"CalPERS Is Near Insolvency; It Needs A Bailout Soon" - Former Board Member Makes Stunning Admission

Two weeks ago, in the aftermath of the February 5 volocaust, we quoted David Hunt, CEO of $1.2 trillion asset manager PGIM, who said ignore the volatility spike, the real financial timebomb was and remains public pensions: "if you were going to look for what’s the possible real crack in the financial architecture for the next crisis, rather than looking in the rearview mirror, pension funds would be on our list." 

In a brief discussion wondering what municipalities and states will do when local tax revenues decline and unemployment worsens, Hunt said "we're worried about those pension obligations.”

He is hardly alone: having reported over and over and over (and over, and over) again that public pensions are in deep trouble, two days ago none other than Steve Westly, former California controller and Calpers board member - manager of the largest public pension fund in the US, made a stunning admission, confirming everything:

"The pension crisis is inching closer by the day. CalPERS just voted to increase the amount cities must pay to the agency. Cities point to possible insolvency if payments keep rising but CalPERS is near insolvency itself. It may be reform or bailout soon."

Westly was referring to an editorial  laying out "the essence" of California’s pension crisis, exposed last week when the $350 billion California Public Employees Retirement System (CalPERS) made a "relatively small change" in its amortization policy.

Specifically, the CalPERS board voted to change the period for recouping future investment losses from 30 years to 20 years. While this may not sound like much, the bottom line is that it would require the California state government and thousands of local government agencies and school districts "to ramp up their mandatory contributions to the huge trust fund."

As author Dan Walters observes, with client agencies – cities, particularly – already complaining that double-digit annual increases in CalPERS payments are driving some of them towards insolvency, the new policy - which kicks in next year - will raise those payments even more.

What we are trying to avoid is a situation where we have a city that is already on the brink, and applying a 20-year amortization schedule would put them over the edge,” a representative of the League of California Cities, Dane Hutchings, told the CalPERS board before its vote.

CalPERS, however, has no choice because as both Walters and Westly claim, America's largest public pension fund itself is on the brink, "and the policy change is one of several steps it has taken to avoid a complete meltdown."

As we have reported previously, the Calpers system, once more than 100 percent funded, now has scarcely two-thirds of what it would need to fully cover all of the pension promises to current and future retirees. And that assumes it will hit an investment earnings target of 7%per year, that many authorities criticize as being too optimistic. 

Last In December we also reported that the increasingly panicked fund, decided to boost its stock allocation to 50% in order to raise its future liability discount rate to 7%, as any reduction in stock allocations would also lead to a lower discount rate which in turn which would require more contributions from cities, towns, school districts, etc. and could bring the whole ponzi crashing down. Amusingly, one Calpers board member argued to raise the equity allocation even higher, to 60%, so that the discount rate was greater than the current 7% in order to make the books appears "better."

Ironically, it was just a decade ago that Calpers' lofty equity allocation resulted in a staggering losses, and the current dead end. The trust fund lost about $100 billion in the Great Recession and never has fully recovered. In December 2016, Calpers voted to lower its earnings projection to 7.0% – it had been 7.5% – hoping to avoid another disaster were the economy to turn sour; since then it has been taking quiet steps to lever up its equity exposure once again.

Meanwhile, officials fear that were it to experience another big investment loss, it would pass a point of no return and never be able to pay for pension promises.

On the other hand, "protecting" CalPERS means getting more money from its client agencies, which could drive some of them into insolvency, as Hutchings said. This is not a hollow threat: three California cities have already gone bankrupt in recent years, in part because of their ever-increasing pension burdens, and payments have escalated sharply since then.

So on one hand, CalPERS is doing what it has to do to remain financially solvent, but on the other hand its self-protective steps threaten local government solvency.

That’s the crisis in a nutshell.

As Walters suggests, one way out would be to modify benefits in some way.

City officials, for instance, have suggested reducing automatic cost-of-living escalators in pensions over a certain mark, such as $100,000 a year.

However, the CalPERS board, dominated by public employee organizations and sympathetic politicians, has spurned such pleas: it is almost as if, once promised generous retirement benefits, public workers would rather take the entire system down, than see their own pensions reduced, even modestly.

“Our members have expressed frustration that you keep coming to them asking for more while at the same time not providing a lot of other options and assistance for them,” Dillon Gibbons of the California Special Districts Association told the board.

Alas, the options boild down to either taxpayers get the shaft, or public employees see their pensions reduced.

In the end, it will likely be the worst of both worlds, as taxpayers are dragged in to bailout CalPERS and other retirement funds, while retirees see huge cuts to their benefits. 

And the next market crash will likely catalyze it.

Meanwhile, everyone involved is waiting for the California state Supreme Court to rule on pending pension rights cases, and were it to overturn the so-called “California rule” that bars changes in benefits, it would open the door to pension modification.

CalPERS officials are also concerned that should it become insolvent, or pension payments force some cities into bankruptcy court, it would revive long-dormant plans for a statewide pension reform ballot measure.

* * *

As Walters concludes, "This crisis will haunt California for many years to come and will be a big headache for the next governor."

Unfortunately, that is an optimistic outlook, because when the crisis really hits, it will be all American taxpayers who are on the hook to bail out the country's insolvent pension funds. It is also then that some of the deepest fissures in US society: between public and private workers, between taxpayers and benefits recipients, between the young and old, all bubble to the surface at the same time, with very violent consequences.


Handful of Dust rccalhoun Sat, 02/24/2018 - 15:06 Permalink

For starters:

Have the recipients contribute to their pension fund (CalPers) (like private sector companies).

Cut benefits in line with reality (like private sector companies).

Replace management of the fund (like my boss did at our place).

Pray for a miracle (like we often do where we work).

Tighten belts (like the private sector has been forced to do for over 8 years).

In reply to by rccalhoun

DillyDilly Handful of Dust Sat, 02/24/2018 - 15:15 Permalink

1000% taxes on Pelosi/Feinstein/vineyards & pineapple plantations in Hawaii, plus, clawbacks from Kamala Harris & Boxer ought to take care of some of the bill...


Then ~ Go after Facebook, Google, Apple to pay their fair share, & maybe turn Al Gore's ENERGY SUCKING estate into a solar & windfarm... Lo & behold, you have a migrant worker communist utopia!

In reply to by Handful of Dust

Conscious Reviver remain calm Sat, 02/24/2018 - 18:52 Permalink

I was doing volunteer work over seas for a country starting up a community college system. I was setting up networks, doing IT work. They brought in some "expert", retired slime ball from the OC community college district in SoCal to advise for a few days. As a fellow American, I was asked to hang out with him for a day.

He dressed like an idiot. Plaid pants, orange shirt, white shoes, balding and hyper active. 

When he was not discussing his bad bowel movements over breakfast, he was bragging about his magnificent career along these lines.

His biggest accomplishment was not getting fired and surviving eight managers. When he retired, he managed to get himself rehired as a consultant at his old do nothing job so that he could double dip. With both income streams he was pulling down $160k/year. His wife, who he met on the job was about to retire and pull the same stunt. So the two of them were pulling down over $300k/year of tax payer money for, as he was proud to say, nothing.

So yeah, burn down the California government and start over from scratch.

In reply to by remain calm

LaugherNYC Baron von Bud Sat, 02/24/2018 - 23:15 Permalink

Low rates only added some gas to the fire. The math NEVER worked. 3% of your pay to pension costs every year for 5 years won’t even total 60% of your final year’s wage, off which most benefits are calculated. With the usual rule of 17/55/65  or 20/62/100, you have people collecting from 65-100% of their salary for 30+ years of retirement having only paid in on aggregate maybe 60% of a single year’s benefit. How is that EVER going to work at anything less that a 15-20% compounded rate. It wont. You cant make it work.  Money only quadruples in 17 years at NINE percent.Do the math, it ain’t even close. Unless the 14’s of 11 were re-issued every year just for pensions, that is.

In reply to by Baron von Bud

Baron von Bud LaugherNYC Sat, 02/24/2018 - 23:40 Permalink

You are correct on the math. The modern pension system evolved largely post ww2. Big economic growth, subdivisions, and big families. And, importantly, the expected life span for a man in 1960 was 67 years old. Robust growth assumptions and shorter payout periods probably made some sense back then. Look at Social Security - same thing. They never were able to change and fix the system and here we are. The nation's industrial decline and Fed policy hastened our judgment day; that's for sure.

In reply to by LaugherNYC

fattail Baron von Bud Sun, 02/25/2018 - 08:36 Permalink

Thank you for stating the not so obvious.  Its amazing when you bring this up to people so many of them don't see behind the curtain.  The real crime committed by the Fed, was the bent over ass raping of the prudent and the savers for the last 10 years by their 0% interest rate.   Probably $10 trillion transferred from mom and pop interest income to Wall Street.

In reply to by Baron von Bud

Lore Conscious Reviver Sat, 02/24/2018 - 21:43 Permalink

Double-dipping is rampant among government workers in British Columbia (and Canada in general, really). Remarkably, despite all the money they're taking home, many exhibit the personal financial management skills of a child. And many are highly leveraged, e.g., speculating on real estate and blaming inflated valuation on "Asians."

If anything interrupts the pension cheques, the squawking will be loud.  The implications are profound, because government employees comprise a dominant and influential proportion of the consumer base: the entire economy is socialized.  So of course, there will be abundant political will to continue bilking The Other Guy (who at ~175% debt-to-income, has little left to bilk). We know how that ends.

It will be amusing to watch the collectivists turn on each other in desperation.  "In the end, the people will eat their own dead." - Brzezinski (paraphrased)

In reply to by Conscious Reviver

MoreFreedom remain calm Sat, 02/24/2018 - 19:52 Permalink

Mostly it's government workers who will be getting big haircuts from underfunded government pensions.  Thankfully I'm pretty sure Trump won't support bailing them out (even Obama wouldn't though he bailed out the UAW in preference to GM creditors).  As for everyone, those who expect Social Security to continue their payouts, you're right, it won't happen.  But many government employees expect those payments as well. 

But it's only appropriate that government employees suffer the most, because they're the ones who've voted for and supported their liberal politician bosses who promised them great retirements, without funding them via taxes now.  They'll soon learn, when they raise taxes, things will get even worse for them because tax revenues will decline as people take actions to avoid the taxes. 

In reply to by remain calm

yellowsub remain calm Sat, 02/24/2018 - 22:59 Permalink

No pols will want to address it for the fact they get theirs from the same funds.

It is political suicide if they want to be a career pol to ride the same gravy train.

You telling me no one notices the percentage in every yearly budget to salaries, pensions/ benefits increasing significantly doesn't register with these pols across America?  It's not going to be more than a decade or so before that hits 100% with nothing left to fund operations.  Their health benefit goes up significantly.

They want to let it fail and act surprise to be able to get a bailout or raise taxes to fund it.

In reply to by remain calm

MEFOBILLS Uncle Sugar Sat, 02/24/2018 - 22:23 Permalink

Pension funds have to buy fixed assets like 10 year bonds.  This is by law.  The 10 year bond is about 2 percent.  This then means that pension funds have to take imprudent risk in order to allow enough gains for retirement.  

Some pension funds have engaged in risky behavior buying financial products like swaps.

In other words, pension funds cannot make their nut with presumptions from the past.  Pension fund fixed assets were assumed to perform about 6 percent, but they are much lower due to games from finance sector.

Six percent fixed asset gains doesn't happen anymore, especially after 2008 when Obama let all of the bad housing bubble debt remain on the books.  These bad debts and overhang were left in place, and then our ((masters)) then demanded QE.  QE then dropped interest rates low to start a new debt cycle.  Paying off old bad debt with new debt is fraudulent.

Rather than erasing bad debts though bankruptcy or nationalizing bad banks, the end result is pension funds not earning fixed income on things like bonds.   Many people won't be able to retire, breaking generational bonds.  Most of those retirees "thought" they were doing the right thing by working hard, but they are being silently screwed.  

Third Way democrats like Clinton butt smoochios with finance.  Obama protected his financial backers.  When he called the bankers into Whitehouse, he told them the only thing between their pitchforks and you is me. 

Clinton was the second worst president ever, with Woodrow Wilson taking the prize.  Obama and Bush were peas in a pod, and went along with the neocon/neo-liberal program.

False economy, false reality, and dupes don't get to retire as the generational pact was broken.  



In reply to by Uncle Sugar

roddy6667 Meat Hammer Sun, 02/25/2018 - 02:54 Permalink

The sales prices of houses do not determine how much revenue a government gets. A grand list is made up. They look at the total value of the properties and assign a mill rate that will bring in the taxes they want. If house prices tank, they will just raise the mill rate. 

Nobody in America owns their home or the land under it. Rent is paid to the real owners in the form of property taxes. If you don't pay, they send men with guns to remove you so that the true owner can sell it to somebody else. 

In reply to by Meat Hammer

Tom Green Swedish waspwench Sat, 02/24/2018 - 18:17 Permalink

The government is perfect. Ask them for a list of how mich each pension is worth each year then compare it to your retirement fund. then you will know that extra $100 dollars you are paying each month to a perfect government employee who did everything perfect and worked so hard doing absolutely nothing for you should have your money and you not have yours. Here is the math. gov pension = $ 27600 no taxes (of course). public 401k - $ 13100 (not guaranteed because the market might take a shit ( but Oloser said we averted another great depession). So they make twice as much as you and dont have to pay taxes. that is fair becuase they are fucking perfect.

In reply to by waspwench

Shift For Brains waspwench Sat, 02/24/2018 - 20:32 Permalink

Come to Texas ( if you're right thinking). Since the late 70s we've had a law on the books. Mandatory deferral of ALL ad valorum taxes on property if you are disabled or over 65. You won't be able to pass on a free and clear property to your kids but you will be able to live the rest of your life without paying into the system. You have six months and one day to pay back taxes plus 5% interest per annum when you quit your primary residence.

Beats having a developer hose you to get your property.

In reply to by waspwench