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Cali. pension fund admits board member took $50 mil. in fees to make bad investments

Thursday, October 15th, 2009 | Economics | Permalink | No Comments |

Wall Street Journal - Calpers Rocked by ‘Pay to Play’:

America’s largest public-pension fund, Calpers, revealed that a former board member had reaped more than $50 million in fees for arranging investments that could saddle state taxpayers with hundreds of millions of dollars in losses.

The disclosure deepens concerns that alleged conflicts of interest are undermining state retirement funds.

The California Public Employees’ Retirement System said it is launching a “special review” into payments by money managers — including billionaire Leon Black’s Apollo Management LP — to firms including Arvco Financial Ventures LLC. Arvco is headed by Al Villalobos, who served on Calpers’s board from 1993 to 1995.

Via W.C. Varones, who has a roundup of his past coverage of the California pension fund’s malfeasance.

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Kansas U: Kansas public pension fund is “bankrupt under current operating assumptions”

Thursday, September 24th, 2009 | Economics | Permalink | 3 Comments |

KU School of Business - THE FUNDING CRISIS IN THE KANSAS PUBLIC EMPLOYEES RETIREMENT SYSTEM (PDF link):

Continue reading the rest of this post right here ›››

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Low interest rates are bad for pension funds

Monday, August 31st, 2009 | Economics | Permalink | No Comments |

iTulip.com - Corporate Pension Fund shortfalls weigh on recovery:

Corporate pension funding shortfalls are a major operating cash flow problem for the corporations that experience shortfalls because by law corporations must finance pension funds to 100% over time. Pension fund shortfalls were problematic for most companies even before the financial crisis. Post crisis, the number of pension funds that are not 100% or better funded has increased from 67.6% in FY 2008 to 92.7% in FY 2009 ending in June. The median funded level is a mere 46%.

The pension funding shortfalls crisis initially appeared between 2002 to 2003 from a combination of falling stock prices and interest rates. The combination turned thousands of previously fully funded pension plans into underfunded plans.

An environment of low interest rates and low stock prices is a double whammy for pension funding because the net present value of liabilities increases as the net present value of assets falls.  As bad as the 2002 to 2003 period was for pension funds, the current crisis is nearly three times worse from a returns perspective, with no letup in sight.

That’s not the worst of it. According to the same source 81% of private medical pensions are underfunded with 65% containing no assets at all.

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CalPERS actuary says pension costs “unsustainable”

Tuesday, August 18th, 2009 | Economics | Permalink | No Comments |

Mish - CalPERS Admits California “Pension Costs Unsustainable” - So What To Do About It?

The CalPERS chief actuary says pension costs are “unsustainable,” and the giant public employee pension system plans to meet with stakeholders to discuss the issue.

“I don’t want to sugarcoat anything,” Ron Seeling, the CalPERS chief actuary said as he neared the end of his comments. “We are facing decades without significant turnarounds in assets, decades of — what I, my personal words, nobody else’s — unsustainable pension costs of between 25 percent of pay for a miscellaneous plan and 40 to 50 percent of pay for a safety plan (police and firefighters) … unsustainable pension costs. We’ve got to find some other solutions.”

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California’s farce continues towards its final act

Tuesday, August 11th, 2009 | Economics | Permalink | 28 Comments |

Courthouse News - California won’t accept its own IOUs for payment:

SAN FRANCISCO (CN) - Small businesses that received $682 million in IOUs from the state say California expects them to pay taxes on the worthless scraps of paper, but refuses to accept its own IOUs to pay debts or taxes. The vendors’ federal class action claims the state is trying to balance its budget on their backs.

Lead plaintiff Nancy Baird filled her contract with California to provide embroidered polo shirts to a youth camp run by the National Guard, but never was paid the $27,000 she was owed. She says California “paid” her with an IOU that two banks refused to accept - yet she had to pay California sales tax on the so-called “sale” of the uniforms.

I was telling someone the other day to imagine working for a company that was in as bad a shape as California.

It’s obvious that any company that had problems like California’s couldn’t stay in business. Anyone who thinks a government can be run that way is delusional.

Things are going to end badly in California. What happens in California is going to provide a glimpse of the problems the United States is going to have due to excessive spending, debt, and poorly-funded retirement programs.

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CALPERS plans riskier bets to recoup losses on previous risky bets

Saturday, July 25th, 2009 | Economics | Permalink | No Comments |

New York Times - California Pension Fund Hopes Riskier Bets Will Restore Its Health:

Mr. Dear wants to embrace some potentially high-risk investments in hopes of higher returns. He aims to pour billions more into beaten-down private equity and hedge funds. Junk bonds and California real estate also ride high on his list. And then there are timber, commodities and infrastructure.

That’s right, he wants to load up on many of the very assets that have been responsible for the fund’s recent plunge. Calpers’s real estate portfolio has tumbled 35 percent, and its private equity holdings are down 31 percent. What is more, under Mr. Dear’s predecessor, Calpers had to sell stocks in a falling market last year to fulfill calls for cash from its private equity and real estate partnerships. That led to bigger losses in its stock portfolio.

And there’s this:

Mr. Dear remains a believer. Private investments, he asserts, will over the long haul outperform stocks by three percentage points a year, and that is necessary to keep Calpers on track to returning its goal of 7.75 percent annual returns.

See Calling BS on high rates of expected return for why a 7.75% annual return - year in and year out - is unrealistic. These municipal pension fund managers and their political bosses have to pretend those returns are possible. Ootherwise they’d have to admit the pensions are woefully underfunded. California is broke and is planning cuts in basic services. They’d have to cut even more if they fully funded their massive pension funds.

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California pension funds lose $100 billion in a year

Friday, July 24th, 2009 | Economics | Permalink | 1 Comment |

LA Times - California’s biggest government pension funds lose almost $100 billion:

CalPERS’ preliminary losses were $56.2 billion in the fiscal year that ended last month, while the California State Teachers’ Retirement System lost $43.4 billion.

On Tuesday, the country’s two biggest public pension funds reported losing almost $100 billion in the fiscal year that ended June 30. And the governor is expected to highlight the new numbers as he renews a campaign to trim the cost of providing lifetime, fixed benefits to hundreds of thousands of government retirees.

Previously:

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Californians are getting the best government IOUs can buy

Wednesday, July 8th, 2009 | Economics | Permalink | 1 Comment |

It was 29 days ago that the California comptroller predicted the state would be out of money in 50 days. Unless California’s rich uncle dies (and his estate goes through an exceptionally fast probate) California will be broke in three weeks.

Last week California began issuing IOUs to conserve its cash. California IOUs are like Disney Dollars. They’re only useful in a fantasy world. In Disneyland mice and ducks talk and wear pants. In the California legislature public employee unions can get endless pay and benefit increases.

Part of California’s problem is that tax receipts have fallen disastrously, but the bigger problem is that California’s spending has risen disastrously. Matt Welch likes to note that California’s budget has grown faster than can be accounted for by the rate of inflation and the increase in its population. All the while, public sector union pensions funds have been helping themselves to public money like Scrooge McDuck.

According to Adam Summers—a policy analyst at the Reason Foundation, the nonprofit that publishes this magazine—the state’s annual pension fund contribution vaulted from $321 million in 2000–01 to $7.3 billion last year. According to public databases, more than 5,000 people are drawing pensions in excess of $100,000 from the state of California each year.

This is all going to come crashing down at some point, with that three week deadline looming large. California isn’t the only state with pension problems, but it looks like California is going to blow up first.

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More underfunded public pensions

Saturday, May 23rd, 2009 | Economics | Permalink | No Comments |

Baltimore Sun - Baltimore pension dispute illuminates public/private divide:

Severe market downturns lay bare any number of Ponzi schemes, and under-funded defined benefits pensions, public and private, can be justly described as such schemes. The problem with private plans is large enough. The Pension Benefit Guaranty Corp., which insures the pensions of 44 million Americans, said in a report this week that its deficit has tripled in just six months to a record $33.5 billion. Chances are it will have to be added to the growing list of entities to be bailed out by Uncle Sam. But this is trivial compared to the under-funding in public plans, which cover about 22 million workers. The deficits in the latter systems are said to total more than a trillion dollars. And these are not insured.

The gap between the public sector and private business in wages and benefits continues to grow. Last month, USA Today reported federal figures showing that public employees earned benefits worth $13.38 per hour in December 2008, compared to $7.98 for private sector workers.

What would you say about a government whose employees make more money than non-government employees performing the same job? That doesn’t sound like a government that has the best interest of its people at heart.

There was a time when people took government jobs for the security they offered. The bargain was that they would sacrifice pay for that security. Over time, the bargain tilted totally in favor of the government workers as they got both job security and higher pay than their counterparts outside government. Can this system be sustained? I think not, but we shall see.

The nature of our current bailout mania is wealth redistribution in reverse. Ordinary people are bailing out banks, car makers, and unionized and public sector workers who make more than them and who have better benefits. If California gets bailed out it will be bailed out by all of the states that are smaller and poorer. The rich are becoming a burden on the middle class and the middle class is becoming a burden on the poor. This can’t last.

Hat tip to Instapundit.

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Indiana state pensions sue to stop Obama’s Chrysler deal

Wednesday, May 20th, 2009 | Economics | Permalink | 1 Comment |

Obama’s plan for Chrysler demoted senior debt holders (whom he maligned as “speculators”) to benefit UAW union members. As a consequence of that decision Obama’s plan shortchanged police and teachers unions who had Chrysler investments in their pension funds. Now the state of Indiana is suing.

As stated in the filings, the US Treasury Task Force is seeking to use the Chrysler bankruptcy to extinguish the property rights of the pension funds as secured lenders, violating the most fundamental tenets of creditor rights in disregard of widely recognized bankruptcy jurisprudence. The proposed restructuring of stakeholders’ rights seeks to make payments of billions of dollars to unsecured creditors, while paying the secured creditors only 29 cents on the dollar.

“As fiduciaries, we can’t allow our retired police officers and teachers to be ripped off by the federal government. The Indiana state funds suffered losses when the Obama administration overturned more than 100 years of established law by redefining ‘secured creditors’ to mean something less,” explained Treasurer Richard Mourdock. “The court filing is aimed not only at recouping those losses but also reasserting the rule of law and preventing the federal government from pursuing policies that strike at the heart of the capital system.”

It’s Economics In One Lesson again: “The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.”

Previously: Obama’s GM plan pits unionized retirees against non-unionized retirees

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Automaker collapse will send worker pensions to government hands

Wednesday, April 29th, 2009 | Economics | Permalink | No Comments |

New York Times - Plight of Carmakers Could Upset All Pension Plans:

Pension experts predict that a government takeover of the two giant plans would spur other auto companies and all types of manufacturers to abandon such benefits for competitive reasons.

For hundreds of thousands of retired auto workers, a federal pension takeover would mean sharply reduced benefits. For the federal agency that insures pensions, it would mean a logistical nightmare in the short term — and most likely a slow demise eventually as fewer and fewer small plans remain in the system and pay premiums.

So far, the prospect of a grueling grind through bankruptcy court has been a major deterrent to companies that might want to rid themselves of pension obligations. But retirement and labor specialists are watching closely to see whether the administration’s auto task force will give either of the auto companies an easier way to shed their huge pension funds, blazing a simplified trail for others to follow.

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Guess what GM’s employee pension plan was invested in?

Tuesday, April 28th, 2009 | Economics | Permalink | No Comments |

GM’s pension plan was invested in GM’s own stock. Brilliant.

Congratulations of sorts go to GM and State Street Bank and Trust Co., the plan’s financial manager, for one final display of ineptitude. Is this a case of better late than never, or a case of why even bother?

What it does show is why company plans, especially plans for struggling companies ought not be in their own shares. GM employees will be out of a job and any shares owned are essentially worthless.

Now, in all likelihood, GM’s pension plan will be dumped to the Pension Benefit Guaranty Corporation (PBGC) which is another way of saying US taxpayers.

Investing your employee pension plan in the company’s own stock. As Taleb said about derivatives, it’s like buying insurance on the Titanic from a passenger on the Titanic. If the Titanic goes down you’ve got nothin’.

Incidentally, this is one reason employee stock purchase plans and employee-owned companies are risky. If the company goes under you’re out of a job and out your investment, too. Sometimes it pays off (lots of UPS drivers got rich when the company IPO’ed), but sometimes it doesn’t.

Previously

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Moody’s may downgrade local govt bonds

Monday, April 13th, 2009 | Economics | Permalink | No Comments |

New York Times - Muni Bonds May Face Downgrade:

Moody’s Investors Service assigned a negative outlook to the creditworthiness of all local governments in the United States, the agency said Tuesday, the first time it had ever issued such a blanket report on municipalities. The report signaled how severely the economic downturn was affecting towns, counties and school districts across the nation.

While Moody’s regularly reports on the financial strength of various sectors of private industry, its analysts have in the past considered America’s tens of thousands of towns and local authorities too diverse for generalizations.

The report suggests that the ratings of many governments could be downgraded in the coming months, something that would make it more expensive for them to borrow money to finance their operations. In the most extreme cases, municipalities might default on some of their obligations, as Jefferson County, Ala., has been threatening to do for a number of months.

LATER: I originally posted this without comment. My comment would be “holy crap!” Moody’s just pointed a finger at every municipal entity in the U.S. and suggested they’re not as sound as people previously thought.

Why not? Well, they tend to depend on property taxes and property values are down and heading down further. They depend on sales taxes and nothing is selling as well as it used to (just ask Circuit City, GM, and Chrysler).  Any local or state government with a pension plan is probably in trouble, too.

When Wall Street started tanking some people were quick to talk about the end of capitalism. The alternative to capitalism is to have the government in charge of the economy. We’re about to see how clean the government’s books are. I suspect the government accounting is at least as crooked as some of the corporate accounting.

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Pension Benefit Guaranty Corporation lost its shirt in stocks

Tuesday, March 31st, 2009 | Economics | Permalink | No Comments |

Boston Globe - Pension insurer shifted to stocks:

Just months before the start of last year’s stock market collapse, the federal agency that insures the retirement funds of 44 million Americans departed from its conservative investment strategy and decided to put much of its $64 billion insurance fund into stocks.

Switching from a heavy reliance on bonds, the Pension Benefit Guaranty Corporation decided to pour billions of dollars into speculative investments such as stocks in emerging foreign markets, real estate, and private equity funds.

The agency refused to say how much of the new investment strategy has been implemented or how the fund has fared during the downturn. The agency would only say that its fund was down 6.5 percent - and all of its stock-related investments were down 23 percent - as of last Sept. 30, the end of its fiscal year. But that was before most of the recent stock market decline and just before the investment switch was scheduled to begin in earnest.

Despite its name, the agency does not necessarily guarantee the full value of a person’s pension and is not backed by the full faith and credit of the government.

Nonetheless, agency officials say that if the pension agency fails to meet its obligation, the government would come under intense political pressure to step in. That means taxpayers - including those who don’t get pensions - could be asked to pay for a bailout.

And now besides guaranteeing pensions and banks, the government is going to warranty the transmission on your Chrysler. What could possiblie go wrong?

Hat tip to Bob Krumm.

This isn’t the first time an underfunded government program with an impossible financial burden has done something this stupid. CALPERS, the California government pension fund, invested in real estate just before the crash and is down billions. And who could forget Rod Blagojevich’s Illinois pension scheme:

With pensions seriously underfunded in 2003, recently arrested and impeached Governor Rod Blagojevich rolled the dice and issued “pension obligation bonds.” The idea was that Illinois would issue debt at a cost of 5.1% and then earn 8.5% or so investing the proceeds. The plan turned into a disaster when the market tanked last year. Now short roughly $60 billion, Illinois has barely half of what it needs to cover future pension obligations.

Previously

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Judge rules that Vallejo, CA can cancel public union contracts

Wednesday, March 18th, 2009 | Economics, Politics | Permalink | No Comments |

Via Mish:

In the first ruling of its kind, a bankruptcy judge held the city of Vallejo, Calif. has the authority to void its existing union contracts in its effort to reorganize, holding public workers do not enjoy the same protections Congress gave union workers at private companies.

Municipal bankruptcy is so rare that no judge had yet ruled on whether Congressional reforms in the 1990s that required companies to provide worker protections before attempting to dissolve union contracts also applied to public workers’ union contracts.

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The Pension Benefit Guaranty Corp.

Wednesday, February 18th, 2009 | Economics | Permalink | 3 Comments |

Reason:

The PBGC is the “government corporation that insures the pensions of 44 million workers and retirees.” You get one guess who is going to have to pay the piper on this one. The fund takes over private-sector defined-benefit plans when they are terminated. As the AP reports, nine of the 10 biggest pension terminations guaranteed by the PBGC have occurred since 2001.

If GM or Chrysler tank, guess who guarantees those fat union pensions? The PBGC, which like the FDIC is a taxpayer-funded “corporation.”

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More on the public/private pension fund disparity

Monday, February 9th, 2009 | Economics | Permalink | 1 Comment |

Forbes - Gilt-Edged Pensions:

America, in case you hadn’t noticed, is dividing into two nations. The 22.5-million-strong public sector (that includes retirees) is growing ever larger, and enjoying ever greater wages and benefits often guaranteed by state constitutions.

In private-sector America your job, assuming you still have one, hangs on the fate of the economy. If your employer ever offered a pension for life, like young officer Goss is receiving, odds are it has stopped doing so, or soon will. Those retirement accounts you scrimped and saved to assemble? Unless they are invested in Treasurys, they aren’t doing too well. In private-sector America the math leads to the grim prospect of working longer and living poorer.

In public-sector America things just get better and better. The common presumption is that public servants forgo high wages in exchange for safe jobs and benefits. The reality is they get all three. State and local government workers get paid an average of $25.30 an hour, which is 33% higher than the private sector’s $19, according to Bureau of Labor Statistics data. Throw in pensions and other benefits and the gap widens to 42%.

And check the story for Rod Blogojevich’s CALPERS-style desperation move to save the Illinois pension fund.

With pensions seriously underfunded in 2003, recently arrested and impeached Governor Rod Blagojevich rolled the dice and issued “pension obligation bonds.” The idea was that Illinois would issue debt at a cost of 5.1% and then earn 8.5% or so investing the proceeds. The plan turned into a disaster when the market tanked last year. Now short roughly $60 billion, Illinois has barely half of what it needs to cover future pension obligations.

Ouch. Those are the kinds of moves gambling junkies make when they pawn their wedding rings to get enough money to bet on a longshot in the fifth race. Just replace “wedding ring” with “state bonds.”

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“If you did not know it before, you do now. California is bankrupt.”

Monday, January 19th, 2009 | Economics | Permalink | 2 Comments |

Mish - Sharing The Pain In California (quoting the San Jose Mercury News):

If Gov. Arnold Schwarzenegger were to fire every employee in state government tomorrow, it would easily patch California’s enormous deficit, right? Not even close.

But surely shutting down all state prisons would do the trick? That, too, would only get him about a quarter of the way there.

Now what if he were to close every prison and cut off funding for health care and other services for the poor? Now we’re in the ballpark.

I’d like to see how the state’s public pensions stack up to that $40 billion projected deficit. Mish has lots more.

If you did not know it before, you do now. California is bankrupt. So is Ohio. So are numerous cities like San Diego. All told, 44 States Face Huge Budget Shortfalls. My big fear in this mess is that Obama will attempt to bail out the states before much needed reforms are made. Such actions will only postpone the problems.

Previously

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