CalPERS Goes All-In On Pension Accounting Scam; Boosts Stock Allocation To 50%

Starting July 1, 2018 stock markets around the world are going to get yet another artificial boost courtesy of a decision by the $350 billion California Public Employees" Retirement System (CalPERS) to allocate another $15 billion in capital to already bubbly equities.  Of course, if this decision doesn"t make sense to you that"s because it"s not really meant to make sense. 

As Pensions & Investments notes, CalPERS" decision to hike their equity allocation had absolutely nothing to do with their opinion of relative value between assets classes and nothing to do with traditional valuation metrics that a rational investor might like to see before buying a stake in a business but rather had everything to do with gaming pension accounting rules to make their insolvent fund look a bit better.  You see, making the rational decision to lower their exposure to the massive equity bubble could have resulted in CalPERS having to also lower their discount rate for future liabilities...a move which would require more contributions from cities, towns, school districts, etc. and could bring the whole ponzi crashing down. 

The new allocation, which goes into effect July 1, 2018, supports CalPERS" 7% annualized assumed rate of return. The investment committee was considering four options, including one that lowered the rate of return to 6.5% by slashing equity exposure and another that increased it to 7.25% by increasing the exposure to almost 60% of the portfolio.

 

The lower the rate of rate means more contributions from cities, towns and school districts to CalPERS. Those governmental units are already facing large contribution increases — and have complained loudly at CalPERS meetings — because a decision by the $345.1 billion pension fund"s board in December 2016 to lower the rate of return over three years to 7% from 7.5% by July, 1, 2019.

Meanwhile, there was only one dissenting vote on the decision to hike the fund"s equity exposure.  Ironically, the dissent did not come from a rational investor looking to preserve the fund"s assets, but rather from a board member named J.J. Jelincic who wanted to go all-in on the pension accounting scam and hike the fund"s equity allocations to 60% so that discount rates could be raised even higher than the current 7%.

Of course, this is hardly a new topic for us. As we pointed out a year ago in a post entitled "CalPERS Board Votes To Maintain Ponzi Scheme With Only 50bps Reduction Of Discount Rate," each year CalPERS has to weigh mathematical realities against the risk of disrupting the ponzi scheme and forcing several California cities to the brink of bankruptcy with lower discount rates..."mathematical realities" rarely win that fight.

But a CalPERS return reduction would just move the burden to other government units. Groups representing municipal governments in California warn that some cities could be forced to make layoffs and major cuts in city services as well as face the risk of bankruptcy if they have to absorb the decline through higher contributions to CalPERS.

 

“This is big for us,” Dane Hutchings, a lobbyist with the League of California Cities, said in an interview. “We"ve got cities out there with half their general fund obligated to pension liabilities. How do you run a city with half a budget?”

 

CalPERS documents show that some governmental units could see their contributions more than double if the rate of return was lowered to 6%. Mr. Hutchings said bankruptcies might occur if cities had a major hike without it being phased in over a period of years. CalPERS" annual report in September on funding levels and risks also warned of potential bankruptcies by governmental units if the rate of return was decreased.

Under the plan adopted Monday, in addition to their 50% equity allocation, CalPERS will have a 28% weighting to fixed income, up from 20%.  Real assets, which includes real estate, will keep its 13% allocation, while private equity will remain at 8% and CalPERS" liquid portfolio, made up of cash and other short-term instruments, will fall to 1% from 4%.

In Massive Blow To California Unions, A Second Court Rules That Pension Benefits Can Be Reduced

Back in September, we noted that, in a surprisingly logical decision particularly for a state like California which is typically devoid of all reason, a court upheld the rights of Marin County (and it"s taxpayers) to reduce final year salary levels utilized to calculate pension payments.  The ruling was meant to protect taxpayers against "salary spiking," a practice whereby union employees artificially drive up their final year salary, by taking cash vacation payouts or 1x bonus payments for example, in an effort to game the annual pension payment they"ll then receive in perpetuity. 

Now, according to Pension & Investments, a second California court in San Francisco has made a similar ruling, finding that while a public employee does have a "vested right" to a pension it is only to a "reasonable pension."

A second California appeals court panel has said that vested pension rights can be reduced or eliminated in California as long as employees still receive a pension that is “substantial” and “reasonable,” court filings show.

The Dec. 30 decision by a three-member panel in San Francisco affirmed a state pension reform law that went into effect in 2013 and eliminated the right of participants of the $302.4 billion California Public Employees" Retirement System, Sacramento, to enhance their pension by buying retirement credits. A lower court in Alameda County in 2015 had ruled that the pension enhancement benefits could be eliminated.

The enhanced benefit, known as an airtime service credit, allowed CalPERS participants to increase their retirement benefit by up to five years by making additional contributions from their salary.

Meanwhile, the San Francisco court cited the Marin Country decision from August which found that employees have a right to a pension but "not an immutable entitlement to the most optimal formula of calculating the pension."  The August decision in Marin County was pivotal because, for the first time, it brought into question a 5-decade California rule which held that pension benefits could not be cut.

The panel cited another state appeals court"s decision in August, which said the $2.1 billion Marin County Employees" Retirement Association, San Rafael, did not have to count pay given to employees for being on an on-call status toward retirement benefits.

That decision also cited the 2013 pension reform law, which applies not only to CalPERS but to most other public pension systems in California.

The law put in place anti-spiking provisions that prevent pension benefit increases from unused vacation and leave, bonuses, terminal pay, among other things.

These “anti-spiking” provisions apply to current workers.

“While a public employee does have a "vested right" to a pension, that right is only to a "reasonable" pension — not an immutable entitlement to the most optimal formula of calculating the pension,” the appeals panel wrote in August.

That decision put into question the so-called California rule, which held for five decades that pension benefits could not be cut.

The California Supreme Court has agreed to hear an appeal on the Marin County case, although no schedule has yet been set for oral arguments.

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For those who missed it, below is our note on a previous California court"s decision regarding a Marin County public pension.

Many public employees utilize a tool, known as "salary spiking," to boost their annual pensions payment in retirement and we taxpayers get to foot the bill.  So what is "salary spiking?"  Typically, a public employee"s pension benefit in retirement is equal to some percentage of their highest annual pay which is often their final year on the job.  Fortunately for public employees who plan ahead, there are all sorts of fun games that can be played to "spike" your final year salary so that you actually earn more in retirement than you did on the job.  In fact, a recent report by the Los Angeles Times found that there are 60 ways to "spike" your final year salary in California including taking cash payouts for accrued vacation time, special 1x bonuses related to graduate degrees (though we"re sure you really needed that extra degree as you head off into retirement), "longevity" bonuses, etc. 

One example of salary spiking comes from former Ventura County CEO, Marty Robinson, who offered up a textbook example of how to stick it to taxpayers by planning ahead.  Robinson"s official salary heading into her final year on the job was $228,000.  That said, Robinson "spiked" her final year salary by cashing out $34,000 in unused vacation pay, taking an $11,000 bonus for a graduate degree and collecting more than $24,000 in extra pension benefits the county owed her.  Adding all the 1x payments, Robinson earned nearly $300,000 in her final year which entitled her to an annual pension payment of $272,000 or the rest of her life...nearly 20% higher than the salary she received for actually working. 

But, as the Los Angeles Times pointed out, Robinson is not alone:

Former Sheriff Bob Brooks, for instance, added a $30,500 "longevity" bonus (for working more than 30 years), which boosted his pension to $272,000 a year, almost 20% higher than his base salary.

Former Undersheriff Craig Husband added nearly $92,600 in unused vacation time, resulting in a $257,997-a-year pension, nearly 30% above his working pay.

Fire Capt. T.N. Roberts, for instance, padded his final year"s pay by nearly $130,000, resulting in a pension 84% higher than his base compensation. He gets $159,598 a year in retirement pay.

In fact, the problem is pervasive.  In Ventura County, 84% of the retirees receiving more than $100,000 a year are receiving more than they did on the job. In Kern County, 77% of retirees with pensions greater than $100,000 a year are getting more now than they did before.

Well, turns out that the party might be over for the "salary spikers" in California.  In a surprisingly logical decision, particularly for a state like California which is typically devoid of all reason, a court upheld the rights of Marin County (and it"s taxpayers) to reduce final year salary levels utilized to calculate pension payments.  According to Bloomberg, the court found that while a public employee does have a "vested right" to a pension it is only to a "reasonable pension."   

“While a public employee does have a ’vested right’ to a pension, that right is only to a ’reasonable’ pension-- not an immutable entitlement to the most optimal formula of calculating the pension.”

Of course the Marin Association of Public Employees intends to take their fight to the Supreme Court in an effort to defend their right to manipulate pension benefits and defraud taxpayers of billions.

As we"ve noted multiple times, public pension funds around the country are currently underfunded by about $2 trillion.  The under-funding has ballooned materially since the "great recession" as asset returns have suffered while pension liabilities have grown due to lower discount rates.

Meanwhile, taxpayers have been forced to cover the difference through higher contributions while employee contributions have remained fairly flat. 

We eagerly await the next court"s decision on this topic and wish the best to California taxpayers.