George Rebane
[This is the addended transcript of my regular KVMR commentary broadcast on 20 July 2012.]
The economy’s downward spiral goes on while the lamestream media continues to paper over the fiscal bombs that explode daily. The latest report is about the disastrous year that Calpers just finished in June. You recall that Calpers is the retirement fund manager for California’s public employees – it invests monies from local jurisdictions like cities and counties for their public service employee pensions. As the country’s biggest retirement fund manager, it is also one of the worst performing.
Right now it has $223B under management. Unfortunately this is still an estimated 55 to 80% underfunded. That, according to a Stanford study, is the amount that California’s taxpayers will have to make up, so that the retired government employees will get the monies that their unions negotiated for them with the help of some very ignorant and cooperative politicians who were supposed to represent the taxpayers.
With a nod and a wink from Sacramento, Calpers told us not to worry a couple of years ago in the depth of the recession. It claimed that its investments would earn 7.75% annually into the indefinite future, and that would make everything alright. Compare that insane number with interest paid by corporate and government bonds which were less than half that rate. The public demand for some reality in projecting future Calpers earnings caused their investment mavens to relent – they relented all the way down to using 7.5% to project future portfolio earnings.
The local jurisdictions, including our Nevada County, demurred the announcement and assured their taxpayers that Calpers’ financial experts had everything under control. Not all, including yours truly, were fooled by that notched down insanity. And guess what? Calpers reported last week that its portfolio had earned a meager 1% last year instead of the projected 7.5%. Now that’s a significant shot in the shorts. But stupid is forever, and Calpers chief investment officer, Joe Dear, put the blame on everybody but himself, and told us that things would be much better in the future. Anyone who has been paying attention to what’s happening in the world of finance knows that things aren’t getting better for quite a long time, and may get significantly worse in the interval.
Here’s the problem. Let’s say that Calpers manages to get its portfolio performance up to, say, 3% for the next four years. Furthermore, assume it has to start the projected target payouts in 15 years, payouts that Mr Dear still considers achievable. Then for the remaining 10 years the Calpers portfolio has to earn an average of over 10% annually. And with the gang that can’t shoot straight in charge, they will not get close to that rate as the world struggles to recover from this depression. We recall that these are the people who lost 7.2% on their stock portfolio last year when the Dow was up 3.8%.
But let’s bring this dismal situation back home to Nevada County whose CEO Rick Haffey recently reported that, using Calpers 7.5% discount rate, the county’s unfunded pension liabilities were in excess of $119M. The exact figure is unknown for a number of known and unknown reasons. Using more realistic portfolio return rates, these unfunded liabilities could easily be much higher. Add to this problem the fact that the county doesn’t know when and how much of these liabilities come due in the next ten to twenty years, and you begin to get an idea of what the county’s taxpayers are facing.
Well not quite. So far I’ve only been talking about the Calpers retirement portfolio. We have yet to cover the liabilities facing us when we include the pensioneers’ healthcare costs, and CalSTRS which manages teacher retirement funds for local school districts. But since you’re already in tears, I’ll save that for another time.
Yesterday I had a chat with Rick Haffey about the Calpers 1% return. He stated that the news had “caught their attention”, but emphasized that the county is committed to continue reducing its employee pension exposure. He cited that even our SEIU Local 39 employees have increased their contribution from 8 to 10.5% of payroll. Currently 16% of the county’s budget goes to retirement costs, and Haffey said that could rise up to 20% if the investment climate does not improve. He also said that the great hope in resolving the $119M unfunded liabilities lies with Governor Jerry Brown’s pension reform program which is still in never-neverland. In the meanwhile, by law the county must continue dealing with Calpers as its retirement portfolio manager.
But one thing is for sure, we taxpayers will not make up the liabilities that past ignorance and corruption has piled on our backs. Someone suggested that Sacramento should pass a new law directing Calpers to return the contributed sums as appreciated to the local jurisdictions on a pro rata basis, and let them each figure out how they will settle with the retirees to whom they are obligated.
My name is Rebane, and I also expand on these and other themes in my Union columns, and on georgerebane.com where this transcript with additional materials appears. These opinions are not necessarily shared by KVMR. Thank you for listening.
[Addendum] This is the WSJ article on Calpers, ‘Calpers Misses Big on Investment Target’.
Here and here are some more grittier assessments of the hanky-panky that has come out of Calpers over the years.
And from Bloomberg BusinessWeek we read, “Moody’s, which rates debt in the $3.7 trillion municipal market, said in a July 2 report that unfunded liabilities of state and local pensions are $2 trillion, which it said was three times the total reported by governments.”
The politicians and senior county staffers responsible for most of the county’s $119M unfunded pension liabilities are long gone, and hard to indict. The relatively calm attitude in today’s Rood Center can most plausibly be explained by the same ‘shoot and scoot’ mentality – the current crowd will be history when the fan blades get soiled. Only the new ‘it didn’t happen on our watch’ crew and taxpayers holding the bag will still be here.
For the record – for my commentary I contacted both CEO Rick Haffey and my supervisor Nate Beason to ask their take on Calpers’ 1% and its impact on Nevada County. Rick called me back yesterday morning and gave me an opportunity to ask my questions. I appreciated that from a very busy county executive. I have yet to hear from Nate.
Finally, one of the bigger retirement benefit dominoes to fall that no one pays attention to is that of the United States Postal Service. The USPS is set to default on a $5.5B payment for its retirees healthcare unless Congress acts (more here). The postal service has been on life support for years, and no one knows quite what to do with our original, ancient, and traditional communications network which we now call ‘snail mail’. H/T to RR reader for connecting this dot.
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