California State Pension System Makes Madoff Proud. Video Reveals Gimmicks Used to Hide The Decline In Their Assets
by Gwilym McGrewCalPERS financial sleight of hand is reminiscent of Bernie Madoff’s lying to his investors through phony statements designed to mask losses and outright fraud.
Much has been written about The California Public Employees’ Retirement System (CalPERS) being underfunded by $500 billion due to massive investment losses over the last decade, but now we have video of a CalPERS Senior Pension Actuary, Kung-pei Hwang, describing how they intend to change basic assumptions in their financial model to (please allow me to mix my metaphors) Hide The Decline in their assets held for municipal, county, and state employee’s retirement.
Through this statistical gimmickry, CalPERS can push the loss into later years and appear solvent today. Of course, at some point in the future it will need to raise funds from state and local governments to compensate for these losses. But for now, they seem content to hide the disastrous condition of their fund.
As you can hear Mr. Hwang say in his presentation to the Huntington Park City Council last week, “that means we will defer most of the loss to future years.” “This means the city will realize another increase in future years. I hate to bring bad news, but those are the facts.” Well, the fact is this bad news will hit budgets for all cities, counties and the state of California and not just Huntington Park. By playing with its financial model in this way, CalPERS is treating all California taxpayers like Madoff investors by cooking its actuarial books to Hide The Decline in its assets.
It gets worse, much worse as noted below after the video………..
In addition, the actuary reports at the beginning of the video that the key “rate of return” assumption is likely to change to a lower level that will then require cities, counties, and the state (read that as “taxpayers”) to significantly increase payments to CalPERS in 2012 and thereafter.
The current rate of return assumption CalPERS is using is 7.75% compounded annually. However, CalPERS board is working on a new asset allocation policy based on a meeting two weeks ago with investment professionals. The new “rate of return” assumption will be lower and announced in February 2011. For every ¼ point CalPERS lowers its investment return assumption, each city and county, or the states cost will go up 2 % in one of two categories of contributions it must pay into CalPERS and 4% in the other.
In other words, the burden on local governments and the state is about to balloon. If CalPERS were to lower the rate of return assumption to Bill Gross’ widely discussed “new normal” rate of return of 4%, that would mean a city or county would have to pay over 20-30% MORE in contributions; a sum sure to sink many cities and maybe a few counties. If the return assumption gets lowered a tiny amount and the actual returns over time are close to the “new normal” then CalPERS will just dig an even larger hole that will need to be filled down the road by taxpayers.
The video begins 3 minutes into the presentation. Not much happens up to this point other than a discussion on the history of CalPERS and the demographics of its members. The actuary points out that with CalPERS the employee contribution amount is fixed but the employer amount varies so the risk to the plan is borne by the employer (city, county, state).
The Senior Pension Actuary then explains that because of losses in 2008-2009 CalPERS assets are 50% below what the actuarial model expected. Next is the discussion about the rate of return assumption and its implications and resulting higher costs to governments. It is pointed out that compounding the problem is the fact that in 2005 after CalPERS lost 1/3 of its assets in the dotcom bubble it created a “new rate stabilization policy,” another Madoff worthy statistical trick.
The new policy changed the model’s Actuarial Value of Assets (AVA), a method of smoothing the asset valuation, from an average of 3 years to an average of 15, thus inflating the average assets held due to previously strong years. By doing this they masked the downturn in the assets thinking the following years would allow them to catch up and smooth out the massive dotcom loss. Trouble is, 2008-2009 came along which shot holes in this assumption and now they are in even worse shape.
Another Madoff-worthy trick then compounded the problem more. After the 2008-2009 losses CalPERS changed their assumptions AGAIN to “smooth” the losses. They then changed the AVA to MVA (market value of assets) ratio to 60% to 140% from 70% to 120%. As you can hear the actuarial state on the video and it is worth repeating in this story, “that means we will defer most of the loss to future years.” “This means the city will realize another increase in future years. I hate to bring bad news but those are the facts.”
The bottom line is CalPERS pension model is not to be trusted. Rather than building a realistic financial model and then inserting the actual assets to obtain an understanding of its solvency, they have changed and tweaked and twisted their model and its assumptions to obtain the results desired.
California bond holders beware.
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55 Comments
First of all, Happy Thanksgiving to everybody!
Second of all, it looks like I have another reason to not live in California anymore. It's hard to believe how prosperous the state once was, and cooking the books like this won't return them to that prosperity by any means. Welfare and EBT cards might as well be a state employee pension too because it allows people to buy stuff like fastfood. How disgusted I am to see people actually buy that stuff and not even have to work for it…
Americans beware, we will all end up paying for this, that has always been the plan.
Glad i don't live in Cal. Unions are just highway men and stealing them blind…
California here I come
Right back where I started from
Where pensions add tensions to budget fears
and taxes keep rising for years and years and years….
Oh, San Francisco, don't be late
Better sell that Golden Gate!
California here I come
On second thought, baby, here I'll stay.
Ha that is what you get when you re elect Jerry Brown.
obama (you American taxpayer) will pay for all of this WHEN Kalifornia sinks into despair. We have liberal republican Arnold being replaced by marxist/stupid (bad combo) moonbeam. We have given the liberal democRAT Assembly and State Senate a simple majority to now raise taxes on the remaining 50% of income tax payers who still reside here. This state will flush down the toilet like Greece. Just like Greece that country will pull the rest of the week countries down with them, Kalifornia will pull down America.
This state is a joke. The happy lib's have no idea what will happen. I am preparing by buying guns ammo, dehydrated food, seeds, propane generator with fuel. Many in my circle are doing the same. Good luck America…..
When the food riots start, Obama will close the banks and the airports and will deputize TSA and SEIU to round up food for the poor by any means necessary. Now I'm not one to advocate armed resistance, but…………………………..if push comes to shove.
It's going to get bad here. Real bad.
GOD givith and GOD can take it away, do Not wish bad to the poor, or else who knows, Carma could come knocking for payment…be Really Thankful you don't need to use food assistance.
Pretty soon Cali will have toll booths set up at all points of entry, and visitors will have to pay a fee
just to enter the state.
GOOD LUCK CALIFORNIANS!
.
Dr Jerome Corsi Exposes Cancer Risks From TSA Full Body Scanners
http://www.youtube.com/watch?v=_sp_Fm7leTg
Wave bye, bye! When Moonbeam tanks the state, too hell with them. The parasite class will resort to cannibalism, the producers will be okay. It will be a great object study for the rest of the country.
This little Ponzi scheme in the CA retirement system is the classic example of 'smoke and mirrors' in action , when the mess is beyond comprehension, dazzle the rubes with bullshit and a 'soft shoe'….. most city employees are asleep anyway…
Those of us that understand the gravity, shake our heads….
The union bloodsuckers shake their fingers at the' taxpayers who don't pay enough'….
i still do not know why madoff is in prison, he only did what government officials have been doing for years. why is it illegal for him to use fuzzy math, but government officials can keep thier offices, and keep moving up, while madoff gets to scrub toilets? is it because madoff got caught?
American Faith, this dude just said he hates that people are buying fast food with food stamps, not "I hate all poor people and wish they would die." Food stamps are supposed to "help people afford nutritious food", and these so-called poor people are buying expensive junk food with money that is supposed to help them afford nutritious food, and all on the taxpayer's dime. I don't believe in Karma, I believe in the reap and sow principle, and with that abuse of food stamps in mind I would say it's the people who are buying fast food with food stamps that are sowing the bad seeds.
Besides, I volunteer for a food bank, and I can tell you that there is a lot of work being done outside the government system to curb the hunger problem, so Swen probably won't even need food stamps even if hard times do hit.
I will only say this and take it for whats it worth because tonight is Thanksgiving.
You cannot sprinkle sugar on crap and dung and call it candy. Thats what California is doing. We need to get rid of the phucking UNIONS that are milking this country dry and living the high life.
Those wanting to leave, will have to pay an exit tax, double what the entrance fee is.
Of course you can.
You can always spread it between two slices of stale bread and call it a shyte sandwich and serve it to the masses for Thanksgiving dinner………
LOL, something tells me they will gladly sell all their worldly possessions to raise that fee in the
not too distant future.
Natives will be praying for natural disasters to be able to collect their insurance and flee with a
few coins in their pocket and freedom from the Marxist taxing entities of the STATE.
.
And loose more money because nobody will come and they will still have to pay the Toll booth workers
Ain't Socialism grand
This is the same Ponzi lies they tell with SS and Medicare and the national debt.
Dems sure like to brag how they think they're so smart, but they're just clever at covering up their lies, until they get caught. Socialism is a big lie.
Oops, Lucky you forgot the word 'UNION' toll booth workers,
now, that's better.
It's okay, you just had a lil too much desert… you''ll be better by tomorrow. ; )
.
Sometimes I think this country is like a delusional parent that just can't come to terms with the fact that one of their children is insane. The US is in denial……let's ditch Kalifornia…….they're incurable………they would be happier with Chavez. We would be happier without them.
Remember ol Ross Perot always used to talk about the "Crazy Aunt" locked up in the basement? I don't know if California is the Aunt, or the basement.
I agree with Harry
Everybody be thankful and give thanks for all the things the Lord has bestowed on us
Relax and enjoy a little time off
God Bless and Happy Thanksgiving
I smell Greece…
Yeah, I do remember. Do you remember when Zell Miller said The Democrat party was like a big ol' comfortable house that he lived in all his life……….but now there are strangers in his basement and he doesn't know how to get rid of them.? I think those ol' boys knew what what was commin'.
…….and Ireland, and Portugal, and Spain…………….
PEEEE-EEEW! It stinks!
I call this socialist accounting – it follows the Stalin Concept of Political Philosophy that states, "one death is a tragedy, but a million deaths are just a statistic." The same here. You would think that, since we are talking about banker criminals, as soon as they were down a million dollars they would take measures to stop the bleeding, but CALPERS places fast and loose with the money, putting only 15% of their funds into income-producing real properties and using the majority to buy junk bonds and play in the stock markets and commodities markets where they routinely get their clocks cleaned by the other banking criminals. I had a client ask me to put together a submittal for the real estate department of CALPERS a few years ago to finance a new development deal. The project has since been financed, built and sold-off with a huge profit to the equity investors. In the meantime, CALPERS got back to us with a request for more information – about a year after the construction was completed. Their supposed professionals are all picked because they know someone and not on what they can do and now America will have to pick up the tab for liberals once again being who they really are and expecting the rest of us to shoulder their losses. Picking up CALPERS losses will cost the average American family almost $4,600. That's how big a sucker they think you are – they want you to put up the money for them. I think we can do it if:
(i) all the fund managers are fired.
(ii) the people who put together the fund strategies are all prosecuted for fraud.
(iii) all of the investment banking firms involved have their licenses revoked.
(iv) the pension plans are then privatized.
That would be fair, just and equitable.
You too my friend.
U-haul rental from Cali to Texas costs a fortune right now as productive citizens flee in droves. A friend purchased a horse trailer, towed it to Houston with all his stuff inside, and then sold the horse trailer on Craigs List in Houston. I hope this helps keep your moving costs down.
The sad thing is the Greeks are getting $150+billion, the Micks are getting $125+billion but the California pension funds alone are "$500+billon in the red"? Although Portugal and Spain will be big…Europe is a drop in the bucket. I know Illinois ranks right up there with California when it comes to unfunded liabilities. The next big bailout will be when Barry bails out the states and nationalizes public pension funds. (The private pensions will be next)
We are screwed!
p.s. Happy Thanksgiving Cowboy…
I tried to warn you!
He should not have picked Houston………it's full of Moonbats!
Tell everyone you know in California to move to Austin, Texas. They will fit right in, and assimilate quite nicely. Tell them whatever they do, DO NOT come to Montana. Tell them that in Montana, the wind always blows thirty miles per hour. In the summer there are forest fires, it is 110 degrees in the shade, and the wolves will eat their children. In the winter, like today, it is twenty below with the windchill, the snow is blowing so hard visibility is down to a quarter of a mile, and my cows are eating hay faster than we can haul it out to the feed grounds. Tell them their little chil'rens will get frostbite on their hineies the first time they pee their pants when they see coyotes circling their family car stuck in a snowdrift.
Please, tell them all to go to Texas.
That is the reason I left Texas………………
I worked for several years in Sacramento as a software consultant. I saw CALPERS and CALSTRS (California State Teachers Retirement Service) spend money like it grew on trees. I saw a CALPERS IT manager require software vendors to wine and dine him before he would consider their products. I saw CALTRANS spend "Billions" on unnecessary Oracle licenses. I saw waste, fraud, and abuse as "business as normal". I saw very competent employees get the shaft while completely incompetent and often hated employees get promoted because they went to the same "Church" as their boss. I saw DA's stealing gasoline in the Sacramento County motor-pool for their personal vehicles. This happens at all levels of government in California. CA is broke and going bankrupt simply because they refuse to stop spending money they don't have. Many years ago when I was a resident of CA we voted in prop 187 that prevented illegals from receiving State services. That was overturned and declared unconstitutional. California is rife with corruption and the liberals have brought this once great state to it's knees.
Don't get me wrong I help out poor people all the time first hand. It's just that I don't like seeing people take advantage of this broken system we have in CA. It's one thing to help the helpless, it's another to help the clueless.
Two years ago CalPers brought on new CEO/Chief Joseph Dear at $450k (the prior chief had already oversaw the carnage). Mr. Dear came from the Washington State Pension where as Chief he supervised the loss of $16 billion in aggregate pension assets. It's all public information, you can check the math yourself by tabulating the quarterly results posted on the pension website.
Mr. Dear is a proven loser, but then many asset managers failed miserably during the meltdown. The shocking fact is Mr. Dear has no financial training, nor has he any industry experience. He graduated from some back hills remedial college in Olympia, got his blue Democrat union card and became a professional point guard for the dems.
The dinks at the Sacramento Bee were not interested in any of this. And CalPers answers to no one for their years of dereliction and cronyism. How does a hack loser jump from one CEO position to another? It's the timing. Mr. Dear and the goons at the pension board knew they could bring in their fall guy before the worst of Washington States pension losses had been reported. this state is so ass backwards that economic ruin or tsunami are the only things that can clean the vineyard.
People on food assistance can't buy fast food, only groceries at the grocery store and are the last thing "We the People" should be worried about…we have bigger problems and one of them -is- getting illegals off of the welfare system. We need to do something about the pet projects, pork barrel spending, first, and the rest will fall into place, people will get jobs. But, like I said karma is a bitch… I also believe you reap what you sow, be happy you have jobs, don't grumble and complain about the poor, or one day you will find yourself in their shoes and that should send shivers down your spine…funny you should mention that Swen wouldn't go hungry, on Thanksgiving day…“Blessed are you who are poor, for yours is the kingdom of God. 21“Blessed are you who hunger now, for you shall be satisfied" and GOD will do what he promises with or without your money…life is long… And by the way you sound like mooshell odumma…who is anyone to tell anyone else what food to buy or eat, oh I forgot its on the "taxpayers dime", so they lose their rights?…
Even Bill Gross' "new normal" expectations of a 4% annual return aren't realistic. In what asset class can one expect that kind of return? Bonds? Hardly! Yields are below 2%! Stocks? Ha! The S&P 500 is at a P/E multiple of 46 and a yield of a paltry 2%! Real estate is in a deflationary depression!
Only commodities have been able to bring higher yields, and if regulators have their way, they'll try to reign in commodity prices. But it won't work because all government attempts at price controls throughout history have only brought smaller supplies and HIGHER prices.
The only way these yields will rise is if the Fed is successful in igniting sickeningly high inflation, but it risks creating an even worse scenario — a hyperinflationary depression that would destroy ALL asset classes (except, again, commodities) through debasement of the currency, but this is precisely the scenario it is pursuing. If it succeeds, and there's no reason to believe it won't, pensioners will be the WORST hit as their pensions becomes worthless in very short order.
The Fed has been artificially suppressing interest rates for so long that it robs seniors of an honest yield on their fixed income investments (bonds, CDs, etc.) while forcing investors to assume higher risks that will ultimately bring larger losses. The real "new normal" is one of Dollar devaluation and destruction that will make even these new actuarial calculations prove to be what they really are — a FANTASY and a FALSEHOOD!
Income-producing commercial real estate properties are the only asset class out there that have a chance. In a depressionary cycle – and we are in one thanks to Obumbles – cash is king and that which produces real cash and can index for inflation will survive the turmoil. Meanwhile, I don't know why people put their money into the stock market. You have to be nuts to play a rigged game where the referees are also players and using their own rules.
California Democrats on the Titanic. "See my rock-hard abs!" "Yeah, but I drive a Prius." "Who wants some more wine?" "Forget the wine, I'll get my bong." "The captain deserves a raise for finding us some ice." "Call me Senator!" "Shouldn't we get in the lifeboats?" "Don't worry. Obama will fill that big leaking hole with money from the other states." "Will all the silicone in my chest keep me afloat?" "Sing us a song Cher."
Government can't be all things to all people. Do the math.
"Communist" countries Russia and China threw all intitlements under the bus, and now they
are thriving. Over there, you want a doctor, come up with some cash.
Calpers is the second largest pension plan in the world! Did you hear that, The World!
To show you how bad this is, #1 is the Indian Railroad Retirement system (not native americans-India) is the largest, and they are fully funded.
Calpers is grossly-grossly under-funded due to terrible investment performance. They have been covering that up for years. Thus all the gold plated "defined benefit" programs are insured by the full faith and credit of the California State Government (the residents of Ca). So when the baby boom retirement bubble comes, the taxpayers must make up for the huge-huge shortfall.
That is why the latest election was so important to the public employee unions. That is why they needed to elect bought off politicians from Governor down to dog catcher. The governor, state senator, and assemblyman to transfer any coming pain to the taxpayer, rather than their closed shop public employee union members of the teachers, nurses, police, firefighters, etc etc. The funding and support of elections at low levels of government insure that the up and coming politicians will be in their pocket, so the state never goes bankrupt.
This is the ultimate strategy, as if the state goes bankrupt, all the union contracts are thrown out and would be renegotiated by a court appointed trustee. That would completely short circuit the public employee system and strategy. They would lose control over the process and the sweetheart contracts would be gone and the pensions would be drastically reduced to reflect the reality of what the bankrupt state could afford.
The reality is the state is bankrupt right now. Any real business owner would be declaring bankruptcy right now to reorganize. Look to see what happened to the Chrysler bond and stock holders. Look to see how GM ended up being government motors and owned by the Auto Workers Union. In both instances the government did an end run around bankruptcy to reward the Unions, and in turn punished the bond and stockholders. For the coming California disaster, just substitute the work California Taxpayer for bond and stockholders in the previous sentence.
The only thing the California Taxpayer can hope, is that Federal Govt gives us a bailout, thus to share our pain with you and other states that act responsibly and somehow provide necessary services without imposing one of the currently highest tax burdens in the entire US, and still going bankrupt.
This is why the Nurses Union and the California Federation of Labor dredged up Nicky Diaz, of the Boo Hoo-ing Gloria Allred news conference fame.
Those public employee unions, it was just revealed this week, secured an immigration attorney (Vander Hoot) and an employment attorney (Allred), so Diaz can put in paperwork to get a green card, even though she publicly admitted to the commission of various felonies including identity theft, false identification, and welfare/AFDC fraud.
Allred so Diaz was able to sue for back wages and benefits totaling $6,400 over 9 years, which was recently settled out for $5,000. At a contingency arrangement normally at 30%, that would mean a fee of $1500 to Allred, thus would cover maybe 4 hours of Allred's time.
The unions have "created" a fund for Diaz. The fund has paid Diaz'es family's expenses, and will continue paying their expenses into the future. Note besides saying that there is a fund, there has been no disclosure as to how much.
The Diaz fund, is capitalized by the Unions, from the withheld dues from the paychecks of the union members. The mandatory, closed shops, union members receive their compensation from the taxpayers. Thus taxpayer money has funded the union payoff of Diaz, and the union theft and subordination of the most recent California elections. People complain of the disputed Florida hanging chad Gore V US election as if it were stolen, the last California Election was a real case of electoral theft.
There is a very good reason "Cash and Cash Equivalents" are listed first in the financial statement known as the "Balance Sheet". Cash is the most important asset and if you don't have liquidity you can't hide it.
Look out you California Statists, John Gault is coming!
I feel your pain Stan. The day after the election I sold ALL my California muni bonds ( and it was a fair sum). I assume my reaction was somewhat typical. So who is going to fund the debt monster now? This state is done. It will go bust and then maybe we can clear out the Progressive or at least their fialed ideas and policies. Except for Hollywood – its hopeless.
Well put, the S & P 500 has a Compound Annual Growth Rate of roughly 1.1% over the past decade, so this "new normal" of 4% is over the top.
I know it's fun to pick on California, and California deserves to be picked on, but if you live in a town or a state that has public sector employees, and those public sector employees are compensated with pensions, you are on the hook the way Californians are.
Think about it, self serving politicians are everwhere and no one wants to tell the firefighters and police that their retirement is going down the drain. So you multiply what CalPERS did by practically every state and local pension across the country, and you get an idea of the problem we face, it's nationwide and not limited to California.
Pretty insightful post. Never thought that it was this simple after all. I had spent a good deal of my time looking for someone to explain this subject clearly and you’re the only one that ever did that. Kudos to you! Keep it up.
Option Poppers
Hey Chi Town Tom,
Speaking of Greece, If France attacked Italy from the rear would Greece help? Or is that hot greece you smell my answer? Happy Thanksgiving all
No Way , Jose CA ,, No Bail-Outs for you Elite Political Class ,, Experts ,, The CA Citizens will be Looking for You .
I don't know where to begin…but I know where to end.
Happy Thanksgiving!
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