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CalPERS Makes Madoff Proud - Kicks The Can Down The Road

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Published on Nov 17, 2010

This is video of a CalPERS Senior Pension Actuary, Kung-pei Hwang presenting to the Huntington Park City Council on how CalPERS is underfunded and why the cities pension costs will be rising. Notice in the video how CalPERS keep changing its assumption to hide losses.

Because of losses in 2008-2009 CalPERS assets are 50% below what the actuarials expected. In otherwords, we California taxpayers are screwed and about to get more screwed.

With CalPERS, the employee contribution amount is fixed but the employer amount varies so the risk to the plan is borne by the employer (city, county, state).

1. CalPERS COSTS TO CITIES SKYROCKETING NEXT YEAR, BONDHOLDERS BEWARE - The current rate of return assumption CalPERS is using is 7.75% compounded annually. However, CalPERS board is working on a new asset allocation policy based on a meeting last week with investment professionals. The new return assumption rate will be lower and announced in February 2011. For every ΒΌ point CalPERS lowers its investment return assumption, the city or county or state cost will go up 2 % in one of two categories of contributions it must pay into and 4% in the other. In other words, the burden on cities, counties, and the state is about to balloon come Spring. If the rate is lowered to Bill Gross's "new normal" rate of return of 4% that would mean a city or county would have to pay over 22% MORE in contributions. A sum sure to sink many cities and maybe a few counties. If the return assumption gets lowered a tiny amount and the actual returns are close to the "new normal" then CalPERS will just dig a larger hole to be filled down the road.

2. MADOFF WOULD BE PROUD - Compounding the problem is the fact that in 2005 after CalPERS lost 1/3 of its assets in the dotcom bubble it created a "new rate stabilization policy." The new policy changed the Actuarial Value of Assets (AVA), a method of smoothing the asset valuation, from an avg of 3 years to an avg of 15, thus inflating the AVA due to previously strong years. By doing this they masked the downturn in the AVA thinking the following years would allow them to catch up and smooth out the massive dotcom loss. Trouble is, 2008-2009 came along and shot holes in this assumption and not they are more screwed.

3. MADOFF SLIGHT OF HAND #2 - Then compounding the problem more, after the 2008-2009 losses CalPERS changed their assumptions AGAIN to "smooth" the losses. They then changed the AVA to MVA ratio to 60% to 140% from 70% to 120%. As you can hear the actuarial state o the video, "that means we will defer most of the loss to future years." "This means the city will realize another increase in future years. I hate to bring bad news but those are the facts."

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