Tyler Durden Blog | "CalPERS Is Near Insolvency; It Needs A Bailout Soon" - Former Board Member Makes Stunning Admission | Talkmarkets
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Tyler Durden (pseudonym) is the lead writer at ZeroHedge.  Tyler represents the idea that a return to truly efficient markets is a possibility and a necessity.

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

Date: Saturday, February 24, 2018 8:46 PM EST

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.

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Scott Baker 1 year ago Member's comment

This is quite misleading.

I've done consulting work examining the Comprehensive Annual Financial Reports for about 3 dozen cities, counties and states, to test the feasibility of public banks. This includes pension (Fiduciary) fund info. From that one can see that the good funds garner about 6%/year, though CalPERSs has not achieved this over a 10-year period, unfortunately. But here's the catches:

1. Employee/Employers already contribute about half of their own pension returns a year - that is, about 3%/year. So, the need to earn 6 (or 7)% a year is not really true, if one was to redirect tht money directly to retiree pensions, also saving 100s of millions in fees to managers who apparently cannot beat the S&P 500, and who fall WAY short on a risk-adjusted basis, and who seem poised to over-buy stocks just at the peak of a record long bull market...again.

2. State Governments could return to doing what they used to do before Wall Street convinced them that the path to pension riches lay in using the market to pay pensions. Using market returns is a particularly poor way to pay pensioners, when governments can simply tax to pay that...and by refinancing bond obligations with part of the rest of CalPERS, improve their credit rating so they can borrow more cheaply in the future and save the millions they would have to tax for, making this a win-win wash. Remember, 94-95% of pension funds are NEVER paid out, but simply are retained to - supposedly - generate an ROI to pay pensions. This is not very efficient even for individuals, but it is just wrong-headed policy for governments with taxing authority.

Ayelet Wolf 1 year ago Member's comment

Interesting, thanks for sharing.