$29 billion loss is more than ‘just a flesh wound’
“Just a flesh wound,” protests the Black Knight in Monty Python’s famous Holy Grail comedy, challenging King Arthur to continue their duel even after all his limbs have been severed.
Similar happy talk is coming from the management of California’s big public employee pension funds after CalPERS, the nation’s largest institutional investor, posted a loss of $29 billion. When CalPERS reported on its end-of-fiscal-year performance, its July 20th press release was headlined, “Challenging global public markets, strong private market returns lead to varied performance.” Varied performance, indeed.
Overall, the hit to the system’s portfolio of investments was a 6.1% decline for the fiscal year that ended June 30. Stocks and bonds took the biggest hit while its real estate holdings actually gained, helping to avoid an even a bigger loss. But the drop from $469 billion to $440 billion is bad news for taxpayers.
Relax, say those who defend CalPERS and its system of “defined benefits.”
Ted Toppin, the Executive Director of the Professional Engineers in California Government, one of the state’s most powerful unions whose members reap big pensions under CalPERS, says in a recent Capitol Weekly piece, “Don’t be alarmed,” over these record losses.
Well, of course not. His members and all participants in CalPERS — both currently retired or employed — can afford to relax because they know that if the investments by CalPERS are insufficient to cover their benefits, taxpayers are on the hook. So at the same time private-sector employees and the self-employed watch their own retirement portfolios sink, they also have to worry about higher taxes to cover the losses of the big public pension funds.
Fiscal watchdogs have been warning about this for more than 40 years only to be ignored by our elected leadership, whose cozy relationship with publicsector unions makes even modest pension reform nearly impossible.
As this column warned back in 2018, “California’s pension crisis exists in large part due to the very nature of defined-benefit plans. Unlike defined-contribution plans, where the taxpayers’ obligation to each public employee ends with every pay period, defined-benefit plans depend on a projection of future investment returns. And therein lies the problem. California has been horribly wrong in its application of assumed rates of re
turn, leading to hundreds of billions in unfunded liabilities. And this shortfall is occurring in good economic times when the state of California is relatively flush. A recession will quickly expose this shortsighted thinking.”
It is difficult for citizen taxpayers to wrap their heads around the size of the problem. “A billion here and a billion there and pretty soon you are talking about real money,” as the late Senator Everett Dirksen famously quipped. But the best way to assess the risks to taxpayer is to consider the amount CalPERS must have to fully meet its obligations both present and future. Prior to the record loss, CalPERS was 80% funded, which some consider to be “fully funded.” The loss of $29 billion reduces the investments to an extent that CalPERS is now only 72% funded. The risk to taxpayers, the ultimate backstop, is going up.
Moreover, the notion that even at 80% funding CalPERS is healthy is wrong.
In fact, the American Academy of Actuaries calls this “The 80% Pension Funding Myth,” noting that “plans should have as their objective accumulating assets equal to 100% of relevant pension obligations.”
Trouble for CalPERS means trouble for local governments as well. David Crane, Research Scholar at Stanford and President of Govern for California, has previously noted that, even without a stock market crash, California would still be in trouble “because pension spending in California crowds out services [of local governments] at times.”
As local governments get squeezed, they are tempted to try risky strategies, such as issuing “Pension Obligation Bonds,” rather than control employee pension costs.
But POBs are magnets for litigation.
The Howard Jarvis Taxpayers Association has a winning record of challenging these esoteric debt instruments.
Pension reform is especially urgent now that the nation is in a recession, notwithstanding the Orwellian denials of the Biden administration. And those reforms need to be more than a Band-Aid for this “flesh wound.”