Tuesday, July 17, 2012

CalPERS Investments Return 1 Percent.

CalPERS announced a one percent  return on investments for the twelve months ended June 30, 2012.  Fixed income and real estate investments led the way with good performance, with the rest of the asset classes showing dismal performance. Maybe CalPERS should stop focusing on "non-core" activities like hectoring public companies about their governance, political speech and executive compensation and look at their own operation of a $233 billion fund

The Wall Street Journal points out this could be bad news for California cities, "Calpers' 1% return for the fiscal year ended June 30 could force the state of California and its cities to contribute more to the $233 billion retirement system to make up for the investment shortfall."

Which gets us back to an earlier post about Californis municipal bankruptcies.  Wall Street municipal bond advisers sniffed about reading too much into Stockton's recent announcements, suggesting that problem cities would account for 1 percent of total municipal issuance.  No need to get alarmed, three problem cities do not make a trend.

The problem is that municipal bond issuers and buyers live in a world about as real as that of the Truman Show. None of the pension liabilities of municipalities are visible to a local bond investor.  Since these obligations are generally pushed up to the state plan, everybody can make believe skies are sunny in the land of Oz. 

Into the tulip-filled hillside steps, of all entities, Moody's Investor Services which reckons that U.S. states and localities have $2 trillion in unfunded pension liabilities.  The overall municipal bond market is $3.7 trillion.  Here's something that troubles me. If virtually all of these plans have contribution and benefit levels which cannot be reduced per legislative mandate, and the funds are backed by the full taxing powers of the states, then aren't these in fact riskless investments like U.S. Treasuries?  So, should we use a discount rate of 2.56%, say for the 30 year Treasury bond?  So Moody's liability estimate might be much higher. This is an aside, but a serious one.

Since Moody's can't afford to become a pariah in the credit ratings market, the ultimate effect of these announcements will be softened.  However, kudos to Moody's for taking this stand and for putting these issues squarely on the table.

Logically, Moody's notes the following potential effects of their new system,
"...because some liabilities in state pension plans that also cover localities will be allocated to the specific local governments. Currently, some of those liabilities might not be broken out by the individual city, town or school that is part of a state plan. The liabilities of all public pension funds, for both states and localities, could leap, as Moody's will also consider a revision of the rate used to calculate them"
Local voters should vote not just on current salaries and expenditures for municipal workers, but on the true employment costs which are dominated by health care and pension benefits, none of which are visible in the present system. 

Then, when municipal bond investors look at state  bond issues, they too can have a truer picture of the state's future obligations. States  need to have their balance sheets look like real statements of financial condition, not the current fantasy fostered by the GASB. 

So while government unions press corporations about their political speech, perhaps they should allow the antiseptic of sunshine to enter into their world of public pension liabilities.  Transparency and accountability are always for the "other guy," though.

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