Why California and Other State Pensions are Just Like Social Security.

The California government employees pension fund (CalPERS) is caught in a war between the current government workers and the retired government workers.  It is the biggest pension fund in the USA and its problems are typical of all government pensions.  It has overpromised and it is underfunded.  This is not going to end well for California state retirees, current government employees, or California taxvictims.

CalPERS Defends Pension Benefits While Risking Losses

By James Nash - Aug 19, 2012 10:01 PM MT

The California Public Employees’ Retirement System, the largest U.S. pension, is defending government workers against criticism of their benefits even while it risks losses as municipalities, faced with rising retirement costs, file for bankruptcy.

Pension funds like to buy bonds because fund managers believe that bonds carry less risk than stocks.  Therefore, CalPERS is a large buyer of municipal bonds.  It bought Stockton and San Bernardino municipal bonds.  It probably bought Greek bonds also.  Why not?  The knuckleheads running this fund lost almost a billion dollars on Enron and WorldCom bankruptcies (http://www.treasurer.ca.gov/publications/actions.pdf).  The $290.8 million at stake amount to one-tenth of one percent of the funds assets.

The $239.1 billion fund is the largest creditor in bankruptcy cases filed by two California cities, Stockton and San Bernardino, since the end of June, with a total of $290.8 million at stake.

Current government workers in Stockton and San Bernardio account for 0.7% of CalPERS total contributions.

Increasing retiree obligations are straining budgets of cities across the Golden State, still grappling with income- and sales-tax revenue reduced by the longest recession since the Great Depression. The two bankrupt cities represent 0.7 percent of employer contributions to CalPERS, according to actuarial statements. Still, others may follow if judges relieve them of pension commitments, said Karol Denniston, a bankruptcy lawyer at Schiff Hardin LLP based in San Francisco.

“The briefs that have been filed by the insurers are interesting in that they’re arguing that CalPERS should be treated like any other creditor,” she said by telephone. “CalPERS is going to argue that they’re a different kind of creditor, in that they hold the money in trust for the retirees.”

Stockton, a city of about 292,000, about 80 miles (130 kilometers) east of San Francisco, and San Bernardino, with 209,000 residents, about 60 miles east of Los Angeles, both cited rising employee retirement costs as factors that drove them to seek court protection. A third community in bankruptcy, Mammoth Lakes, hobbled by a legal judgment, owes CalPERS $4.2 million, according to its filing.

Stockton Precedent

“Where this is so important is that we know Stockton is going to be precedential,” Denniston said.

CalPERS is a Stockton bondholder (they are playing the role of the northern European bankers) and Stockton is in serious financial turmoil (they are playing the role of Greece).

Stockton is trying to become the first American city since the 1930s to use bankruptcy to force bondholders to take less than the principal they’re owed. The city will need approval from a federal judge in Sacramento to impose any cuts on creditors.

In an Aug. 2 statement responding to insurer Assured Guaranty’s objections to Stockton’s bankruptcy filing, CalPERS general counsel Peter Mixon argued that the interests of pensioners should trump those of other creditors.

Mr. Mixon’s comments are designed to elicit emotional support to CalPERS predicament by claiming that the public employees are not in a position to evaluate credit risk.  CalPERS fund managers are responsible for evaluating municipal government credit risk.  CalPERS fund managers had proven themselves to be as stupid as the northern European bankers that lent money to Greece.

“The obligations owed to the public workers of the city have priority over those of general unsecured creditors including bondholders,” Mixon wrote. “Unlike insurance companies, policemen, firefighters, and other public employees are not in a position to evaluate credit risk of their employers.”

Even as it defends its standing in the Stockton case, CalPERS is working to counter the notion that pension costs are a significant factor in current and potential municipal bankruptcies.

‘Not Fair’

“It’s not fair to scapegoat public employees and pensions for the financial woes of our cities,” Rob Feckner, the chairman of the CalPERS board, wrote in an Aug. 8 op-ed in the Sacramento Bee. Feckner is an executive vice president of the California Labor Federation, which represents 2.1 million unionized workers, about half of them in government.

So, what then are the real causes of current and potential municipal bankruptcies?  Not unsustainable pensions with rising costs.  Oh, no.  I couldn’t be that.

“The real culprit is the economy and housing market, along with financial decisions made by city officials,” he said. “Pension costs are a small piece of the budget.”

CalPERS’ position contradicts the realities facing many municipalities, said Chris McKenzie, executive director of the League of California Cities. Reducing pension costs is the top priority this year for the Sacramento-based organization, McKenzie said by e-mail.

Rising Costs

“Cities statewide have seen pension costs rise to the point that they are no longer viewed as sustainable,” McKenzie said. “Soaring pension costs are a serious concern.”

While pension costs are roughly 10 percent of most city budgets, municipalities need flexibility to deal with them when revenues slump, said Dan Pellissier, president of California Pension Reform.

CalPERS is a ponzi scheme just like Social Security.  It is obligated to pay the pension to the retirees, but they also know that city/county/state budgets will be destroyed by rising pension costs.  Current workers in the ponzi scheme must be courted and reassured that the ponzi scheme really isn’t a ponzi scheme.  The current workers are needed to pay for the retirees.  That’s why CalPERS representatives are talking out of both sides of their mouths.

“It’s ironic that CalPERS is defending a system that is placing an unsustainable burden on employers’ budgets,” Pellissier said in an interview in Anaheim, California, where he spoke at a CalPERS forum on pension legislation. “CalPERS has to find out a way to work with government agencies that have overpromised benefits based on contribution rates that have been artificially low.”

So we learn that the municipalities are the source of 14 percent of CalPERS income annually.  As CalPERS investment returns fall short of their assumptions of 7.5% rate of return they will demand higher contributions from current workers to “save the system”.  Eventually, the retirees will get screwed when the younger California voters outnumber them.  This will take a while, but it will happen.

More than 1,500 cities, counties and other units of government pay into the fund, according to a CalPERS fact sheet. Such employer contributions accounted for $7.5 billion, or less than 14 percent of CalPERS’ total income in 2010-11; most of the income came from investment earnings.

Investments Return

CalPERS, which posted a 1 percent return on investments for the year ended June 30, has about 72 percent of the assets needed to pay long-term obligations to retirees, spokesman Brad Pacheco said.

CalPERS claims to have 72 percent of the assets it needs to keep the ponzi scheme going (based on false assumptions to begin with).  But let’s assume Mr. Pacheco is correct.  Where is CalPERS going to get the other 28 percent of assets that it needs to keep things going?  Its going to get it from the current workers in the form of higher contributions.  The more municipalities that go bankrupt; the more CalPERS doesn’t have enough assets to cover the current pension obligations to retirees.  This is exactly the same problem as Social Security and Medicare, but on a state level.

Even if the three bankrupt cities withheld their entire payments due to CalPERS, it would not “move the needle” on the pension’s funded status, Pacheco said in an e-mail message.

Robert Udall Glazier, a CalPERS deputy director, said leaders of the fund view cities’ financial distress “with great concern.”

“These cities,” he said, “are our partners in providing services and a better quality of life for Californians.”

Let me translate: We need the money from the current city employees to make up for our poor investment performance and growing pension payouts.  If the stock market doesn’t do what it did from 1982-2000, then we’re screwed.  If the Federal Reserve prints trillions of dollars and the banks lend it out, then there will be massive inflation which will destroy the asset value of all these bonds we’ve bought from the Greeks – Ahem! I mean cities.

The Stockton bankruptcy case is In re Stockton, 12-32118, U.S. Bankruptcy Court, Eastern District of California (Sacramento).

To contact the reporter on this story: James Nash in Los Angeles at jnash24@bloomberg.net

To contact the editor responsible for this story: Stephen Merelman at smerelman@bloomberg.net

The good news is that the State of California, the counties, and the cities will not be able to afford all the stupid government spending and regulations that they have put into place.  There will be more freedom once they go bankrupt through visible default on their welfare obligations.  That is good for individual liberty.

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