Thursday, October 23, 2008

CalPERS Lost $30 Billion in Three Weeks

The Sacramento Bee broke the story on Monday, but a simple search of CalPERS press releases also tells the tale.

CalPERS has a generic tag line it uses at the end of some of its press releases that mention the total size of the fund. Here's what it said in January 2008:

CalPERS is the nation’s largest public pension fund with assets totaling more than $240 billion. The System provides retirement and health benefits to more than 1.5 million State and local public employees and their families. For more on CalPERS, visit www.calpers.ca.gov.
Here's what it says now:
CalPERS is the nation’s largest public pension fund with more than $190 billion in assets. It provides retirement and health benefits to 1.6 million active and retired state, local public agency, and non-teaching school employees on behalf of 2,600 public employers. For more information about CalPERS, visit www.calpers.ca.gov.
CalPERS has lost around $50 billion (21%) this year, and $30 billion in the last three weeks! Ouch! Here's a graph of the CalPERS PR Fund Size Indicator for 2008 (Note: The scale doesn't start at zero to better illustrate change):



**Quick Edit**

Found a CalPERS agenda item discussion paper on the issue (pdf warning). If the 20% losses remain in place after fiscal year end, CalPERS will only be 68% funded for 2009. This means that California state employer contributions will have to increase by 2%-4% of payroll. State payroll is around $16 billion per year, so that's another $540 million in additional unanticipated spending on top of the $7 billion deficit the state already has. Also, the increases will add up well into the future. From the report:
Beyond those fiscal years, if CalPERS does experience a negative return in 2008-2009 as illustrated above then employer rates would likely continue to rise slowly over time even if CalPERS earns its anticipated 7.75% return. It would take returns well in excess of 7.75% in subsequent years to prevent a steady rise in employer rates.

If for example the investment return in 2008-2009 remains at -20% for the fiscal, investment returns of 7.75% in the next few years would result in increases in employer rates of about 0.2% to 0.6% of payroll each year. Under that scenario, it would take a return in excess of 28% in 2009-2010 to prevent further increases in rates in subsequent years.
Since the state is on the hook for any losses CalPERS sustains, there's really no upper limit to what this will cost the state. In addition, there's a huge retirement wave approaching that will strain the retirement fund like never before.

16 comments :

Sold in '05 said...

"In addition, there's a huge retirement wave approaching that will strain the retirement fund like never before."

Maybe not so much strain now… I think many Boomers in that wave have screwed themselves by being too greedy as they approached retirement.

I work with many people who are currently eligible to retire from federal service with full pensions. However, NONE of them, as they approached retirement did the advised rebalancing of their savings (401k, IRA, TSP) out of the markets and into safer but lower yielding assets. “Things were going too well and everybody said the market would rebound soon”, read: “I wanted more money and didn’t think there was any real risk”. These people will be working for MANY additional years if they want to have their retirement accounts refilled.

Statistically, if this is happening throughout society (and I believe it is), a significant portion of the anticipated wave of baby boomer retirements will be blunted by workers dying before they can afford to retire and/or living a shorter period after they do finally retire.
So even though CALPERS and every other retirement plan is losing money… here is a sad silver lining.

Deflationary Jane said...

The other side to that are the people taking one time cash outs and getting out of Dodge while they can.

Darth Toll said...

Max said "Since the state is on the hook for any losses CalPERS sustain"

Is this true, and to what extent? Can this status change at the will of the legislature/governor, and could it politically? It seems to me that the world's largest pension fund is headed into the trash can and with the state's budget already in tatters, this is something we should look to divest ourselves of immediately. There's no point in trying to make good on the state worker's pension, when everyone else is having their pensions eliminated or 401k decimated. Everybody should share in the pain!

Look for a huge contentious fight about this in the near future as the economy worsens and the state workers want the taxpayers to make CALPERS whole. This has the potential to rip the state apart politically, socially, and economically.

Anonymous said...

Lets see.... the employees/future retirees got fat while CAPERS played in hedge funds and real estate investments but the taxpayer gets the bill to fix?

I think the food chain got broken on this one. The state will likely be renegotiating retirements, contributions, service lengths, etc. Small municipal entities will have no problem with this. Bankruptcy starts the contracts from scratch.

Send the ratings agencies the bills and stop paying those CAPERS execs so much to listen to them.

Sippn

Patient Renter said...
This comment has been removed by the author.
Patient Renter said...

Lets see.... the employees/future retirees got fat while CAPERS played in hedge funds and real estate investments but the taxpayer gets the bill to fix?


Bailing out CalPERS is not better or worse than any other bailout - people who have no involvement end up footing the bill.

Bryan said...

Just one more bill to "foot" these days...

Anonymous said...

Does CAPERS really need to be "bailed" out or is it just a return to the mean?

Ms Sippn today commented that many assumptions will now change as seniors and almost seniors change their work vs retirement plans, changing expected traffic patterns, etc.

But as people live longer, we got to expect to work longer.... it takes a certain % of the population producing (working in real jobs) to support the non...

Sippn

Anonymous said...

Thats right cous... only so many teets on that pig... and one of 'em just shrank!


(Sippn's crude hillbilly cousin)

Max said...

Look for a huge contentious fight about this in the near future as the economy worsens and the state workers want the taxpayers to make CALPERS whole. This has the potential to rip the state apart politically, socially, and economically.

I agree completely. The CA state workers I know are oblivious to the fact that most "regular" workers hold them in contempt. When the economy is doing well, government excess is tolerated. When the economy turns down, there's always a backlash.

This calpers thing could put people over the edge. I agree with Sippn that the only way out of this for the state is Chapter 9. The Bankruptcy of California will be the largest public bankruptcy in world history.

BTW: I type this as the market is crashing again. I wonder what calpers balance sheet will look like this afternoon?

Anonymous said...

At least the state said no to CPOA - our $100K prison guards - but now they're shootn' each other!

Sippn

Westparker said...

There's a real simple fix to all this. Instead of cops, teachers and firefighters making more from Calpers then when they were working. Cut benefits by 50% and the problem's solved. Most will still be averaging 3-4K a month, just not the 8-10k they're making now.

Anonymous said...

The 21% decline does not include the monthly deposits by all current employees. I'm guessing closer to 25%. If you read the Bee article closely, they also only quote the return on a gross basis with regards to fees. I'm guessing you can knock another .75% off for fees.

Wadin' In said...

$190 billion for 1.6 million employees. Hmmm, so CalPERS has $118,750 saved up for each employee? That should fund 2.375 years of retirement at $50,000/year. Or fund ten years at $11,875/year!!

All the state employees better start saving up right now, 'cause there is no way out.

Sippn, did you forget your log in identity? Use your e-mail for your user name, then enter your password.....I forgot too....

Wadin' In

Anonymous said...

I think it is actually way worse than what you are saying. The problem is that there is an assymetrical payoff for the portfolio managers. Like Wall Street, they get paid large bonuses when the fund performs well (very high when taken on a cost of living adjusted basis). Unlike Wall Street, they can not be fired when things tank. It encourages them to take larger and larger bets when they fall behind their benchmark because the worst that can happen to them is a $0 bonus - firing isn't an option. And in times like now, with the head of CalPERS vacant, the incentive to take on even more risk to get a promotion is even higher.

Take for instance the fixed income group as an example of this behavior. Although this information will never see the light of day, the head of the group made the investment decision to buy $600M in Fannie preferred stock, which became worthless about a week later. Did anything warrant them taking a huge exposure that was way, way higher than their benchmark weighting and not in their historical sphere of knowledge? Absolutely not, but I think the fact that the top spot is vacant and bonuses were already trending toward $0 made the guy make this trade.

Of course, no one will ever ask questions and he will not be fired (which he should be along with stripping his pension benefits for gross mismanagement) and the taxpayers will eventually have to come to the rescue again. In the mean time, this guy will still pocket $300K+ in salary and his team of unqualified cronies will do their best to cover up this blunder. Really sad.

Darth Toll said...

anony, great points. Probably the CALPERS bonus structure and approach is centered around the fundamental problem - there just isn't enough money to go around, and they know it very well. When we first had the CALPERS discussion on this board several months ago, they were holding 142K per retiree, and now as Wadin' pointed out, CALPERS is holding 118K per retiree. My guess is that after the smoke clears on October that number will be a whole lot lower - drop a digit off certainly. This isn't remotely enough money for a solid retirement.

So we have a situation where the investments started getting more and more risky, effectively doubling down to try to make up the shortfall, and no negative repercussions for failure as you mentioned. CALPERS has turned into a bubble-chasing hedge fund. First they had a lot of investments in various RE vehicles during the height of that bubble, then they went heavily long the commodity bubble right near it's peak, throwing their considerable weight onto a raging fire. We knew then that this would be a disastrous move, and sure enough it was. The FNM debacle was the height of lunacy.