Friday, November 25, 2016

"CalPERS Staff Nudges Board To Consider Lower Return Rates"

Talk about fake or real, kids this is the big time.

From Reason:
There's bad news coming down the pike for California municipalities following several days of board meetings for the nation's largest state-based pension fund. Although no action has been taken, it's clear the California Public Employees' Retirement System, or CalPERS, might again lower its expected rate of returns on investments. That means cities and other member agencies would have to pay more to make up the shortfall.

A key moment, buried amid nearly 13 hours of recorded meetings, came when CalPERS' Chief Investment Officer Ted Eliopoulos played a short interview video with Wall Street experts, including famed investor Warren Buffett, opining on the expected investment returns in coming years. One investment guru thought a 4 percent or 5 percent rate of return would be the objective. Buffett pointed to very slow growth in the economy.

Eliopoulos used a diagram showing a 30-year decline in interest rates, even as discount rates used by pension funds remained steady. CalPERS currently calculates its pension liabilities based on an expected return rate of 7.5 percent. Based on the data provided by CalPERS staff, it's clear the agency would need to ramp up its risk taking to have any chance to continually meet such goals. In the past year, CalPERS' return rate was 0.6 percent.

Longtime pension-reform advocate Daniel Pellissier, president of California Pension Reform in Sacramento, praised the CalPERS staff for its bout of truth telling, given that such predictions are not what the current system's defenders want to hear. "I'd like to think they actually have a conscience and they understand the role they play," he said. "What do you do when you're facing flat returns for years ahead and liabilities are rising?"

The staff is "pushing the board to do the right thing," Pellissier added. "Some board members are essentially saying to staff: Make me do the right thing." The "right thing," in Pellissier's view, is to further reduce the expected return rates to more closely match market performance. He compares the situation to 1999, when CalPERS officials did not sound the alarm bells about the looming costs that would follow SB400, the law that led to 15 years of statewide retroactive pension increases and that still plagues the system to this day.

At least one CalPERS board member complained about the cost of reducing the discount rate. There's no doubt that doing so means that California cities will face costly spikes in their payments. But in reality, the costs are already there. State and local governments have already made pension promises to public employees. The courts have consistently enforced the so-called "California Rule," which stops agencies from lowering benefits for current employees, even going forward.

The question, according to reformers like Pellissier, is how forthright state officials will be in accounting for the size of the pension-related debt. Few dispute the essential point: Governments have undercharged municipalities for the cost of pension benefits, possibly for decades. They have to keep those promises. The "unfunded pension liability" is essentially the debt – the difference between what's promised and the available funds....MORE
We have so many posts on the outright fraud that is the public employee pension plan's expected rate of return assumptions and pronouncements that it's probably easiest just to do a Google search of the site: calpers 
rather than link to individual posts. However, one that really stands out was this bit of spokesperson spin back in March 2009:

Public pension funds’ rosy forecasts pose problems

...Last week we linked to a Bloomberg story "Hidden Pension Fiasco May Foment Another $1 Trillion Bailout", which took public plans to task. Here's CalPERS response via the Sacramento Bee's The State Worker blog:
Beware of the anti-pension ideologues who come out of the woodwork during market downturns. Like vultures, they prey on the highly charged and negative investment environment, looking for ways to convince you a temporary performance downturn will be typical for all time! They know -- but don't tell you so -- that we set our rates based on a fiscal year investment return. They don't tell you that our assumed rate of return is made based on advice from a range of experts within CalPERS and within the industry and that it is regularly evaluated every two to three years in public session. They don't tell you what you would learn from a textbook on pension management: that some years investment returns are as expected; other years, they will be more than expected and yes, some years they will be less than expected.
They don't tell you that over the last 24 years, we have exceed our assumed rate of return 17 times, and eight of those years were more than double the 7 3/4 percent assumed rate of return.

(And here's an interesting fact: For five years after the Great Depression, there were multiple double digit return years.)

We will withstand the market swings, with our goal in mind: to achieve our assumed rate of return averaged over many, many decades. That's what we are designed to do. That's the math that matters.

Patricia K. Macht
Assistant Executive Officer
Office of Public Affairs
Alrighty then....

As we noted in July 2015's "Largest U.S. Public Employee Pension Fund, CalPERS. To Fall Short Of Assumed Returns Once Again":
This is not the same as oops, "missing your target".
The return assumptions are part of the actuarial funding matrix required to keep the pension fund solvent. We've been calling CalPERS out for faulty assumptions since 2007, and are starting to think maybe they aren't very good at what they do....

...Following up on January's "CalPERS Earns 1.1% in Calendar 2011, a Bit Less Than the 7.75% They Need"....

As that post, and others, goes on to say, the embedded assumptions in the 1999 pension law, SB 400, are 25,000 on the Dow Jones Industrial Average by 2009 and 28,000,000 by 2099.
A bit behind schedule already, seven years and 6,000 points, and making that 1500-fold gain over the next 83 years looks optimistic.
Really optimistic.