Thursday, February 26, 2009

CalPERS Monthly Update and Heath Benefit Info

Another month, another 2.3% asset decline:

CalPERS' fund size declined $4 billion in the month of February to $170 billion. It's down 33.3% from its peak of $245 billion in July 2007.

In other CalPERS news, California State Controller John Chiang has released 10-year cost projections (pdf) for state retired state employee health costs, and the results aren't pretty:

Projecting the three scenarios out over 10 years shows the actuarial unfunded obligation would grow from $48 billion to $71 billion in 2017-18 under a pay-as-you-go scenario. Full funding would increase the unfunded obligation from $31 billion to $48 billion. Partial funding would increase the unfunded obligation from $38 billion to $58 billion.
The state has paid $1.36 billion this year for retiree health benefits, or a little more than 1% of the entire general fund budget. While it may seem unwise to use the "pay-as-you-go" method to fund these liabilities, Chiang's press release had this to say about the alternative (emphasis mine):
Pre-funding permits the State to earn investment income on the amounts set aside to fund future benefits. That investment income can be used to help offset the costs. The State would need to contribute $2.68 billion in 2008-09 to fully fund its obligation.
Ruh-roh. I don't like where this is headed. Digging into the actuarial report (pdf), we find these gems:
The primary assumption influencing Annual OPEB Costs and the Actuarial Accrued Liability is the assumed rate of return or discount rate on assets supporting the retiree healthcare liability. The State of California currently finances retiree healthcare benefits on a pay-as-you-go basis from assets in the general fund, which are invested in short-term fixed income instruments through the Pooled Money Investment Account (PMIA)... Based on PMIA's historical returns, investment policy and expected future returns, a discount rate of 4.5 percent was selected for the pay-as-you-go funding policy.
Seems conservative. Or is it?
Over the last ten years, the PMIA average annual return was approximately 4.00 percent on a nominal basis and 1.50 percent on a real basis. The discount rate of 4.50 percent takes into consideration a long-term inflation assumption of 3.0 percent, and a real return of 1.50 percent.
Fudge factor alert. None of the liability assumptions are inflation adjusted, but the expected investment returns are? Also, the PMIA annual returns are not at all consistent. Here are the last 10 years (pdf):
98/99 5.344
99/00: 5.708
00/01: 6.104
01/02: 3.445
02/03: 2.152
03/04: 1.532
04/05: 2.256
05/06: 3.873
06/07: 5.121
07/08: 4.325
I realize this is a planning document, and policies will adjust as conditions change. However, as expensive as these spending projections are, they seem fairly optimistic to me, and even the current cost levels are nearly unsustainable politically. CalPERS retirees should expect a bumpy ride in the years ahead.


Darth Toll said...

Jeez, I could do a better job than these chumps. Why not just take all your remaining $$$ and go short and make a killing when the market crashes to 3,000? Seriously though, why haven't they radically altered strategies, or is it just that they are stuck with illiquid CDO's that are losing value and they can't get rid of them? The first rule of thumb when you are stuck in a hole is to stop digging. The guys just keep losing money month, after month, after month. They completely missed the 24% wave-4 bounce from November and even I could see that one coming and in fact commented on it here with the S&P 500 crash count cross-post from Mish's blog.

Anonymous said...

All the top management was bailing out over the past year.....hmmm. It was fairly clear then that when their real estate related investments were going to be "marked to market" they were doomed. Duh.

OK so I remember a lot of fat increases when returns were (shown as) fat..... now lets reel it back please.

This pig just had some teets removed.


Max said...

CalPERS is a case of OPM squared: the managers don't have a stake in the portfolio performance and any losses are backstopped by the taxpayer. This structure is a recipe for disaster.

Notice that the PMIA fund outperformed CalPERS over the last 10 years! Everybody would be better off if they dismantled the entire thing and put it all in t-bills.

anon1137 said...

Re: the Calpers health care liability, that will be easily solved by shifting to lower cost plans, e.g., fewer covered procedures, higher co-pays. Calpers retirement doesn't guarantee a certain quality of health plan, it only guarantees *a health plan*.

It's already been happening for years - the new government accounting rules will only accelerate the change.