COMMENT: Facing a vicious circle of conflicting demands and priorities, the California Public Employees Retirement System is turning to debt – a risky scheme to borrow billions of dollars in hopes of juicing its investment returns.

The California Public Employees Retirement System, the nation’s largest pension trust, benefited greatly from the runup in stocks and other investments during the last few years, topping $400 billion early this year.

CalPERS needed it because it was still reeling from a $100 billion decline in its investment portfolio during the previous decade’s Great Recession and was tapping state and local governments for ever-increasing, mandatory “contributions” to keep pensions flowing and reduce its immense “unfunded liability.” But it faced a backlash from local officials who said vital services were being cut to make their CalPERS payments.

Just when CalPERS appeared to be climbing out of its hole, the COVID-19 pandemic erupted early this year, sending the economy into a tailspin. Virtually overnight, the fund saw its value take a $69 billion hit as the stock market — CalPERS’ biggest investment sector — tanked. Stocks have since recovered, but CalPERS is still down about $13 billion from its high early this year.

Further investment erosions would, almost automatically, trigger even greater CalPERS demands for contributions from government employers, but the recession is also eating into their tax revenues, creating substantial budget deficits.

It underscores CalPERS’ vulnerability to capital market gyrations. Investments more immune to fluctuations would be safer but they offer very low returns and CalPERS could not safely meet its lofty earnings goal — an average of 7% a year.

It’s a vicious circle of conflicting demands and priorities, driven by an official policy of providing generous, inflation-adjusted pensions for government workers, bolstered by the political clout of public employee unions.

CalPERS desperately needs an escape route and has chosen the perilous path of debt.

It plans to borrow billions of dollars — as much as $80 billion — to fatten its investment portfolio in fingers-crossed hopes that earnings gains will outstrip borrowing costs. It mirrors the recent and risky practice of local governments borrowing heavily to pay their pension bills via “pension obligation bonds.”

“More assets refers to a plan to use leverage, or borrowing, to increase the base of the assets generating returns in the portfolio,” the system’s chief investment officer, Ben Meng, wrote in the Wall Street Journal recently. “Leverage allows CalPERS to take advantage of low-interest rates by borrowing and using those funds to acquire assets with potentially higher returns.”

What could possibly go wrong?

The new scheme is an implicit admission that CalPERS can’t meet its 7% mark without increasing its exposure to the vagaries of the market. “There are only a few asset classes with a long-term expected return clearing the 7% hurdle,” Meng wrote.

Perhaps, then, the real problem is the 7% goal, much higher than those of private industry pension plans.

CalPERS and other public systems use higher earnings projections because they need them to pay for the expensive pensions that politicians have awarded. Inferentially, if they fall short of the mark, they can tap employers — i.e. taxpayers — to close the gap. However, that option is pretty much maxed out, which may explain why the very risky borrow-and-invest approach is being adopted.

This is serious stuff, so risky that the Legislature should dump its informal hands-off policy toward CalPERS and order up a comprehensive and independent examination of the system’s assets, liabilities, and long-term prospects of meeting its pension obligations.

SB

REPLY: We are looking at state and local pension funds collapsing. There is not much they can do. This is the collapse of socialism of which I am referring to. This is why the 2020 election will be so critical. The left is determined to overthrow Trump because they are looking to raise taxes dramatically. The World Economic Forum is already suggesting a 400% increase in taxation in Europe. These people are insane. We have states raising property taxes between 30-40% because the lockdowns have deprived them of revenues that are pushing pension funds over the edge. They are brain dead, for so many people live hand-to-mouth and cannot afford such drastic increases in taxation. The Democrats are really hoping to draft Hillary for they believe that is their best shot to beat Trump. This is the entire objective for career politicians who have no real business to return to and they will always exempt trusts and themselves. Trump would never agree to the agenda and this is the battle to the death here in 2020.

COMMENT: Dear Mr. Armstrong,
Thank you!!! for opening our eyes to the scary new world in which we live in. Are there more Socialist/Marxist to other political groups?

Our neighbor is a professor at a major university in South Florida with a Doctorate in Nursing. She recently shared with us her strong ideologies and political views which caught us a little off guard. We started off talking about COVID 19. She definitely refuted anything we had to say regarding the virus and any information we provided (which of course we learned from your blog and the many videos from Drs working on the frontline). She said, that we should be following the WHO, the NIH, and not so much the CDC. We are sad because she conveyed to us, “ let’s leave the leadership of the future to the youth, of course, this is where she has direct influence. Well, here are some of her responses to our questions. She is 100% on board with disbanding the police. And in mentioning the economy, She feels just leave it to artificial intelligence/robotics. We suddenly had a flashback of the robots you showed in an earlier video on your blog and their capabilities, and how they could be used to police our country. We then said, What about jobs? She blatantly expressed that she was for a guaranteed basic income for all. She said, Europe is more socialistic than the United States, as though that was the way it should be. She came out and literally said, she was a “Marxist”. We were shocked. We were always democrats as many of our friends are still. Thanks to you and your blog that we stumbled upon one day. She ended by stating there are “more of her than us”. We are assuming that she means Marxist/Socialist.

We are no longer leaning left or consider ourselves Democrats. Most of our friends consider us “trump lovers” and they will not accept any of our thoughts or reasoning. And when they reveal their point of view, it’s always an example of one person and how they were so unjustly treated. Never do they provide the big picture. We forwarded Michael Moore’s new movie to one of our friends and their email response was “what happened to Michael Moore….he use to make great movies.

Keep up the good work. There are many people who are listening.

Cheers,
Mj

REPLY: The greatest mistake these people make is they have no respect for human nature. Some people are thieves while others are honest. Some women have no problem selling their bodies to the highest bidder and others will not wear even a two-piece bathing suit. One thing is certain: not everyone will be willing to stay home and just watch TV and never work. They assume if they hand out guaranteed basic income that everyone will be happy. They are judging everyone by themselves. We are all NOT the same. Some people hate work and others are addicted to it. I could never sit home, not work, and just watch TV.

I am probably more Libertarian. I respect that there are many versions of human nature. The object is FREEDOM, and I strongly disagree with those who always want to seize politics to FORCE their view upon the rest of society, as Bill Gates and his crew are doing right now. Trump gave the WHO 30 days to explain their false forecasts or he would cut off all funding. They REFUSE to reply. Just ask a simple question — why did they refuse to respond if they are so perfect?

Hillary Clinton and friends are still plotting to have her drafted at the Convention now scheduled for August 17-20. The rumors remain that Joe Biden is “seriously senile” or has dementia. It’s not really “sleepy Joe” as Trump politely calls him, they keep him off the road because they are scared to death what he will say next. He just said 130 million Americans died from COVID. He is losing it – plain and simple.

The interesting thing is the computer is already targeting the week of the Democratic Convention – August 17th. It seems strange that the computer is targeting that week if this is a shoo-in for Biden. The Republican Convention is the next week – August 24th. That will be no surprise as to who is the candidate. This is interesting, to say the least. The Democrats can manipulate the polls, but they know Biden would make a fool of himself in any debate and the people will see he is not all there nor is he fit to be president. This is a socialist agenda and to win, they know they need Hillary.