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."
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.
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.
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.