Sus-Pension Of Belief

Via John Cole at Balloon Juice, it's not the $26.3 billion in the budget deal that's the state's problem...it's the $56.8 billion the state's pension fund lost in 2008.

California's huge government pension fund is expected to report today a whopping annual loss of an estimated $56.8 billion, almost a quarter of its investment portfolio.

The loss at the California Public Employees' Retirement System for the fiscal year ended June 30 is the second in a row for the country's largest fund. A year ago, CalPERS reported an $8.5-billion loss, as the severe recession began to take hold.

The tremendous drop in value is expected to have a direct effect on the amount of money that the state and about 2,000 local governments and school districts must contribute in coming years to pay for pensions and healthcare for 1.6 million government workers, retirees and their families.

As income from the pension investments fall, the governments would have to make up the difference to meet the state's pension and healthcare obligations.

In the fiscal year that ended a year earlier, CalPERS' holdings in stocks, private equity, real estate and commodities positions were worth $239.2 billion. They fell to $182.4 billion on June 30, down 23.7%, according to daily postings on the fund's Internet site.

But hey, readers around here have known state and local governments and state pension funds were in trouble for a while now. Why is everyone acting all suprised that pension funds, investing heavily in the stock market, tanked in 2008?

The misleading numbers posted by retirement fund administrators help mask this reality: Public pensions in the U.S. had total liabilities of $2.9 trillion as of Dec. 16, according to the Center for Retirement Research at Boston College. Their total assets are about 30 percent less than that, at $2 trillion.

With stock market losses this year, public pensions in the U.S. are now underfunded by more than $1 trillion.

That lack of funds explains why dozens of retirement plans in the U.S. have issued more than $50 billion in pension obligation bonds during the past 25 years -- more than half of them since 1997 -- public records show.

The quick fix for pension funds becomes a future albatross for taxpayers.

In the CTA deal, the fund borrowed $1.9 billion by promising to pay bondholders a 6.8 percent return. The proceeds of the bond sale, held in a money market fund, earned 2 percent -- 70 percent less than what the fund was paying for the loan.

The public gets nothing from pension bonds -- other than a chance to at least temporarily avoid paying for higher pension fund contributions. Pension bonds portend the possibility of steep tax increases.

Warned you about this three months ago. Saw it coming a mile away. You think California has problems? Your state's pension is next. And by law, you're on the hook for it.

“It’s pitiful, isn’t it?” says Frederick “Shad” Rowe, a member of the Texas Pension Review Board, which monitors state and local government pension funds. “My experience has been that pension funds misfire from every direction. They overstate expected returns and understate future costs. The combination is debilitating over time.”

Rowe, 62, is chairman of Greenbrier Partners, a private investment firm he founded in Dallas 24 years ago.

Texas teacher retirement fund spokesman Howard Goldman and Calpers’s McKinley declined to comment on Rowe’s views.

Most public pension funds, like the one in Chicago, were already treading water before the 2008 stock market crash. Now they’re closer to sinking.

State government pension fund assets in the U.S. fell 30 percent in the 14 months ended on Dec. 16, losing $900 billion, according to the Center for Retirement Research.

Fund managers don’t have many options for increasing assets. They need adequate funding from state legislatures, which in many cases they don’t get. Beyond that, they’re at the mercy of financial markets.

There's another $850 billion in pension losses out there, folks. Enjoy that as the baby boomers roll over into retirement age over the next ten years.