long unused Monopoly Game... LOTS of MONEY in there!

RagaMuffin's picture

Nice work TYLERS, nice work

Yukon Cornholius's picture

Gimme gimme never gets. Don't you know your manners yet?

Yes I do, but I say gimme gimme anyway.

indaknow's picture

He who panics first. ..

Anyone eligible to take their pension and doesn't is a fool. 

Clowns on Acid's picture

Tyler, Please show how the Pension funds portfolios have changed regarding asset mix (equities, fixed income, alternative) since 2010 and advent of QE. This info will highlight the disastrous socio-economic results from the Fed's QE money printing out of thin air. 

Oh yeh...then show on the same graph, Bank Holding companies stock proce and CEO's compensation packages since QE money printing out of thin air.

Lets complete the picture.

GunnerySgtHartman's picture

For those who are unaware, it would also be good to throw the Fed interest rate policy decisions over time into that mix.  Most ZHers already know how that would show up as it relates to pension fund returns, but it should be included so that everyone can see the effect of Fed policy on pension funds.

HuskerGirl's picture

"Using the same investment rates of return that corporate plans are required to use – the Corporate Bond Index rate – the aggregate underfunding for all of Kentucky’s eight plans goes from $33 billion to $64 billion,”

It's a travesty that ERISA excluded public service pensions.  It allowed government and unions to mismanage pensions either leaving taxpayers on the hook or will leave pensioners without promised benefits.  But when ti comes time to assign blame, it'll be the wealthy working class that will be labeled greedy for daring to want to keep what we've worked for.   They'll say it's not "fair" for us to get to keep our 401(k)s while others are left with nothing.  But there will never be any responsibility taken by either governments or the unions who were supposed to look out for the worker. 

If you're trusting someone else to take care of your retirement responsibility the responsibility is ultimately yours. 


GunnerySgtHartman's picture

It's a travesty that ERISA excluded public service pensions.

It was by design.  Can't have the proles rioting over tax increases to fund pensions when you can just kick the can down the road ... gotta get re-elected, you know.

mjcarr51's picture

"terrible news for public employees"?

Not a care in the world.


terrible news for taxpayers 



Lucky Leprachaun's picture

'terrible news for taxpayers '. Or for the Fed printers.

Sofa King's picture

I keep hearing about this astronomically high Underfunded Liability.  What is the total liability? Anyone?  It must be incredible.

I hear that the Shitty-Ass, Third World Territiory of Puerto Rico alone is $45 Billion.  Thats fucking insane.

In case anyone asks you why the Infrastrucure in this Country is fucked...for the look no futher that the leeaches in Public "Service".  There really is no money left over for basic services.

Republic my ass.  The USA is a real fucked up version of Socialism to say the least.

dchang0's picture

Yep, but the patsies out there will continue to call the US economy "capitalism" and blame capitalism when it all falls down. To some degree, I wish Hillary had won instead of Trump, because then the coming collapse would be more difficult to blame on small gov't policies. The left would still try, but the average voter would not believe them.

Snaffew's picture

no, real socialism would be much more fair than the US version of "socialism".  Workers in the US on any government teat are required to work 20-30 years so they can collect 67 percent of their final 3 years aggregate salary for the next 30-40 years on average.  I know an ex-primary school principal and his retired teacher wife that are taking home in excess of 4k a week on their retirement pension.  They go to the casino 3-4 times a week because they don't have any idea what to do with all that money.  needless to say, they lose 3-4 times a week.

Not My Real Name's picture

"real socialism would be much more fair than the US version of 'socialism'."

Okay. That's like saying "real highway robbery would be much more fair than the US version of 'highway robbery.'"

hooligan2009's picture

libtardd socialist PR owes 70 billion.

it will cost a minimum of 30 billion to restore basic services (including 20 billion for the ambulance chasing corrupt local contracting of 20 billion)

PR has 3.4 million people, less the 0.5 million that will suck off the Fla government teat, forever.

put it all together? where could you build an ifrastructure for 100 billion anywhere you like.

my vote is..... tennessee!


(either laugh or puke o rico)

Bai Suzhen's picture

If these states default, all the pensioners can just come to Florida.  Get a ticket on the Puerto Rican line, join in on the good times, maybe go to Disney, and definitley soak up the welfare sunshine.  After all, Florida's governor is welcoming Ricans with open arms.  And he wouldn't deny other states' refugees in favor of PR, would he?

LeftandRightareWrong's picture

More political promises that can't be kept.  Who is more nervous now, DACA "kids" or public pensioners?

RagaMuffin's picture

How many are going to be affected? How many can legally buy an AR? HHHHHmmmmmmmmmm....... 

QQQBall's picture

Higher Taxes. Problem solved!