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CalPERS Past The Point Of No Return?

The American Council for Capital Formation, or ACCF, has recently made headlines with their scathing critique of the nation’s largest public pension system CalPERS (California Public Employees’ Retirement System). The report entitled “Point of No Returns” was published two weeks ago and argued definitely that CalPERS “continues to mislead taxpayers and pensioners to the true performance…” of their pension system. The study cited poor fund performance, poor financial, managerial competence, politically motivated decisions, and an artificially inflated discount rate as the reasons for the pension systems increased failure.

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These accusations did not sit well with CalPERS Board who issued a rebuttal to the report arguing that ACCF’s study “represent a fundamental misunderstanding about CalPERS’ investment strategy and operations.” The pension system’s board went on to suggest that ACCF’s report was drafted to “subliminally promote at anti-pension ideology.” ACCF retorted by explaining that CalPERS has managed to fail its solvency test. Fundamentally, the present value of the fund is not sufficient to cover future obligations: this is in large part because unfunded liabilities for the ailing pension system have grown by a crippling  $138 billion more than assets under management.

ACCF also gave pause to criticize CalPERS interest in poor performing ESG investments. Although the losses absorbed by the pension system accounted for only $600 million, it still represents annual benefits for 12,000 retirees at $50,000 each for one year, or 600 over 20 years. ACCF also went on to criticize CalPERS insistence on using a preconceived exorbitant discount rate to conceivably shield the amount of foreseeable future losses the fund will sustain. ACCF recommends that CalPERS should use a discount rate of 4% to which the CalPERS claimed that such an action “would do serious damage to many California cities, counties, other public agencies, and schools. If implemented, they would forever jeopardize the retirement security of millions of current and retired California public employees and their beneficiaries.”

It appears that from the numbers alone as well as from CalPERS own admission; the California pension system is indeed on the road to complete insolvency: this spells grave alarms for California taxpayers. Currently, CalPERS has a future liability of $436 billion while only having assets of $298 billion.

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