Tag Archives: CalPers

What CalPERS On The Brink Of Insolvency Means

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The largest public pension fund in the United States is the California Public Employees Retirement System (CalPERS) for civil servants. California is in a state of very serious insolvency. We (Martin Armstrong) strongly advise our clients to get out before it is too late. I have been warning that CalPERS was on the verge of insolvency. I have warned that they were secretly lobbying Congress to seize all 401K private pensions and hand it to them to be managed. Mingling private money with the public would enable them to hold off insolvency a bit longer. Of course, CalPERS cannot manage the money they do have so why should anyone expect them to score a different performance with private money? Indeed, they would just rob private citizens to pay the pensions of state employees and politicians.

CalPERS has been making reckless investments with retiree capital to be politically correct with the environment rather than looking at projects that are economically based. Then, CalPERS has been desperate to cover this and other facts up to deny the public any transparency. Then, because stocks they thought were overpriced last year, they moved to bonds buying right into the Bond Bubble. Clearly, California’s economy peaked right on target and ever since there has been a steady migration of residents out of the state.

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Meanwhile, Governor Jerry Brown has been more concerned about bucking the trend with Trump effectively threatening treason against the Constitution. The insolvency at CalPERS has exceeded $100,000 owed by every private citizen in California to government employees. It was $93,000 that every Californian owed back in 2016 for their state employees. In January 2017, Jerry Brown wanted a 42% increase in gas taxes to bailout CalPERS. California is an extremely liberal state – but that means they are also LIBERAL in spending the FUTURE earning of residents on public employees.

The pension crisis at CalPERS is getting worse by the day. The State looks to be totally bankrupt by 2021-2022. CalPERS has just decided to increase the contribution of local governments and cities to their fund. The cities say they are approaching bankruptcy because of rising subsidies, but CalPERS itself is approaching insolvency. The problem is that there really is no honest reform in sight. The choice is clear – CUT pension benefits of government employees or RAISE TAXES! 

CalPERS simply needs a bailout and very soon. It looks like they are hunting for it by sharply increasing taxes where ever they can get away with it, for state employees to grab whatever they can of your future income for themselves. This is a trend that will bring down Western society as a whole – a Sovereign Debt Crisis of untold proportions.

Board Member Steve Westly even told The Mercury News that a bailout was needed and soon. Currently, CalPERS manages approximately $350 billion of future pension claims of its members. Recently, CalPERS passed an amendment to the statutes, which resulted in higher contributions for the California municipalities. The amount of contributions has been increased several times over the past few years and this time the cities do not appear to be able to handle the increased costs. With the Trump tax reform, the real incompetence of local government is coming to a head.

Once CalPERS was 100% funded with assets under management. In fact, they had a surplus in the good old days before Quantitative Easing. Right now, the system no longer has more than two-thirds of future claims covered. CalPERS itself expects an annual return of 7% on its financial investments when it needs 8% minimum. Most pension funds run by the States are insolvent or on the brink of financial disaster. This is what I have been warning about that the Quantitative Easing set the stage for the next crisis – the Pension Crisis. The Illinois Pension Fund needs to borrow up to $107 billion to meet its payment obligations with no prayer of repayment. Promises to state employees are over the top and off the charts. This is why Janet Yellen at the Fed kept trying to raise rates stating that interest rates had to be “normalized” for this was the crisis she knew was coming. And guess what – Europe is even worse and Draghi will not raise rates for fear that government will be unable to fund themselves. The ECB is creating a vast European Pension Crisis while trying to keep member state governments on life-support. It has purchased 40% of all sovereign debt and appears trapped and cannot reverse this process. The choice is pensions collapse or state collapse.

There is NO WAY OUT of this crisis. The portfolio would have to be completely restructured and benefits reduced. Lame Duck Jerry Brown will do everything in his power to raise taxes and fees to try to hold CalPERS together. That is by no means a long-term solution. If you can transfer to one of the 7 states without state income tax – do it NOW before it is too late.

Source: Martin Armstrong | Armstrong Economics

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California Supreme Court Set For Ruling That Could Cut Pensions For Public Workers

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For decades now public pensions have been guided by one universal rule which stipulates that current public employees can not be ‘financially injured’ by having their future benefits reduced.  On the other hand, that ‘universal rule’ also necessarily stipulates that taxpayers can be absolutely steamrolled by whatever tax hikes are necessary to fulfill the bloated pension benefits that unions promise themselves.

Alas, that one ‘universal rule’ may finally be at risk as the California Supreme Court is currently considering a case which could determine whether taxpayers have an unlimited obligation to simply fork over whatever pension benefits are demanded of them or whether there is some “reasonableness” test that must be applied.  Here’s more from VC Star:

At issue is the “California Rule,” which dates to court rulings beginning in 1947. It says workers enter a contract with their employer on their first day of work, entitling them to retirement benefits that can never be diminished unless replaced with similar benefits.

It’s widely accepted that retirement benefits linked to work already performed cannot be touched. But the California Rule is controversial because it prohibits even prospective changes for work the employee has not yet done.

The ballooning expenses are an issue that Gov. Jerry Brown will face in his final year in office despite his earlier efforts to reform the state’s pension systems and pay down massive unfunded liabilities.

His office has taken the unusual step of arguing one case itself, pushing aside Attorney General Xavier Becerra and making a forceful pitch for the Legislature’s right to limit benefits.

“Lots of people in the pension community are paying attention to these cases and are really interested in what the California Supreme Court is going to do here,” said Amy Monahan, a University of Minnesota professor who studies pension law.

“For years, self-interested parties, overly generous promises whose true costs were often shrouded by flawed actuarial analyses, and failures of public leadership had caused unsustainable public pension liabilities,” his office wrote. A ruling is expected before Brown leaves office in January 2019.

Meanwhile, it’s not just California taxpayers that have an interest in the Supreme Court’s decision as twelve other states also observe a variation of the ‘California Rule’, said Greg Mennis, director of the Public Sector Retirement Systems project at Pew Charitable Trusts. One of them, Colorado, has walked it back a bit, he said, requiring “clear and unmistakable intent to form a contract before pensions will be contractually protected.”

While a change to California’s interpretation of its rule would not automatically change legal precedents in other states, it could provide the catalyst for lawmakers to test changes that they previously considered unfeasible.

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As we pointed out earlier this year, the case currently before the Supreme Court comes after a lower court ruled that “while a public employee does have a ‘vested right’ to a pension, that right is only to a ‘reasonable’ pension — not an immutable entitlement to the most optimal formula of calculating the pension.” Here’s more from the Los Angeles Times:

The ruling stemmed from a pension reform law passed in 2012 by state legislators. The law cut pensions and raised retirement ages for new employees and banned “pension spiking” for existing workers.

Pension spiking has allowed some workers to get larger pensions by inflating their pay during the period in which retirement is based — usually at the end of their careers.

In a ruling written by Justice James A. Richman, appointed by former Gov. Arnold Schwarzenegger, the appeals court said the Legislature can alter pension formulas for active employees and reduce their anticipated retirement benefits.

“While a public employee does have a ‘vested right’ to a pension, that right is only to a ‘reasonable’ pension — not an immutable entitlement to the most optimal formula of calculating the pension,” wrote Richman, joined by Justices J. Anthony Kline and Marla J. Miller, both Gov. Jerry Brown appointees.

Of course, ‘reasonable’ can be a tricky term to define and for most union bosses it is synonymous with ‘MOAR’….the only question is does the California Supreme Court agree?

Source: ZeroHedge

California Cities Spiking Taxes to Pay Spiking Pension Costs

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California cities are being forced to spike taxes to pay for spiking public employee pension funding costs.

California Public Employees’ Retirement System (CalPERS) has just reported that its $344.4 billion defined benefit pension plan, which covers most state and local government employees, has fallen from a $2.9 billion surplus in 2007 to a $138.6 billion deficit as of June 2016. The rate of funding decline accelerated over the prior year by $27.3 billion.

With the pension plan’s funded ratio — equal to the value of plan assets divided by present pension obligations — having fallen to 68 percent, far below what actuaries call the 80 percent minimum for adequate fund, CalPERS is demanding that cities increase payments.

A recent report warned that CalPERS’ poor investment return of just 4.4 percent over the last decade could be further reduced by large and politically motivated “environment, social and governance” investment strategies. These so-called ESG strategies have drastically underperformed other pension plan returns, which explains why CalPERS is “in the midst of a plan to lower its investment return assumptions to 7% from 7.5% by July 1, 2019.”

CalPERS will pay out $21.4 billion in benefits to retirees and beneficiaries in 2017, a 5.5 percent increase from 2016 and more than double the $10.3 billion in 2007. But most of the 1.93 million retirement system members and 1.4 million health care participants who receive administration services from CalPERS are associated with local governments that are directly responsible for paying spiking benefit costs.

At the September CalPERS meeting in Sacramento, eight cities told the pension plan’s trustees that they are experiencing spiking pension funding costs. Representatives from the largest local governments in the Sacramento area claimed that pension funding costs are set to spike by 14 percent next fiscal year.

The city manager of Vallejo, which recently emerged from bankruptcy, said that the city’s police pension funding costs are expected to jump from about 50 percent to 98 percent of payroll over the next decade. Both Lodi and Oroville officials stated that they have had to cut a third of their staff over the last decade.

El Segundo mayor pro tem Drew Boyles told the CalPERS board last month that his city’s CalPERS required pension contribution will be $11 million next year, or about 16 percent of the general fund’s revenue. But the cost in five years is expected to hit $18 million, or 25 percent of general fund revenue. He blamed the increase on funding for police and fire pension costs that are set to spike from 50 percent to 80 percent of payroll.

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The California legislature passed SB 703, which will allow Alameda County and its local cities to raise about $148.9 million by exceeding the 2 percent local sales and use tax rate cap. The City Council of El Segundo plans to spike the local sales tax by an additional 3/4-cent to 10.25 percent to generate $9 million to pay for spiking pension funding costs.

All the local government representatives that have been addressing CalPERS’ monthly meetings complain that even after eliminating of services, slashing infrastructure spending, and planning for layoffs, they will still be forced to raise taxes to fund pension costs.

Despite California already being the highest-taxed state in the nation, the California Tax Foundation warned in June that Sacramento politicians were proposing another $16.9 billion in “targeted taxes and fees.” If passed, much of that tsunami of new cash could end up at CalPERS to fund pension shortfalls.

By Chriss W. Street | Breitbart

Update:

CalPERS Goes All-In On Pension Accounting Scam; Boosts Stock Allocation To 50%

Starting July 1, 2018 stock markets around the world are going to get yet another artificial boost courtesy of a decision by the $350 billion California Public Employees’ Retirement System (CalPERS) to allocate another $15 billion in capital to already bubbly equities.

Required Pension Contributions of California Cities Will Double in Five Years says Policy Institute: Quadruple is More Likely

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The California Policy Center estimates Required Pension Contributions Will Nearly Double in 5 Years. I claim it will be much worse.

In the fiscal year beginning in July, local payments to the California Public Employees’ Retirement System will total $5.3 billion and rise to $9.8 billion in fiscal 2023, according to the right-leaning group that examines public pensions.

The increase reflects Calpers’ decision in December to roll back the expected rate of return on its investments. That means the system’s 3,000 cities, counties, school districts and other public agencies will have to put more taxpayer money into the fund because they can’t count as heavily on anticipated investment income to cover future benefit checks.

Including the costs paid by cities and counties that run their own systems, the fiscal 2018 tab will be at least $13 billion to meet retirement obligations for public workers, according to the analysis, which is based on actuarial reports and audited financial statements.

Barring any changes to pensions, “several California cities and counties will find themselves forced to slash other spending,” the group wrote in its report. “The less fortunate will simply be unable to pay the bills they receive from Calpers or their local retirement system.”

Quadruple is More Likely

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The California Policy Center Report details 20 cities and counties reporting pension contribution-to-revenue ratios exceeding 10%. San Rafael, San Jose, and Santa Barbara County head the list at 18.29%, 13.49%, and 13.06% respectively.

The report “reflects the impact of CalPERS’ recent decision to change the rate at which it discounts future liabilities from 7.5% to 7%.

Lovely.

A plan assumption of 7.0% is not going to happen. Returns are more likely to be negative than to hit 7% a year for the next five years.

As in 2000 and again in 2007, investors believe the stock market is flashing an all clear signal. It isn’t.

GMO 7-Year Expected Returns

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Source: GMO

*The chart represents local, real return forecasts for several asset classes and not for any GMO fund or strategy. These forecasts are forward‐looking statements based upon the reasonable beliefs of GMO and are not a guarantee of future performance. Forward‐looking statements speak only as of the date they are made, and GMO assumes no duty to and does not undertake to update forward looking statements. Forward‐looking statements are subject to numerous assumptions, risks, and uncertainties, which change over time. Actual results may differ materially from those anticipated in forward‐looking statements. U.S. inflation is assumed to mean revert to long‐term inflation of 2.2% over 15 years.

Forecast Analysis

GMO forecasts seven years of negative real returns. Allowing for 2.2% inflation, nominal returns are expected to be negative for seven full years.

Even +3.0% returns would wreck pension plans, most of which assume six to seven percent returns.

If we see the kinds of returns I expect, even quadruple contributions will not come close to matching the actuarial needs.

by Mike “Mish” Shedlock