On July 13, the Fresno Bee reported California’s big pension fund sees flat earnings for a second year.
CalPERS still maintains that its long-term track record of 7.5% returns is intact. Is it?
Reader W.C Varones sorts it out in his article CalPERS Deliberately Deceives Public by Cherry-Picking Dates.
Cherry-Picking Dates by W.C Varones
You probably know that CalPERS recently reported yet another year of investment results that fell far short of its absurd promises.
But did you know that CalPERS is actively, deliberately deceiving the public about its investment promises and results?
CalPERS has a section called “Myths vs. Facts” on its website where it tries to debunk critics of its rosy expected returns, which experts nearly universally believe are too high. Here’s what the site showed until mid-July:
This is a recurring theme of CalPERS propaganda: pay no attention to expert opinion, zero percent interest rates, or historically high valuations. CalPERS can always expect high returns because CalPERS earned high returns in the past.
After a second consecutive year of dismal returns, the statements above about 20- and 30-year returns are no longer true. This spreadsheet shows the past 21 years of returns, taken from CalPERS annual reports (we could not find data prior to 1996). CalPERS’ 20-year annualized return is now just 6.57%… and it’s about to go a lot lower because it is rolling off four more consecutive years of double digit returns from the tech/internet bubble.
Last year, CalPERS semi-acknowledged that it needed slightly less crazy assumptions, promising to eventually lower expected return… but only after it has a really good investment year first. That’s like a heroin addict promising to quit after just one more fix.
Given that the CalPERS “Myths vs. facts” statement was no longer true, we were curious to see what CalPERS would do after 2016’s bad results came in. And CalPERS did not disappoint:
Look what they did here. In mid-July 2016, after they had already reported 2016 results, they went back and cherry-picked time periods ending June 30, 2015. If we don’t cherry-pick the data, the truth is that CalPERS has missed its annual return targets for all of these time periods: 1-year, 3-year, 5-year, 10-year, 15-year, and 20-year — and the long-term returns are even worse than the recent years! CalPERS is deliberately misleading the public!
If we can’t trust CalPERS even to be minimally honest with the public about its investment returns, why are we trusting them to manage hundreds of billions of dollars for retirees and taxpayers?
End Varones – Mish Comments
Despite two more bubble years, “CalPERS’ investment portfolio barely eked out a profit during the 2014-15 fiscal year and it performed even more poorly during the 2015-16 cycle that ended June 30, declining by $8 billion (2.6 percent) to $293.7 billion.”
And not only is this one of the biggest stock market bubbles in history, bond yields are at historic lows.
US Treasury Yield Curve
If one assumed a 60-40 mix of stocks and bonds, one would either have to invest heavily into junk, or get returns of 11.88% a year in one of the biggest bubbles ever.
GMO Estimates vs. Pension Plan Assumptions
Even if pension plans get 4% returns for the next seven years they will be in serious trouble.
Mike “Mish” Shedlock
The Fed has painted all defined benefit pension plans into a dark, dark corner. All so that the Federal government can go on spending hundreds of billions of cheap fake money. This will end badly, but nobody has a clue as to when.
Of course this ends badly. Around 60-70 years from now, the same way the Soviet System ended,,,with a whimper.
The FED is just doing its job. If USA.gov did not have these huge deficits it would be a different ballgame. I believe the FED is touting inflation as the remedy as preparation for that solution. You can inflate upwards more than you can go downwards on the interest rate side. Rickard’s has an interesting perspective:
“…Now the IMF is about to enter its most powerful stage yet. Central banks bailed out the world in 2008. The next financial panic will be bigger than the ability of central banks to put out the fire. At that point, the only source of global liquidity will be the IMF itself.
The issuance of 5 trillion of SDRs, equal to $7.5 trillion, to paper over the next financial panic will be highly inflationary. The difference between this coming inflation and those in the past is that few investors will know where the inflation is coming from. Politically, it will not be easy to hold the U.S. Treasury or the Federal Reserve accountable, because they will just point a finger at the IMF.
The one true advantage of SDRs is that very few people understand them, and there’s no political accountability…”
Rickards Link [http://dailyreckoning.com/behind-closed-doors-imf/]
…and if the IMF/BIS craps the bed (which seems as likely as not), then the FED’s game ends minutes later.
…and/or a SinoRusAsian development bank effectively backs asian currencies & exchanges, and the Western financial paradigm slowly withers as capital & capacity bleeds eastward.
It’s been checkmate for Bretton Woods since 1973. The transition is now accelerating.
mpower1969, that seems to be the thesis. The IMF SDRs (special drawing rights) replace the dollar as the reserve currency when the next derivatives or financial crisis hits and the financial system needs liquidity to keep the too-big-too-fail banks and their derivatives from hitting zero value. Chine’s currency being part of the currency basket that constitutes SDRs has its seat at the table, and via the IMF may be calling the shots behind the scenes on austerity etc. for the USA.
Nothing new in the IMF imposing conditions on indebted member states, but this time it is the USA. USA.gov and the FED plead helpless innocence. The mainstream media will obfuscate and debate Hillary’s hairdo, transgender bathrooms, the need for more leftist lesbian and gay supreme court justices, inequality, climate change, etc. The SDRs issued to liquefy the financial system during the crisis result in devaluation of the dollar and inflation, which would be welcome by the FED and the main debtor, USA.gov, which could payoff its debt and pensions in devalued currency. Perhaps more politically palatable than buying back the debt at a discount, as Trump suggested; or devaluing/cutting pensions directly. In a crisis, USA.gov can do anything, as illustrated in 2008/9 with TARP etc.
If China is the financial power and the USA dissipates itself in debt, then China via the IMF would have a say in imposing austerity on the USA. Certainly not an outlandish scenario, given the cumulative indebtedness being racked up by the welfare-warfare state. It will indeed be a new world order: the culmination of LBJ’s guns and butter Great Society, neo-Con madness and an untethered fiat currency.
There is no need to worry. As part of a comprehensive bailout plan, Public pensions will hold 75% or more of their assets in special US Treasury securities that pay an inflation adjusted return annually.
All private retirement plans will have similar requirements, or will be nationalized (except Roth’s) for something resembling the SEIU’s “Shared Retirement” type plan.
So really, no worries. The Fed or the 1% will end up owning all stocks or non government bonds, and everyone else will be safe with our government securities. Until hyperinflation, of course.
\not sarc, unfortunately.
That’s not that far-fetched actually. They have done backdoor (partial) nationalizations of pensions in Poland (http://www.bloomberg.com/news/articles/2016-07-04/poland-to-overhaul-its-35-billion-private-pension-fund-industry) and Hungary (http://www.bloomberg.com/news/articles/2010-11-25/hungary-follows-argentina-in-pension-fund-ultimatum-nightmare-for-some), for example. You don’t really need to own something if you can have a permanent, irrevocable mandate to do as you please with it.
Someone should chekc their sums from the linked spreadhseet.
Twenty year, fifteen year and ten year returns are 6.49%, 5.15%, 4.07% and not what is shwn on the linked google worksheet (need to compound the annualized root of the time periods to get the right answer – maybe this is a problem with google, not the compiler, but in any case the correct results to June 2016 are margially lower
No end in sight for ZIRP/NIRP here on earth… Maybe they have a portal through CERN to another dimension, but more than likely, marketing magic combined with the public mis-education system seems to be the only thing California needs to keep the masses happy.
I believe that’s what I did. Can you see the formula and tell me what you think I did wrong?
I just unhid Column C in the spreadsheet which is the compounded return starting at 1995=100. Then then formulas are like this:
=(C23/C3)^(1/20)-1
Is that not correct?
CalPers can manipulate the dates today to slop more lipstick on the pig; however, in the near term, reality will rear its ugly head and the head fakes will no longer work. No matter how much CalPers’ management spins the truth – the facts will speak for themselves. It’ll be impossible to hide the warts on CalPers nose.
This is how it will play out: CalPers will spin, spin, spin until they can’t anymore. Then they will run to the gobblement for a bail-out. AND THEY WILL GET IT!!!!
So brace yourselves. The PTB won’t let the public pension funds fail or reduce the pension payouts until the entire system sees a full-blown collapse. At that point Mr. Math stick his middle finger high in the air. But at first they’ll use your bail-out tax dollars as the initial Band-Aid to plug a severed artery. Of course, it’ll fail. And then the judges (who all draw gobblement pensions) will have no choice other than to order huge reductions in the pension payouts.
How is it possible the calper pension is fully backed by the taxpayer but our 401k’s aren’t. Get out of Cali fast!
Looks like Calpers already modified their website….you must have scared them Mish!
I am a California inmate er resident. Jerry Brown and his union thugs will not require a bailout. They will employ the Chicago model of increased taxes and fees. Guaranteed.
The Chicago model involves bailouts as well. Just hasn’t gotten there yet. California will be no different.
Lest the population at large grows the heck up; and realizes “rule of law”, “shared sacrifice”, “promises”, “can’t let people starve in the streets” and the rest of the Ricky Retardo progressive baloney pile that comes out of the same hole the above drivel does; is nothing more than propaganda to keep them bent over and taking it harder by the minute by their self proclaimed “rulers”, they’ll just end up playing patsy once again. Just as they’ve always done, for as long as they’ve walked the earth. Since that’s what the Man on TV tells them to do and all.
That is a pity because California is really a nice state, except for the government.
The place might be nice, but it’s the people, not just the government, that screw it up.
The worst thing that can happen to you around here property-wise is that a Californian might move in next door.
Too big to fail. If need be the Fed will provide inside info to calpers to see that it makes it’s goal. Same for Union Pensions in general,,,and any other large campaign contributors to the “Party.”
What-Ever-It-Takes
Odds are that CALPERS will lag inflation for the next decade, while real world retiree expenses of their members will go beyond the CPI. Unless their members vote for a gold standard to eliminate inflation.
Soooooo… What I’m hearing is that CALPERS is ready to start their IPO process. Buy CALPERS stock based on their (selective) history! (while of course the boilerplate states that prior performance does not guarantee future valuations)
I believe Martin Armstrong said that they have approached congress about getting control of private retirement funds, which they will manage for them.
Oddly enough, just before reading this I was enjoying some fine cherries, and feel inclined to appreciate cherry-pickers and rank them up there with tuna casserole makers and apple pie bakers. Seriously, calpers is being overloaded with $200k, $300k, $400k and even $500K+ annual lifetime pension liabilities for city and public agency employees. Some employees have lifetime benefits calculated based on the last 5 years or 2 years of employment. These last earning years are traditionally “padded” with massive overtime, unused vacation and sick leave, etc. So, for pension calculation purposes, the last two years of employment can reflect 4-6 years of income. Nifty accounting, very employee-centric, it is not unusual for California public employees to collect $150k for life, even it their top year was $65k. Social Security, in contrast, is going from averaging the last 5 years to the last 38 years of employment to lower payouts (I think the millenials have caught on to this hoax).
But there are some important differences, versus Chicago. California constantly raises taxes and fees, and is of course driving out businesses. But higher taxes on the remaining businesses and individuals has so far masked the exodus. Unlike Chicago, calpers gets bailouts voted by the state legislature and governor whenever needed. So, they can overload the system with high pensions and have low returns, and pensioners will not be affected. That was the case in 2008/9: The state of California was issuing IOUs to its vendors in 2009, but calpers got a half billion dollar bailout which was promptly invested in Brazilian businesses and real estate. When calpers needs more money and the political stars are in alignment, they will un-cherry pick the numbers, trumpet the crisis and blame it on the recession or whatever and collect another bailout. A great game, with high rewards for cherry pickers who know when to strategically unpick.