Is it time to restructure CalPERS?

April 21, 2013

A canary is singing in a coal mine in California. Canyon Lake, a city of about 11,000, has announced its intention to terminate its contract with CalPERS, the statewide retirement system. The small city has outsourced most of its public services and has two employees on its payroll, which it will shift from full time to part-time employment. According to Reuters:

Canyon Lake said it has looked at Calpers’s website, which states that its unfunded liability to the fund is $661,000.

Richard Rowe, Canyon Lake’s interim city manager, said the city decided it would be cheaper to borrow money to pay off Calpers rather than continue to pay the fund.

The city only has two full-time employees. Payments to Calpers for the pair will cost the city about $35,000 in the next fiscal year beginning July 1, Rowe said. If the city quit Calpers and turned those jobs into part-time positions with much lower benefit structures, the city would save about $88,000 annually in pension and health costs, Rowe said.

This effort is not the first to terminate a municipal entity’s relationship with CalPERS. From Reuters again:

Pacific Grove, a California coastal city of 15,000, informed Calpers earlier this year that it wants to explore ways to renegotiate its obligations to the fund. Other California cities are taking legal and financial advice about their obligations to Calpers.

There are also the big federal bankruptcy cases of Stockton and San Bernardino that could have a significant impact on CalPERS and open the door to other municipalities taking action to adjust their pension payments.

In a move that will likely antagonize more cities and possibly the state, CalPERS just approved requiring higher payments, which will begin in 2016. Fitch Ratings gets into the nitty-gritty of who will really be stressed by the CalPERS move (emphasis mine):

We consider carrying costs for debt service, pensions, and other post-employment benefits to be high when they total more than 25 percent of general government operating expenditures. Of the 40 California cities Fitch rates, seven are at or above that threshold. Although the CalPERS changes are expected to increase pension contribution levels by up to 50 percent over a five-year ramp up period, contribution rates have already been on an upward trajectory.

State and local governments will be paying more into the system while CalPERS reconsiders its approach by going to passive asset management. Returns at a 2.2 percent annual rate over the last 5 years for the system are slightly below the national median of 2.3 percent. Many questions have been raised about the high fees the system pays for private equity and alternative investments. It’s almost as if the system is too big to run efficiently.

There is also criminal activity that might be associated with CalPERS. Reuters reported in March:

A former chief executive of Calpers, the largest U.S. public pension fund, was indicted on federal conspiracy charges in connection with a scheme to commit fraud, the U.S. Department of Justice said on Monday.

And early this week:

The Securities and Exchange Commission today charged the CEO of Chicago-based investment advisory firm Simran Capital Management with lying to the California Public Employees’ Retirement System (CalPERS) and other current and potential clients about the amount of money managed by the firm.

As California taxpayers pay more taxes into the CalPERS system, it is time for the State Legislature to convene a review. Something seems amiss at CalPERS and it is unlikely to fix itself.

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