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Blue Model Blues
The California Pension Bomb Just Got More Explosive

California’s massive public pension fund has been severely underfunded and mismanaged for decades, but its accountants have managed to conceal the extent of the problem by assuming that the state-run asset manager would secure white-hot seven to eight percent returns over the long run. Independent analysts have estimated that at a more realistic rate of return of five percent, the fund would be over a trillion dollars in the hole. But the latest returns make even that figure sound like a pipe dream. Pensions & Investments reports:

CalPERS on Monday announced a preliminary net return of 0.61% for the fiscal year ended June 30.

The latest fiscal-year return, coming on top of 2.4% in the prior year, means CalPERS has not met its expected 7.5% rate of return for the last 20 years, Ted Eliopoulos, chief investment officer, disclosed Monday at a press briefing on the returns.

It is not exactly reassuring that in the face of this acute solvency crisis, CalPERS executives seem to be prioritizing political activism—like demanding that companies they invest in signal their concern about climate change—over what should be their overriding responsibility: maximizing returns for pensioners.

This news highlights once again the critical need for state and local governments to take action to reform their pension systems before it’s too late, and for the federal government to make contingency plans in case the next recession sets off a wave of bankruptcies. It is also a reminder of the fact that ultra low interest rates may be staving off recession today, but only at the cost of making the pension time bomb even more explosive down the line.

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  • Tom

    Is anyone surprised by any of this?

    • Johnathan Swift Jr.

      Good enough for government work.

  • Gene

    The last paragraph of the post implies, in that relentlessly evenhanded TAI way, that by gum, we might be able to stop this train wreck with the right attitude from voters and by responsible actions by public servants. Yes, and I might be able to achieve exit velocity from Earth if I practice jumping for a few months and get some special sneakers.

    Ugliness is coming, folks, and there’s no way we’re going to avoid it.

    • Pete

      “Ugliness is coming, folks, and there’s no way we’re going to avoid it.”

      Exacto, Gene, and that’s what happens when the can that’s being kicked down the road runs out of road.

      • Johnathan Swift Jr.

        And over a clff, straight to Hades.

    • seattleoutcast

      I imagine they think they’ll be getting bailouts, just like the banks.

      • f1b0nacc1

        Some of them will, the ones that get connected BEFORE the money runs out. After that….well the ugliness will be on a “Rosie O’Donnell naked” level…

        • JR

          I see your Rosie O’Donnell and raise you Roseann Barr.

          • f1b0nacc1

            Of course that was the line that Andrew Dice Clay used…

            Either way, touche!

          • Johnathan Swift Jr.

            I can see you must spend a lot of time in the gym. Roseanne is more than enough without getting Rosie into the act.

        • Johnathan Swift Jr.

          Yes, perhaps this is one of the reasons the gun stocks have been going up. When California implodes, all the people who it can’t pay to do nothing are going to come looking for something. It will be Lord of the Flies on steroids .

          • Mastro63

            Maybe not Mad Max meets LOTF- but a lot of teachers will have to sell their California houses and move to AZ or , God-forbid- Texas.

          • Andrew Allison

            And that’s a bad thing?

          • Chris Zeller

            It is for Texas

          • Andrew Allison

            Why? Texas doesn’t need teachers?

          • f1b0nacc1

            Go into the Central Valley…it is perilously close to that already…
            But yes, it will get very ugly, very, very fast. I suspect that a lot of the residents of CA may regret their comments about the police when they suddenly confront life without them…

  • Wayne Lusvardi

    Part of the problem with the California pension system is that actuaries didn’t forecast retirees living longer (one can only guess retirees are living longer because of all that cleaner and healthier air to breathe due to the state’s Cap and Trade program – hah!).

    According to the independent Legislative Analyst’s Office, California spends $15 billion per year on useless energy efficiency programs. How many other programs are bloated?

    • Johnathan Swift Jr.

      I would guess all of them, but since few of them are every subject to an outside audit, not to mention any test of efficacy, it’s just a guess. The state is efficient at one thing, cleaving off a big share of the people’s cash and then flushing it down a big toilet. The smart public employees are moving out of state where costs are cheaper, so that they are a little better prepared for the financial tsunami that will hit the state. Places where they can plant a Victory Garden would also be a good idea.

    • Mad Max for the geriatric set is just what the doctor ordered. Dietary restrictions, less sedentary time and MUCH more exercise. It will be like a spa weekend that never ends!

    • Jeffn

      I think states and cities are already looking to reduce employees- when the wave of retirements grows really big they can shut down things like DMV and do more on the internet. EZ Pass is eliminating the need for toll takers and states are behind the times in computerizing payroll. Cities will also gentrify to “solve” the problem. It won’t solve it of course, which raises an interesting prospect. Someone at some time is going to pull a report showing where these pension checks are being sent. What’s going to happen when California residents discover the tax hike they’re voting on is going to be spent writing checks to people in Arizona who don’t do anything for California?

      • James

        What’s going to happen when people figure out the truth? Nothing, because it takes moral character to respond positively to the truth. The truth itself does nothing to liberate the lying liars from the lies they love. And this generation of Californians make and love lies like no other generation ever in recorded history, and probably in unrecorded history, too.

        • Jeffn

          They also vote against tax hikes and love them some referendums. This is the state that accepted a tax hike on the rich only on the promise that it be temporary. It’s supposed to expire this year and, of course, government employee unions want to extend it.

          • James

            Wanna know what makes me very sad? That you get to say “they” whilst I have to say “we,” kimosabee. I’m a 3rd generation Kalifornicator and I’m ashamed and appalled at what has become of my state. And I blame the assholiness of the People here. None of our problems would be insurmountable if it were not for the rottenness and arrogant pigheaded stubbornness of the state’s occupants. We’re like your keys when they’ve fallen into hot lava: let ’em go, ‘cuz man, they’re gone.

    • DJ

      The ball really got rolling in the late 90s when then-governor Gray Davis signed a big increase in pension benefits predicated on the continuation of the stock market rise we now know as the “tech bubble”. This was of course retroactive for people already in the system. And, constitutionally, the increased benefits can never be withdrawn. Brown signed a big increase in taxes here to try and square the circle – if you don’t live here check out our sales and income tax rates and compare them to your state. And…it’s still not enough. This model of paying off your constituencies with tax dollars was bound to implode, though politicians in past years knew they’d be safely out of office before that occurred. I suspect the current crop of pols are just trying to kick the can far enough down the road until a favorable climate in DC allows them to be bailed out by federal tax dollars.

      • Wayne Lusvardi

        Or bailed out by creating a number of monopolies guised by environmental policy, such as cage less chicken farms that require out of state chicken ranchers to also raise cage less chickens or be banned. Same re-monopolization ploy is being replicated with chemicals allowed in products sold in California, with subsidized green power that is immune from environmental laws and thus can kill thousands of birds including bald eagles, with “socially responsible investing” rules in Cal-PERS that invest in California oligopoly industries, etc.

        This stealthy re-monopolitization mainly using environmental justifications, is reversing California’s Progressive political history which was formed to reduce the influence of monopolies (railroads) on California politics.

        Coincidentally, it may be interesting to note that a definition of organized crime is an organization of markets into hierarchical, extractive monopolies through the use of violence or threats of violence to outlaw entrepreneurship and competition within a defined geographic territory. Government has a monopoly not only on use of legitimate violence but on regulation. So is California really evolving into a gangster, kleptocratic state that will do anything to prop up its pension systems to keep its ruling class in power?

    • Andrew Allison

      I’d bet dollars to donuts that only actuaries that were willing to ignore the long-standing trend in longevity were hired. It turns out that because of the very progressive income tax, a modest life style doesn’t require anything like the pensions being awarded to “public servants”. The answer to your final question is all of them, it’s just a matter of degree.

  • Diws

    What I would like to see is a sober, full accounting of the likely consequences of what forms the ugliness will take once the pension time bomb does in fact explode. There have been some articles by WRM which touch on this, but I would like something like Kotkin published recently on the likelythrust and consequences of a Hillary presidency ( here: . )

    • adk

      “a sober, full accounting of the likely consequences” would drive one right into a deep depression, that’s why we better talk about transgender bathroom access rights and other, equally urgent and important, matters.

      Kotkin’s essay is excellent as usual, although even he skips over some potentially very explosive issues such as resumption of illegal immigration amnesty (under a president Clinton) or a catastrophic international development (under either).

      • Johnathan Swift Jr.

        All of this is WHY we are talking about transgender bathrooms, to get everyone looking at the shiny object, or at least the man in the woman’s clothing in Target’s restrooms.

  • Andrew Allison

    States can’t file bankruptcy. As Gene points out, things are going to get very, very ugly.

    • Johnathan Swift Jr.

      It’s like an Ed MacMahon question for Johnny Carson, “How ugly will it get Johnny?” Ugly enough for Smith & Wesson and Colt to outperform Apple Ugly.

    • Who needs bankruptcy when you are a sovereign entity? They could just declare debts void. They could pay them in bonds. They could do the hokey-pokey and turn themselves around even if, as in Illinois, the payments are Constitutionally guaranteed. They can do anything as a piece of legislation but what they cannot do is go back in time and not expand the bennies despite the hew and cry to always pay more to the nice little grannies. Oh, and then trim payments when the investments cratered. Sure, it’s a crap job but if you don’t want to do it once you sure don’t want to do it over and over.

      • Andrew Allison

        The States are not sovereign. They could default on their obligations, but that would result their not being able to borrow more money. Paying pensioners with bonds, which would be very hard (and costly) to sell, isn’t an option. If there aren’t enough non-union votes in IL to change the constitution today, there may be tomorrow when schools and public safety and municipal services all go away in order to make the mandated pension payments (not sure I’d like to be a pensioner in that environment). Will people pay their taxes simply to pay pensioners? This is the death spiral which is already apparent in CA as the productive members of society leave for greener pastures. Here’s what I think will happen in IL: Cook County declare bankruptcy and punt the state constitutionally mandated pension obligation to the State. The State will go to Uncle Sugar (that’s the bare majority who actually pay taxes). What happens then depends on who’s in charge of Congress.

  • Andrew Allison

    And the State legislature has compounded the felony by not including pension obligations on its balance sheet (

    The claims of a California economic recovery are pure smoke and mirrors; the State is effectively bankrupt and about one-third of its population is on Medicaid..

  • Johnathan Swift Jr.

    The last paragraph is pure wishful thinking, reminds me of the quote Bobby Kennedy apparently borrowed like a blond floozy:

    “Some people see things as they are and say why. I dream things that never were and say why not?”
    George Bernard Shaw

  • bflat879

    Perhaps the biggest story no one is talking about.

  • Ha! And do not look to SS. The flagship of the Liberal Project is in freefall. Socialism kills, fellow babies. A little socialism just kills a bit more slowly.

  • Mastro63

    When did the 7.5% return assumption start? The Seventies were below 6%- when these funds really got large- sure the ’80’s and 90’s were in the teens- but you don’t account for pretty recent history? Oh- for the 2000’s- the return average is 1.07%

  • Forbes

    One fix, with two parts. One fix: Apply private sector rules to the public sector. Two parts: Compliance with private sector (FASB, not GASB) pension accounting rules, and make the ’74 ERISA apply to public sector benefit plans, as well. The accounting rules appear a nuance but the difference is a mile wide. Once companies had to honestly account for pensions, i.e. the unfunded liability posted on the balance sheet, companies moved to 401-K type plans. This is the reality of 40 years that politicians keep kicking the problem down the road. Eight years of ZIRP from the Federal Reserve has revealed the charade of public sector pensions (in addition to destroying the savings of millions of Americans).

  • charlesaustin

    You almost grasped the impact of ZIRP at the end. It is a tax on wealth used to keep government borrowing costs artificially low.

  • MPH

    Why should the taxpayers in the rest of the country have to pay for the actions of the people that CA voters put in power? We didn’t get a vote in CA elections. They crapped in their bed, let them sleep in it. If CA’s pension fails, or CA goes bankrupt, that’s CA voters’ fault, and the people in the rest of the country shouldn’t have to be held accountable for it via a federal bailout.

  • Ulysses Noman

    Obviously their fund is run by Top. Men. A bunch of random chimps throwing darts could make a better return.
    An S&P 500 Index fund will net you ~7%. And do it without millions of dollars squandered on travel junkets, six-figure salaries and leather couches.

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