George Rebane

Readers familiar with my screeds were informed almost two years ago of the unfunded liabilities game played across our formerly golden state.   One aspect of the game was how Calpers – the world’s largest state employees’ retirement fund manager – was projecting its future income from the retirement monies it invests.  The yokels at that organization were telling equally gullible local officials all over the landscape that they would earn a handsome 7.75% net on their investments, and the locals should plan their retirement contributions based on this performance.

I and several other lonely voices on the sidelines tried our best to get out the message that Calpers was smoking funny stuff.  Local jurisdictions already underwater in their unfunded liabilities should plan on much higher remittances if they were not going to stiff their retirees when it came time to write the checks.  Ridicule from those who knew better was our lot.

But now comes the hot flash, and you guessed it.  The 1mar10 WSJ reports (here) that

Calpers is considering reducing the projected rate of return used by the giant pension fund to make investment decisions. A cut could force cash-strapped governments in California to pay millions more each year to cover their employee pension obligations.

Since 2003, the California Public Employees’ Retirement System has assumed that the value of its stocks, bonds and other holdings would increase by 7.75% a year. But the likelihood of an extended period of modest economic growth world-wide is fueling doubts inside Calpers that the pension fund can continue aiming so high.

Pressure to lower the target has been building for months. “You’ll be lucky to get 6% on your portfolios, maybe 5%,” BlackRock Inc. Chairman and Chief Executive Laurence Fink told Calpers board members last July.

The astute retail investor of late 2008 could have easily explained the matter to Calpers.  Most certainly some of us tried to explain the matter to our local jurisdictions.  The feedback from them was ‘Calpers is our investment expert, they tell us what to set aside and pay for our retirement obligations, and that’s that.’   As with the resetting of known millions of adjustable rate mortgages, projecting the coming economic disaster cum “muddle through economy” was not a matter of rocket science to anybody paying attention, except maybe governments at all levels.

Lest someone thinks that there is still a soft landing in the offing for all this, fugetaboudit.   For the local jurisdictions the alternatives are still 1) hope for a rapid destruction of the dollar, or 2) get real familiar with Chapter 9 of the bankruptcy code – aka The Vallejo Plan.  Better yet, do #2 while praying for #1.

This Calpers’ caper could become the biggest Madoff scheme in history.  (Sorry Mr. Ponzi, you were outclassed, but take heart because ol’ Bernie may not hold his title for long either.)

[update]  H/T to RR reader in SoCal.