More Evidence That CalPERS Board (and Staff?) Does Not Understand Finance

Naked Capitalism ^ | 22 February 2016 | Yves Smith

[Lorianne]

This is just scary.

As those of you who follow the CalPERS soap opera may recall, California Governor Jerry Brown pushed for the giant pension fund CalPERS to lower its assumed investment return from 7.5% to 6.5%. Given that the world is headed towards deflation and that CalPERS earned only 2.4% for the fiscal year ended June 30, 2015, Brown’s request seemed entirely reasonable. Instead, the board approved a staff proposal to move to the 6.5% target over 10 years.

One of the things that is perverse about pension accounting is that the convention is that the liabilities, that is, what the pension fund expects to pay out over time, are discounted at the same rate as the assumed returns. However, for a government pension plan, where taxpayers are on the hook for any shortfalls, the risk of CalPERS beneficiaries getting their money is not the risk measured in terms of what CalPERS projects in terms of future employee contributions, expected returns, and expected payouts; it’s ultimately California state risk, which means the liabilities should be discounted at California’s long term borrowing rate. With California rated S&P AA3, Moody’s Aa-, and 20 year AA muni yields 2.75% and A at 3%, no matter how you look at it, the discount rate on the liability side is indefensibly high.

This matters on the estimation of liabilities because the lower the discount rate, the larger the amount (in current terms) that has to be paid out. Remember, this is the mirror image of “inflation can help bail out underwater borrowers” scenario.

[CharlesOConnell]

An annuitant, a retired employee returned to work to process retirees, tried to convince me not to cash in. "You'll get $1,600 a month, in addition to SS."

It's only a matter of time until the legislature confiscates their golden egg goose.

[Steely Tom]

In California, the measure of how smart you are is determined by where your name appears in the credit crawl at the end of a recent movie.

[stocksthatgoup]

Liars figures and figures lie.

[Parley Baer]

Seeing as they are all dimoKKKRATS it is not hard to understand.

[calljack]

I think you mean “Figures don’t lie, but liars figure”

[Vince Ferrer]

In a nutshell, CalPERS can’t make the return it needs with interest rates as low as they are. While lower rates are good for borrowers, they are not good for lenders, like pension funds. Eventually California will be forced to bail out the fund because they are legally required to. But this will cause a massive tax increase. The result of the tax increase will be people voting with their feet and leaving the late great state of California.

[DoughtyOne]

[taildragger]

"which means the liabilities should be discounted at California's long term borrowing rate.

I believe Ford did something like this with their Pension a few years ago ( note shut down to new employees, 401k only for them). See the link. CALPER's hasn't "de-risked" yet....

http://www.pionline.com/article/20120309/ONLINE/120309873/ford-to-derisk-pension-plans

[sergeantdave]

“Eventually California will be forced to bail out the fund because they are legally required to. “

How is California “legally required” to bail out the fund?