The telephone went nuts yesterday with reporter calls about CalPERS (California Public Employees Retirement System).
CalPERS is the largest retirement system on the planet. We can also lay some of the most egregious defined benefit pension plan abuses at its feet.
It was the CalPERS Board (two-thirds of whom are public employee union representatives) that gave California the highest retirement formulas in the nation.
They also gave us the brilliant, and unconstitutional, directive to allow those formula enhancements to be retroactive to the date of hire. Prospective? Maybe. Retroactive? Unconscionable.
They have a high interest rate assumption.
They have taken the smoothing of losses to unbelievable heights, with amortization periods that would amaze most accountants and actuaries, in order to reduce contribution rates (and, thus, defer the pain to future years).
And I could go on. For fun, check out my presentation to the Governor’s Post Employment Public Employee Benefits Commission at http://www.pebc.ca.gov/images/files/Moorlach.pdf.
Now they have nowhere to go. They can’t lower their interest rate assumption, because it would cause higher contribution rates.
They can’t amortize more aggressively, because they’re already running the ball down the sidelines (to use a football analogy). They is no more room. The next step is out of bounds.
The amazing thing is that the Board of CalPERS is in that la-la land of “don’t worry, be happy.” Investment returns will solve our ills, is their mantra. (Don’t get me started on presumption, again.)
You may remember that I had an editorial in the OC Register last December reminding then CalPERS President Rob Feckner he used a period of reasonable funding to enhance pension benefit formulas, instead of “protecting the taxpayers during the next down cycle.” See http://www.ocregister.com/articles/years-feckner-fully-2261929-government-market.
Being overly greedy has a way of catching up with people.
With the recession blowing sand off of everything, it’s nice to see CalPERS in the barrel for a checkup by the journalism industry. Holding CalPERS accountable is long overdue.
Today’s LOOK BACK will show that after waiting five years, someone now is realizing that there is a problem.
Calpers fee probe stokes concerns of local officials
By Jim Christie
SAN FRANCISCO (Reuters) – Calpers’ disclosure that a firm led by a former board member reaped $50 million in fees for placing private equity investments at the largest U.S. public pension fund is adding to worries among local California governments using it to manage retirement benefits.
Some local officials said on Thursday that the California Public Employees’ Retirement System’s probe into the fees underscores the activist pension fund’s responsibility that it should hold a mirror up to itself and follow the advice it frequently dispenses for better corporate governance.
The $200 billion pension fund is reviewing placement agent fees paid to former board member Al Villalobos’ firm for private equity investments overseen by outside money managers.
Placement agents are under intense scrutiny in other states, notably New York and New Mexico, where politically connected individuals have served as middlemen for investment institutions, particularly private equity funds.
“It’s just one thing after another, where we have to question what’s going on,” said John Moorlach, an Orange County, California supervisor.
The top priority for local officials is how much Calpers pays out in retirement benefits defined in contracts with government employers, Moorlach said.
“Calpers is sort of the poster child for public defined benefit abuse,” he said. “There is a serious problem here.”
Scores of local governments across the most populous U.S. state pay into Calpers and its performance during the market downturn, marked by the loss of more than $50 billion in the last fiscal year, left them stunned.
They expect to be called on to help make up a shortfall to cover pension benefits.
“Our concerns, of course, are more about what the contribution rates are going to be,” Dwight Stenbakken, an official at the League of California Cities, told Reuters during a recent interview.
LETTING VOTERS DECIDE
A political campaign aimed at overhauling Calpers is already underway and the fund’s probe into placement agent fees could play to its advantage.
“To me it smells of corruption,” said Keith Richman, a former Republican state lawmaker and leader of the campaign.
Richman and associates have already embarrassed Calpers in recent months with a website posting the names of fund members receiving six-figure annual pensions, playing on the anxiety of investors with steep losses in 401(k) retirement accounts.
The headlines generated by the online effort has so emboldened the former lawmaker and his allies that they plan a ballot measure campaign to overhaul state public pensions.
One obvious change would be to impose two benefit tiers for public employees, said Steve Levy of the Center for the Continuing Study of the California Economy.
Under that plan, Calpers members would receive current benefits. New public employees would receive reduced benefits to give local governments some budget relief in the face of steep drops in tax revenues from falling property values due to the housing slump and sharply lower retail sales as consumers rein in spending.
OCTOBER 17 — SATURDAY
Enjoy a guided tour of Fairview Park in Costa Mesa, located at 2525 Placentia Avenue. We’ll meet at 9 a.m. at the park’s new interpretive area, near the west parking lot.
Costa Mesa’s Carol C. Proctor and Robert Staples will be leading the tour. The flyer, an invitation letter and the latest map of Fairview Park are attached.
We’ll learn about recent additions, improvements, restoration projects (with which the County and the Army Corps of Engineers has been assisting), and future projects.
Please RSVP by responding to this e-mail or contacting Carol Proctor at 714-754-5688 or CProctor@ci.costa-mesa.ca.us.
FIVE-YEAR LOOK BACKS
Bob Porterfield of the Associated Press did a thorough analysis of public employee pension plan sponsor pension obligation bonds (POBs) in his piece, “Governments borrowing heavily to cover growing pension shortfalls,” which was published around the nation. On this issue, we’ll have to research who coined the phrase “ticking time bomb” first. As to POBs, the OC has not issued new ones since our bankruptcy filing (only a refunding and defeasance). It’s amazing that this was written five years ago, as it is contemporary to today. Here is the beginning of the article and a later paragraph.
Local governments in California are borrowing money this year at a rate unmatched in the past decade to pay for growing deficits in their pension funds, according to an Associated Press analysis.
So far in 2004, local governments with pensions outside the giant California Public Employees Retirement System have issued nearly $1.7 billion in bonds just to pay for existing pension shortfalls. With three months left in 2004, that’s 50 percent higher than any year in the last decade, according to data from the California Debt and Investment Advisory Commission.
The stock market’s poor performance, shrinking tax revenues and the creeping expansion of employee benefits all contribute to the swelling deficits in public pensions. But whatever the cause, these debt numbers suggest California governments aren’t putting enough away for their employees’ retirement.
Increasingly, local governments are relying on pension obligation bonds to pay the difference between pension assets and payouts. Wall Street is happy to help, especially since courts have held that pension bonds can be issued without voter approval.
Ultimately, California’s taxpayers will pick up the tab for the shortfalls and for sweetened benefits as they pay off the bonds.
“It’s a ticking time bomb,” said Orange County Treasurer John Moorlach, “and everybody keeps walking around like there’s no problem.”
Moorlach, who is still grappling with the county’s 1994 bankruptcy, said a decision to improve benefits three years ago increased pension costs “by $400 million overnight.” Public pensions, he said, “may be the straw that breaks the camel’s back” of some government budgets.