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Hotel CalPERS: you can check out but you can never leave?

Original post made by Hotel CalPERS, Another Pleasanton neighborhood, on Sep 9, 2011

Hotel CalPERS: You can check out, but you can never leave?

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Comments (3)

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Posted by money madness
a resident of Another Pleasanton neighborhood
on Sep 9, 2011 at 6:15 pm

Gotta fight these guys to win. It's a hold up and that's robbery.

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Posted by You can never leave
a resident of Another Pleasanton neighborhood
on Sep 9, 2011 at 8:15 pm

I would like to offer a new element to this yet to get off the ground discussion. The 7.75% assumed rate of return is essentially meaningless in the world of Pleasanton pension plans which are about as unfunded/under funded as you can get. Let’s just consider the PCEA pension plan which, according to the last CalPERS actuarial report, is 52% funded (there is a reason for that) while the average CalPERS plan was about 60% funded. For the sake of simplification, I’ll call it 50% funded. If you suffer a 50% loss, meaning your principle investment decreases from $100 to 50 bucks (add as many zero‘s as you like), you need a 100% gain just to get back to point A. That is the first part of the CalPERS/Pleasanton pension issue.

The second part of the problem is that even if CalPERS were to return 7.75% annual investment gains it would only represent 50% of what they need to return just to keep the unfunded liability from growing - it wouldn’t provide 1 extra dollar to pay down the unfunded liability. It would only INCREASE the unfunded liability while defering the additional expense. The reason for that is the 7.75% they need to return ($7.75 in this example) isn’t based on the 50% of assets they actually have to invest. It is based on the 100% of assets they should have - expect to have, but do NOT have. Can they do that on annual basis? The answer isn’t no - it is HELL NO!

Here is an example.

-If calPERS were 100% funded ($100) and returned 7.75% they would have returned 7.75 cents at the end of year one, for a total portfolio value of $107.75.

If CalPers were 50% funded (based on the original $100) and earned 7.75% they would have returned $3.88 cents, for a portfolio value of $53.88. So even though CalPERS met their rate of return the unfunded liability grew from $50 to $53.88 cents (107.75 - 53.87). That will be added to all the other unfunded liability. At this point the only useful recognition of the 7.75% rate of return is to consider it the guaranteed return/interest rate taxpayers are stuck paying on the unfunded liability.

So, what rate of return would Calpers need to prevent the PCEA union pension plan from growing their unfunded liability - increasing debt? The answer is 15.5%. A 15.5% return will do little if anything to reduce the dollar amount of the unfunded pension liability but it would prevent the number from growing. Can CalPERS return 15.5%? Not a chance! And I haven’t even addressed the retiree medical costs that are barely funded yet growing at an average of 8% per year, and create an entirely separate category of unfunded liability that taxpayers will be paying.

I’ll leave people with this. From a WSJ article:

Calpers Confronts Cuts to Return Rate
Wall Street Journal, March 1, 2010

"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 (pay the actual cost).

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.””

What has CalPERS done to address the issue - nothing. The union controlled BOD rejected common sense instead choosing to string the taxpayers along at 7.75% interest rates, financed over 30 years, to cover the unfunded liabilities they have been instrumental in creating.

What does a leading pension expert have to say about CalPERS shenanigans? Girard Miller, a pension expert, writes this in Governing Magazine:

"How high will this flood crest? Local employers are now skeptical that they have been told the full truth about how high their pension costs will ultimately surge. Unlike the vast majority of public pension funds, CalPERS uses a 15-year actuarial smoothing process that camouflages the genuine economic impact of market fluctuations. I have no issue with normal industry-standard actuarial smoothing periods of 5 years, in light of the average length of a business cycle — which is 6 years based on 14 recession cycles in the past 84 years. But the CalPERS process is opaque and flunks the transparency test that taxpayers, public managers and municipal bond investors are entitled to expect. As I have explained before, such extraordinary "smoothing" practices deserve SEC investigation as an "artifice and device" to conceal relevant financial information from the investment community — as well as the employers who must now bear the financial brunt of unsustainable pension benefits."

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Posted by Susanna
a resident of Downtown
on Sep 9, 2011 at 9:27 pm

All I have to say is Holy Cow! This sounds sooooooo serious. Especially the portfolios. Don't bother reading that post above. It will give you nightmares, chills, and you'll not be able to eat for weeks on end. I'm leaving. I can't stand it. And they think global warming is bad? Ha! Wait til the tsunami.

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