On March 16, 2010 this Blog posted an article CalPERS and the Coming Pension Bubble that reviewed the shell game being played by the state of California with the California Public Employees’ Retirement System (CalPERS). This largest of state run public employee pension plans is basically insolvent.
The earlier posting reviewed how determining the real costs of any pension plan depends on key variables and assumptions that are subject to manipulation by the states that manage the plans. Two key variables include life expectancy and the estimated long-term return on a plan’s investments. Life expectancies have increased to a greater level than projector earlier. However, this was the result of advances in science, not bad intent.
On the other hand, assumed long-term plan investment returns are determined by a plan’s administrator, in the case of CalPERS the state of California. This creates a conflict of interest as California can and has used rigged figures to show less expensive and viable pension plan when it is neither.
In March of 2010 when the original posting was made, CalPERS maintained an already unrealistic annual rate of return on investments of 7.75% even thought the stack market had been flat for the previous ten years and interest on bonds were at historically low levels. To placate the investment community who purchase State bonds and understood the fallacy of California’s return rate assumptions, California indicated that it was considering lowering this return assumption to 6% in 2011, a number that still may be too high in the current economic environment. However, a decrease in this assumption from 7.75% to 6% would increase the amount of cash injection required by California by about $2.8 billion at a time when the State is already statistically insolvent.
Instead of biting the bullet with honest accounting, California today announced that it will continue running the state like a Bernie Madoff Ponzi scheme. They will not lower the assumed return on CalPERS investments even by a fraction of a point, against the State’s own actuary’s recommendation. Making matters worse, CalPERS main retirement pool is only 70% funded, meaning it is not prepared to meet its obligations to its workers when they retire even with the currently used bogus return rate.
The CalPERS matter should be one that State employees and their unions protest since that State will not have the ability to meet its pension obligations. Instead, the California public employee unions continue to take dues from State workers while ignoring the coming train wreck. Unions at a national level have diverted members’ attention from CalPERS and similar problems by marching on Madison to attack Governor Walker for addressing a similar problem in Wisconsin. The irony is that at the end of the day, Wisconsin retired public employees will get their pensions while many in California will lose at least a substantial portion of these. Public employee union members would do well to heed the words the ancient Chinese General Sun Tzu who said:
If you know the enemy and know yourself, you need not fear the result of a hundred battles. If you know yourself but not the enemy, for every victory gained you will also suffer a defeat. If you know neither the enemy nor yourself, you will succumb in every battle.