Economics

How California Public Pensions Fell Into Crisis

Like many public pension systems, California Public Employment Retirement System, or CalPERS, is marred with increased unfunded pension liabilities and cost overruns from mismanagement. It has culminated in desperate measures to stem the inevitable- bankruptcy.

[REITs]

Check out our H2 hedge fund letters here.

Calpers logo CaLPERs private equity

Last week, the CalPERS voted to change their period for recouping losses from 30 years to 20 years. This is an effort to attempt to obtain much needed capital to ward off insolvency concerns for the pension system. The public pension will require state governments and thousands of local government employees to increase their mandatory contributions to a languishing fund.

Many agencies, in particular cities, have been complaining about the increased required contributions that has reached doubt-digits annually. These payments are driving some municipal concerns toward insolvency.

“What we are trying to avoid is a situation where we have a city that is already on the brink, and applying a 20-year amortization schedule would put them over the edge,” a representative of the League of California Cities, Dane Hutchings, told the CalPERS board before its vote.

Nevertheless, CalPERS is nearing the point of no return as it attempts a series of last ditch efforts to avoid complete meltdown. The system, once funded more than 100 percent, now has only approximately two-thirds of what it needs to fully cover all its pension obligations to current and future retirees. This of course assumes that they are able to hit a very optimistic rate of return of 7 percent year over year. Critics have questioned the likelihood of this feat.

The trust fund slid during the Great Recession and never fully recovered. It lost a staggering $100 billion during this period. To date, the pension systems efforts to recoup its losses has been a patch work methodology that includes lowering its earning projections (down from 7.5 percent) while moving to more conservative investments in addition to cutting the amortization period. Another major investment loss would leave the weaken pension system crippled.

Attempting to salvage the Californian Pension System has meant getting more money from its client agencies. This will lead many of them into insolvency as three California cities have already gone bankrupt in recent years- largely due to ever increasing pension burdens.

This catch-22 means that the methods the pension system uses to attempt to remain solvent will mean the ruin of many local governments under its authority. A possible way out of this debacle would be to modify benefits. Some have insisted that a reduction in automatic cost-of-living excalators in pensions over a certain mark, such as $100,000 a year, would be a step in the right direction. Nevertheless, the CalPERS board, controlled by public employee organizations and sympathetic politicians, has remained unmoved by these suggestions.

“Our members have expressed frustration that you keep coming to them asking for more while at the same time not providing a lot of other options and assistance for them,” Dillon Gibbons of the California Special Districts Association told the board.

The public waits in marked anticipation for the awaited State Supreme Court ruling on pension rights cases which encompass a possible overturn of the so-called “California rule” that barred any changes to benefits; This would open the door to pension modification.

CalPERS officials are also concerned that should the pension system become solvent, or the pension payments force some cities into bankruptcy court, a long dormant plan for statewide pension reform initiative through ballot could reemerge.