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Market Crash Slams State Pension Funds
By JOHN SEILER So much for record gains in California state and local pension funds. The stock market crash of the past week worsened the funds’ crisis, putting taxpayers further on the hook for funds guaranteed by law. Less than two months ago, CalPERS boasted that its fund had gained 20.7 percent in the previous calendar year, July 2010 to June 2011. The California Public Employees Retirement System is the largest pension fund in the nation. “This is a great one-year achievement that powerfully affirms our strategy and the skills of our investment team,” said Chief Investment Officer Joseph Dear, as reported by CalPERS. “While we can’t assume that we’ll sustain this high level of earnings, we have averaged a net return on investments of 8.4 percent for 20 years.” “These strong returns are a testament to our commitment to our long-term investing principles,” said Anne Stausboll, CalPERS Chief Executive Officer. “Our members, employers and California taxpayers all benefit from our disciplined approach to investing.” On June 30, 2011, the fund’s balance stood at $237.5 billion. Since then, the fund declined to $226 billion on August 5. Then it crashed again to about $220 billion on yesterday, August 6, based on preliminary estimates. Combined, that’s a loss of about $17.5 billion in just five weeks, or 7.4 percent. So practically half the gain from last year was wiped away. And there’s no gain for the new fiscal year. Yet the fund has to make at least 7.75 percent a year, on average, to keep its funding levels high enough to avoid further forced taxpayer contributions. “We’re a long-term investor and have a long-term investing horizon,” CalPERS spokesman Wayne Davis told me. “We’re able to ride the waves — when it goes up or when it goes down.” As to the crash in the market, he quoted Joseph Dear as saying, “There’s fear out there.” Back on July 19, the Fresno Bee reported, “Steve Maviglio, spokesman for the union-backed Californians for Retirement Security, said the solid returns should stall the movement toward overhauling the pension system. ” ‘When you have these kinds of numbers with the economy struggling, it shows the funds will be healthy in the long term,” he said.” Yesterday I asked Maviglio about his statement of three weeks ago. “The 30 year average return for CalPERS averages 7.5 percent,” he replied. “My point was that the pension-bashing crowd used the depths of the recession as the reference point to sound an alarm about pensions instead of the long term returns actuaries use. And given the last two days on the market [August 5 and 8], the alternative that reformers are pushing — 401(k)s — are looking even worse than before.” CalPERS Is the MarketWorse for public employees expecting pensions at current levels, perhaps, but not for taxpayers. The problem with the 401(k) comparison is that “CalPERS is so big it basically tracks the market,” Dan Pellissier told me; he’s president of California Pension Reform, which is pushing to put a pension-reform initiative on the November 2012 ballot. “It’ just can’t beat the market. Fundamentally, they are the market.” The smaller funds may be able to do better because they are more nimble. But as Wayne Lusvardi reported on CalWatchDog.com on July 19, “The public stock component of Cal-PERS’ investment portfolio had a 30 percent return, while the Standard & Poor’s 500 Index had about a 31 percent return over the same time interval. So in public stocks, at least, the CalPERS fund slightly under-performed a plain-vanilla index fund. Politicians couldn’t help make public union pensioners any windfall profits over investing in index funds invested in a 401(k). “An index fund is a passively managed fund designed to match the performance of the whole market or mix of funds. So whatever commissions CalPERS paid all its external fund managers to invest in public stocks apparently could have been saved just by passively investing in the S&P 500 Index.” Peter Pan PortfolioJohn Moorlach told me that CalPERS’ fund is similar to the “Peter Pan Portfolio” that led to Orange County’s bankruptcy in 1994. The meaning: If you just believe, the fund will be all right. In Orange County’s case, Treasurer-Tax Collector Bob Citron kept saying low interest rates would make the portfolio perform. But then interest rates soared and the county went bankrupt. Back then Moorlach was an accountant warning of the county’s severe fiscal problems. Reporter Andrew Bary of Barron’s called Moorlach and wrote a story with the title, “Peter Pan Portfolio: Orange County bet that interest rates would stay low forever.” Moorlach later was appointed to replace Citron as treasurer-tax collector. And in 2006, he was elected as an Orange County Supervisor. This time, he said about CalPERS’ Peter Pan Portfolio that fund managers are saying, “We’ve got to hope and pray that the Dow goes up,” meaning the Dow Jones Industrial Average. “To have the market determine the pensions is scary, because you can’t control the investment arena,” he warned. “The pension spokespeople say, ‘We don’t have to fear,’ sort of like that’s half the story” because pensions go up in many years. “But don’t patronize me. Some years it goes up 20 percent, but the next year it will go down. If you lose 50 percent, you have to make 100 percent the next year to break even. “It’s pretty risky to put it on taxpayers,” who have to make up for any market shortfalls because of legal guarantees in union contracts, as well as in the California Constitution. “They’re doing badly on their portfolios, too. And they’re supposed to pay more in taxes.” Reform InitiativePellissier concurred. “The real point here is taxpayers should not see 5 percent daily swings” in the pension funds guaranteed by their tax dollars, he said. “Taxpayers need for public employees’ retirement programs to get off the stock market roller-coaster. Stop making pension promises to employees based on the stock market.” His initiative would get replace the current defined benefits plan, in which the taxpayers are on the hook, no matter what happens in the market, with a defined contribution plan. In the words of the current reform draft, “All government employees hired on or after January 1, 2013 will receive an employer match into their defined contribution plan of up to 6 percent of salary, 9 percent for new safety employees.” Employees could contribute more on their own if they wished. “It is a very simple approach,” he concluded. “Cap the government employer cost for new pension benefits at the private sector level and then let employees decide how much more of their money they want to pay. Give folks who do not have Social Security an equivalent benefit. Require a majority of pension board members be independent and experts.” Default Next?One thing I’ve always warned is that, if reforms aren’t made soon, even the pensions of current employees could be reduced — despite laws, union contracts and the California Constitution. I put that question to John Bury, an independent actuary and author of a popular blog on pensions. “Default to retirees is probable, first by decreasing or eliminating COLAs and, down the road, direct reductions, possibly through taxing pensions,” he told me. So, it might already be too late to fix the system. “The reason this pension crisis isn’t being effectively addressed is that nobody dares to cut benefits or pay for the benefits already promised so there will be more Central Falls solutions.” Bury was referring to the city of Central Falls, Rhode Island, which is in bankruptcy. Unlike the Orange County bankruptcy of 1994 or the Vallejo bankruptcy of 2008, Central Falls is trying to cut its payments to those already retired. The Providence Journal has reported on the matter. Bury was even more pessimistic on his pension blog, where he wrote, “What will this precipitous drop in asset values do to public pensions across this country? “Doom them. “Most of these plans are using ridiculously high interest assumptions to justify keeping required contributions low.” What’s Next?“This crash simply reaffirms the need for serious statewide pension reform in California,” Jack Dean told me. He is vice-president of California Pension Reform and publishes the Pension Tsunami Web site, which chronicles state and national pension problems. “The system was unsustainable seven years ago when I started tracking the problem. The financial meltdown in 2008 didn’t cause the underfunding, it merely exposed the enormity of it.” Dean added that the market crash of recent weeks “increased taxpayers’ liabilities for overly-generous public-employee pensions even as their own pensions and 401(k) accounts lost even more value. Not only is this path unsustainable, it’s also unfair, and taxpayers are eager to do something about it.” How the stock market performs in coming weeks and months will determine what further steps will be taken by fund managers, taxpayers and voters. Unless the market makes a remarkable recovery, cuts seem to be inevitable. A market decline, or even stagnation, will spark chaos.
Tags: CalPERS, Central Falls, Dan Pellissier, John Bury, John Moorlach, John Seiler, Orange County bankruptcy, pensions, stock market Comments(12) |
May 24, 2013
Isn’t it just heart-warming to know that we hardworking, recession-battered California taxpayers are on the hook for CalPERS shortfalls? Can we expect pensioners to feel our pain and agree to reduced pension payments? Uh-huh. Sure.
This is exactly the scenario that kept many current pensioners in public service during the go-go big money years of still recent history, so no Laer Pearce, you should not expect any pensioner to feel your pain or agree to reduce their pensions earned through many years of service.
This is exactly the scenario that kept many current pensioners in public service during the go-go big money years of still recent history
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LOL..ANOTHER GED COP WHO COULD HAVE MADE $2 MILLION A TYEAR SELLING REAL ESTATE OR DOING LOANS, OR INJENTING THE NEXT GOOGLE.
THE MEDIAN CASH SALARY IN CA HAS BEEN $31k PER YEAR FOR THE LAST 12 YEARS, IT HAS IN FACT GONE DOWN SINCE 1999, THAT INCLDUED THE “go-go big money years” THAT SKIPPY IS CLAIMING HE MISSED OUT ON.
Skippy, give the public piglet “talking points” a rest! No one bought it last year, no one is buying it today, and no one will buy your baloney tomorrow
BTW Skippy, you and your cown buddies in copland never “earned” your pensions, they were gifted retroactively, and the rest was 95% covered by taxpayers.
Excellent article.
This correction in the stock market was anticipated. When the financial markets and real estate crashed in 2008, money flowed out of real estate and bonds and into stocks — hence a bubble was created in stocks out of sheer money volume. S&P’s downgrading of debt has put a tiny leak in the bubble and it has started to deflate.
John Seiler asks “What’s Next?” Stay tuned to Calwatchdog.com tomorrow for a look see.
The defined benefit government plans are really guaranteed 401k plans, with us taxpayers the sad sack investors. If performance is subpar, we get the extra bills, but none of the benefits.
“The defined benefit government plans are really guaranteed 401k plans, with us taxpayers the sad sack investors. If performance is subpar, we get the extra bills, but none of the benefits.”
Pensions are nothing more than deferred compensation, Richard, so you’ve already received the benefits. Now it’s time to pay your bill. You’ve known for years that the “no new taxes, not now, not ever” mantra didn’t account for the rising costs associated with the provision of public services, but you were happy to take the services anyway.
Now it’s time to pay for what you’ve already consumed, unless you’re nothing more than a financial scofflaw.
I suspect the drop in the total CalPERS portfolio is larger than indicated, as I would think that they only periodically revaluate illiquid assets — namely real estate. Assuming that real estate has taken a hit like the market (reflected in RE liquid assets such as REIT’s), the total fund downslide is probably bigger than we can see at this point.
Of course, CalPERS will likely gain it all back (and then some) by the end of the week.
Or whenever.
Union spokesman Steve Maviglio brags about a 7.75% annual rate of return going back 30 years, as he mocks his critics who pick certain starting dates to reveal the poor recent performance of his portfolio.
But if we go back 30 years to the date he chooses, we find that the Dow was below 1000, and was just embarking on a Reagan-inspired upturn as the economy recovered from Jimmy Carter’s disastrous years. In fact, the Dow was around 1000 fifteen years earlier. So Stevie, what would your average look like if you had started in 1966?
Skipping Dog thinks we have received the benefits from these pensions and now have to pay the bill — typical of the entitlement mentality found among government employees. We, the public, never received any benefit from this unconscionable transfer of wealth from those who produce wealth to those who merely consume it.
And of course, the right-wing “destroy government” machine gets its “facts” and its resources from plain old, god-fearing working class Americans, like these average citizens:
A young Texas couple with a multibillion-dollar hedge fund fortune is bankrolling a series of reports by one of California’s most influential pension overhaul groups.
The until-now secret $150,000 grant from the Laura and John Arnold Foundation to the California Foundation for Fiscal Responsibility is sure to fuel speculation about who might fund a brewing battle over California’s public pension system. Advocates of limiting pensions have been searching for a deep-pocketed donor to fund a multimillion-dollar ballot measure.
But while the Arnolds already are drawing criticism for entering the fray, it’s unclear whether they are the answer pension activists have been waiting for and public-employee unions have been worried about.
John Arnold, a former Enron trader who became a billionaire as a hedge fund manager, formed the foundation with his wife as a way to promote change in education, pensions and the criminal justice system. Although they give money to President Barack Obama and other Democrats, the Houston couple hired a conservative political strategist as president of the foundation.
Marcia Fritz, president of the California Foundation for Fiscal Responsibility, hopes the Arnolds give to future projects and perhaps even a high-stakes ballot initiative.
“There’s not that many billionaires around,” she said. “I’m hopeful this would inspire others like them.”
Fritz’s group has made waves by suing for the public release of pension information and publishing details on the state’s top recipients of retirement benefits. Her newest report analyzes the savings to state and local governments of different pension overhaul proposals.
Steven Maviglio, Democratic consultant and spokesman for the union-backed Californians for Retirement Security, criticized the report’s funding.
“California voters have never taken kindly to out-of-state special interests or billionaires trying to influence our state’s public policy,” he said. “Concerns about California’s pension system are best addressed by Californians, not Texans. We continue to believe that the best approach to address abuses in the pension system are through our elected representatives and the Legislature, and we are working hard to do just that.”
The California grant is one of the first in a ramping up of foundation funding for pension overhaul work across the country, said Josh McGee, the Arnold Foundation’s vice president for public accountability initiatives. The foundation hopes the California study, released today, will “spur some sort of reform that works for the government, the taxpayers and workers, too.”
“There hasn’t been a whole lot of work done to really illuminate the stress caused by public-employee benefits on state and local governments,” he said.
McGee said the foundation is looking to fund other educational activities but is prohibited from funding overt political work like ballot initiatives.
“I think what we can do in California right now is to really illuminate the issue and provide people with information that will allow them to make informed decisions at the ballot box,” he said.
Dan Pellissier, president of California Pension Reform, plans to put a measure capping public pensions on next year’s ballot, but he won’t comment on his funding prospects yet. “We’re going to wait until the time is right,” he said.
John Arnold once was renowned for his lucrative natural gas trading at Enron. He never was implicated in wrongdoing at the now-infamous company, but Democratic U.S. Sen. Dianne Feinstein of California once criticized him for allegedly refusing to answer, during a deposition, whether he had manipulated West Coast energy markets. A committee representing former Enron employees sued Arnold and other top traders for receiving huge bonuses, including $8 million for Arnold, right before Enron collapsed. Arnold and the committee settled on confidential terms, according to court records.
Arnold went on to form a successful energy-trading hedge fund, Centaurus Advisors, which manages more than $5 billion. This year, Forbes pegged Arnold’s fortune at $3.3 billion. Arnold’s wife, Laura, is a lawyer and former executive at a Houston energy company. The couple has pledged to give the majority of their fortune to charity. They gave $25 million to Teach for America, where Laura Arnold sits on the board, among other large donations.
The Arnolds mostly have given political contributions to Democrats. John Arnold, for example, gave $35,800 to an Obama fundraising committee this year and was an Obama bundler in 2008.
But the Arnolds hired conservative political consultant Denis Calabrese as president of their foundation. Calabrese has written columns on the Republican Party’s best strategies for success, and his firm’s clients include Texans for Rick Perry and GOP megadonor Bob Perry.
The foundation also recently hired Meredith Simonton, former executive director of the conservative Citizen Leader Alliance, as communications director.
“My role there was much different than my role here,” Simonton said.
The foundation’s McGee said: “We’re interested in solutions, and I think that’s the key thing. Ideology doesn’t really come into it.”
(If you believe that, you believe in the Easter Bunny–StevefromSacto)
StevefromSacto: What is your point?
That this rich couple who give mostly to Democrats are evil because they also feel motivated to see pension reform in CA?
That they are evil because they are from Texas?
That they once worked for Enron?
Really, what is the point of your lengthy post?