MOORLACH UPDATE — 37th in the 37th — August 9, 2017

First, I would like to wish my lovely, wonderful and patient wife a happy 37th anniversary! Thank you, honey, for putting up with the public service sacrifices for more than half of our married bliss. You’re incredible.

Second, the LA Times had a great Sunday California section front-page piece on the city of Loyalton (see http://www.latimes.com/politics/la-pol-ca-loyalton-calpers-pension-problems-20170806-htmlstory.html).

This city’s efforts to escape from the CalPERS "lobster trap" was the genesis for my legislative effort in Senate Bill 681, which is now a two-year bill. On June 28th, a joint hearing was held with the Senate Public Employment and Retirement Committee, on which I sit, and the Assembly Committee on Public Employees, Retirement, and Social Security. The California Policy Centerpiece below links to this hearing.

The little fact that a State Legislator was actually trying to address this matter, what is known as the Terminated Agency Pool procedure at CalPERS for exiting municipalities, was not addressed in the article. But, the California Policy Center’s Steven Greenhut realized it and provides his coverage in the first piece below.

Since this was missing from the LA Times article, I decided to let them know through a Letter to the Editor submission, with links to various segments of the hearing. Here’s what you may see in one of its upcoming editions:

Re “A tiny town’s massive pension trouble” Aug. 6: http://www.latimes.com/politics/la-pol-ca-loyalton-calpers-pension-problems-20170806-htmlstory.html

Your article ably reported on the problem the small city of Loyalton is facing with its unfortunate and expensive withdrawal from CalPERS. But, CalPERS created the problem some 40 years ago and Loyalton is the tip of the spear in reacting to the implications of this tightening fiscal straightjacket. The current procedure of withdrawing from CalPERS is in dire need of reform.

I authored a solution to help fiscally strapped municipalities get out of this “lobster trap,” as I called it during a recent joint hearing.

.

John Moorlach,

Costa Mesa

The writer is the Republican state senator for the 37th district

Third, Steven Greenhut is on a roll. In the second piece below he discusses the results of SB 185 that were prophesied in the same publication that he writes for today, CalWatchDog (see MOORLACH UPDATE — SB 185 — November 6, 2015 november 6, 2015 john moorlach). If you choose not to go to the link, let me at least give you the headline: "California pension systems stand to lose millions by divesting from coal." Spot on. Again. When will the monopoly party learn? This piece may provide a hint as to why many cities want to exit CalPERS.

BONUS: The summer evening BBQ and Taco Bar fund raiser at the home of Scott and Wendy Baugh tomorrow evening is almost at capacity. This is going to be a fun party. Thanks to those who have RSVP’d and to those who are making generous contributions, even though your summer schedules prevent you from attending. I am most grateful

There is still a little bit of backyard space available and I would love to see you there! For more information, contact Scott@MoorlachforSenate.com or go to MOORLACH CAMPAIGN UPDATE — BBQ Invitation — July 22, 2017 july 22, 2017 john moorlach. My thanks to Cox Communications for being our corporate sponsor.

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Same old story as Loyalton’s woes echo growing pension crisis

By Steven Greenhut

http://californiapolicycenter.org/old-story-loyaltons-woes-echo-growing-pension-crisis/

The tiny Sierra Nevada mountain town of Loyalton, Calif.—population: 862—has become the poster child for cities that want to check out of the California Public Employee’s Retirement System, but can’t swallow the insurmountable cost of leaving. Loyalton’s oft-repeated tale appeared again this week, on Sunday in the Los Angeles Times.

All the familiar characters are there, in the Times story. There’s CalPERS demanding far more money than the city spends on its entire annual budget. There are cash-strapped city officials struggling to make ends meet (even though their spending priorities were criticized by a 2014 grand-jury report). And there are retirees looking to get by on 40 percent of their promised pensions.

The only thing missing is a solution.

Sen. John Moorlach, R-Costa Mesa, has proposed a serious solution in the state Capitol, but the legislation has a ballpark-zero chance of passage given the power of union-allied Democrats. His Senate Bill 681 would allow an agency to “terminate its contract with CalPERS in a manner that does not result in excessive costs or penalties” while ensuring that the agency is responsible for the full costs of its employees without shifting them onto other CalPERS participants.

Though it would seem fair – and would better protect promised benefits in Loyalton and other agencies facing a similar situation – the measure is opposed by several unions. They know that once an agency has exited the system, CalPERS cannot collect anything from it in the future. That’s why CalPERS’ current approach reminds Moorlach of the lyrics from the Eagles’ song, Hotel California: “You can check out any time you like, but you can never leave.”

In 2013, the Loyalton City Council voted to end its contract with the California Public Employees’ Retirement System, the $300 billion behemoth that manages pensions for the city’s four retirees and single full-time employee. Loyalton “voted to pull out of CalPERS when its last pension-eligible employee retired,” according to the recent Times article, “deciding the monthly payments were too steep for a town that for years flirted with insolvency.”

But CalPERS wasn’t about to let the city go. In June 2014, it handed Loyalton a bill for a $1.66 million “termination” fee. Given its small $1 million annual budget, Loyalton couldn’t come up with the funds. The result was every public employee’s nightmare: Beginning last November, retirees had their modest pension checks cut by 60 percent. Some other small agencies that left the CalPERS system are looking at major cuts in retiree benefits, too.

The fund, whose sole purpose is to protect the retirement benefits of California public employees, was remarkably cold-hearted about the situation. “As a board, we have a fiduciary responsibility to keep CalPERS Fund on secure footing, and as part of this duty we must ensure that employers adhere to the contracts they agreed to,” CalPERS wrote in a November statement.

Certainly, contracts need to be honored, but there’s something seedy about the way the system is designed. During a recent legislative hearing, Moorlachfocused on the most relevant point: “When you want to exit, they use a whole different discount rate … It could be like 2 percent.” That’s a shocking revelation, although it needs some explanation.

The predicted rate of return on CalPERS’ investments determines the size of the system’s unfunded liabilities – i.e., the shortfalls to meet promises made to California public employees. CalPERS expects to earn 7 percent(recently lowered from 7.5 percent) on those investments. The higher the predicted return, the better the financial shape of the system.

Public employees are promised a pension based on a formula (the number of years worked multiplied by a percentage of the final years’ salary) and taxpayers are responsible for any shortfalls. So the pension fund, and the unions and politicians, have a vested interest in keeping the earnings assumptions as high as possible to downplay any predicted shortfalls.

Moorlach revealed a dirty little secret. The agency is bullish about the stock market when the public’s money is at risk, figuring that 7 percent is a fair rate to expect. But when cities want to exit the fund, CalPERS becomes shockingly conservative, given that its own money is on the line. It then assumes a miniscule rate of return. CalPERS assesses those high termination fees to make up the difference between its overall fund and the special fund for terminated agencies, which can no longer depend on taxpayers to make up for future downturns.

As that Times article noted, the federal judge handling the Stockton bankruptcy case “called the fee a ‘golden handcuff’ and ‘poison pill’ that prevents cities and other local governments from leaving CalPERS to find other options for employee pension benefits.” When the fund tried to assess a $1.6 billion fee on Stockton, that city stayed in CalPERS and didn’t reduce pensions for current employees and retirees. Those current and former employees still enjoy lush deals, even as the city raised taxes.

Ironically, CalPERS’ defenders criticized a 2011 Stanford study that projected a 4.1 percent rate of return as realistic, yet the fund’s handling of the Loyalton exit is a tacit acknowledgment that the system’s expected returns are unrealistically high and that pension debts are far larger than the state will acknowledge.

Meanwhile, CalPERS maintains big surpluses in the special fund for those agencies that terminated their accounts — $111 million, according to the Times. CalPERS apparently has thrown a handful of low-earning, small-town public employees under the bus to make an example for other agencies and protect the inordinately high earnings of many public employees, especially those in the public-safety and management professions.

Former San Jose Mayor Chuck Reed, a Democrat who had placed a pension-reform measure on that city’s 2012 ballot (it passed with 70 percent support, but was gutted by the courts), has described the Loyalton situation as a “wake-up call” for underfunded pension systems. “Failure to fund pension obligations as they are incurred makes retirement security impossible,” he wrote in the San Diego Union-Tribune in December.

For now, these retirement-security issues fall heaviest on some small agencies with the audacity to try to leave the nation’s largest state pension fund. Presumably, public employees and retirees in agencies deemed “too big to fail” can continue to sleep without fear. But it reminds one of another line from Hotel California: “Up ahead in the distance, I saw a shimmering light.” How long will it be before Loyalton’s problems afflict bigger California cities?

Steven Greenhut is a contributing editor for the California Policy Center. He is Western region director for the R Street Institute. Write to him at sgreenhut.

CalWatchdog.com

CalPERS’ divestment goals in crosshairs as coal stocks soar

by Steven Greenhut

http://calwatchdog.com/2017/08/09/calpers-divestment-goals-crosshairs-coal-stocks-soar/

SACRAMENTO – A newly released report from the California Public Employees’ Retirement System confirms that, fulfilling the Legislature’s directive to divest from coal-related investments, the pension fund has now largely exited from coal stocks. But as news reports this week suggest, this “socially responsible” investment policy has come at a price, as coal stocks soar under the Trump administration’s fossil-fuel-oriented energy policy.

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The Public Divestiture of Thermal Coal Companies Act of 2015 required CalPERS to “identify, engage and potentially divest from companies meeting the definition of ‘thermal coal companies.’” The pension fund was directed to do so “consistent with its fiduciary responsibilities,” providing some wiggle room for the fund, whose primary duty is to maximize investment returns to make good on its public-employee pension obligations.

Nevertheless, CalPERS promptly identified two dozen publicly traded companies that generate at least 50 percent of their revenue from mining thermal coal, as required by the law. As the recent report explains, three companies adapted their business model and redirected their investments toward clean energy. As such, they were exempt from divestment. CalPERS had no holding in eight other companies identified under the act.

But 14 companies “failed to indicate applicable business plan adaptations, or failed to respond to CalPERS engagement efforts and were subject to divestment,” according to the report. As the Sacramento Bee explained, “stocks for 13 of the 14 companies are worth more than they were a year ago when the pension fund was divesting from the industry.” The shares of one of those firms were trading at 15 times their April 2016 levels.

There’s little question that the act was designed to achieve a social goal, rather than one related to increasing CalPERS’ investment returns. “Coal combustion for energy generation is the single leading cause of the pollution that causes global climate change,” said the bill’s author, Sen. Kevin de Leon, D-Los Angeles, as quoted in the Senate bill analysis. He added that coal is “a leading cause of smog, acid rain, and toxic air pollution” and that “most U.S. coal plants have not installed these technologies.”

CalPERS’ investment staff tends to oppose socially oriented investments, but the CalPERS board has the final say. The issue was debated at the CalPERS Board of Administration meeting in May. The Sacramento Bee reported on union officials who criticized the policy at the board meeting. “We cannot afford to lose funding for law enforcement officers in exchange for a socially responsible investment policy,” said Jim Auck, treasurer of the Corona Police Officers Association.

This isn’t the first time that there’s been tension between the fund’s politically oriented investment goals and its desire to increase investment returns. At a board meeting last year, CalPERS investment officials argued for an end to a 16-year ban on tobacco-related investments made by the system’s own investment officers. (Tobacco investments by outside firms were still allowed.) Because tobacco stocks had rebounded since 2000, news reports estimated that the pension fund had lost about $3 billion because of that decision. The fund’s total investments are valued at more than $300 billion.

Instead of following the investment team’s advice, the CalPERS board continued to ban tobacco investments and also decided to divest about $547 million in tobacco-related investments handled by outside firms. That decision also was based on social goals. Advocates for tobacco divestment argued that CalPERS ought not invest in firms that sell deadly products.

At the time, the tobacco-divestment decision was particularly controversial because CalPERS faced investment returns of a measly 0.61 percent. Now, with CalPERS’ latest returns showing a robust 11.2 percent gain, it makes continuing with the coal divestment plan – and other socially oriented investment strategies – an easier option to pursue.

Regarding coal, CalPERS isn’t the only state agency to pursue divestment. Last summer, California Insurance Commissioner Dave Jones launched his Climate Risk Carbon Initiative, which called for any insurance companies that do business in California to divest “voluntarily” from most of their thermal-coal investments. The state vowed to publicize the names of companies that didn’t comply and ramped up mandatory reporting requirements.

Insurance commissioners regulate insurers to assure they have the resources to pay any claims. Yet the department’s divestment request clearly had a social (and some say political) goal. Jones justified it by arguing that such investments put the companies at risk. “As utilities decrease their use of coal and other carbon fuel sources … investments in coal and the carbon economy run the risk of becoming a stranded asset of diminishing value,” he said in a statement.

But critics of the policy, including a 2016 study by this writer, note that insurers are invested in extremely conservative positions, mostly in fixed-income bonds, and that even the insurer with the largest percentage of coal-related investments (TIAA-CREF) had only 1.76 percent of its total assets in such holdings. Furthermore, the value of the stocks already reflects the well-known uncertainties that the insurance commissioner raised. Jones’ office argued, in response, that “since 2011, coal prices, cash flows, and company valuations have fallen sharply thus adversely affecting and bankrupting numerous coal companies.”

The broad question, especially for CalPERS, is the one raised by the union officials at the recent board meeting: Are the political and social gains of divesting from these industries worth the costs in investment returns?

Chief investment officers “invest for value and don’t appreciate being hamstrung by legislators who don’t know how to manage a diversified portfolio,” said Sen. John Moorlach, R-Costa Mesa, who voted against Sen. de Leon’s divestment act. “I think I’m the only legislator who managed a $7 billion portfolio. And the studies I’ve seen have shown that social investing has produced lower returns.”

Despite the recent good-news returns, CalPERS has an enormous amount of unfunded liabilities – the shortfall in assets to make good on all the long-term pension promises made to government employees. The system is only funded at around 68 percent. This should be of concern not only to the agency, the Legislature and public employees who depend on a CalPERS retirement, but to California taxpayers. Ultimately, they are the ones who will pay for any pension shortfalls.

Steven Greenhut is Western region director for the R Street Institute. Write to him at sgreenhut.

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