California Ponzi Scheme Finds Fresh Meat

The state government pension crisis: You will be made to care

California Gov. Jerry Brown just signed SB 1234, a bill that establishes the California Secure Choice Retirement Savings Trust, a state-run retirement fund for 7.5 million Californians. All firms with more than four employees will be forced to participate unless they already offer a retirement plan. Unless they opt out, private sector employees will see 3 percent of their salaries automatically deducted from their paychecks to be held in trust by a panel of politicians and political appointees.

What could go wrong?

Per section 100004 (c) of the new law: Moneys in the program fund may be invested or reinvested by the treasurer or may be invested in whole or in part under contract with the Board of Administration of the Public Employees' Retirement System or private money managers, or both, as determined by the board. What is the California Public Employees' Retirement System or CalPERS for short? It's America's largest public pension fund with some 1.8 million current and retired government employees.

But, as with many public retirement systems around the nation, CalPERS is grossly underfunded. Including the California teacher retirement system and smaller local government systems, the unfunded liability for future retirement payouts is about $991 billion, according to the Stanford Institute for Economic Policy Research's Pension Tracker run by Joe Nation, Ph.D., a former Democratic member of the California State Assembly.

Since cash is amazingly fungible in government hands, dragooning some 7.5 million Californians into a retirement system that supports 1.8 million state government workers by levying what amounts to a 3 percent payroll tax is going to go a long way towards ensuring CalPERS' short-term solvency while, perhaps more importantly, building public support for bailing out CalPERS' looming trillion-dollar shortfall.

7.5 million Californians will be made to care about CalPERS fiscal health.

An underfunded governmental pension system is a classic Ponzi scheme waiting to happen. The earlier people who sign up can do quite well, while the latter enrollees are likely to lose badly. One way a government can keep the scheme alive is by enlisting more payees at the bottom to pay off the ranks above them. Which works, until their turn comes.

My family has done rather well in this Ponzi scheme. My mother had an excellent pension and health plan as a result of her years of service to the University of California. My father is still benefitting from this because the health care package available to him as a high school teacher, and yes, private law school president were far inferior.

People who take advantage of government programs are not at fault. It's the fault of the politicians who use tax payer's money to buy votes for themselves.

San Berdoo Stiffs Lenders

San Bernardino has defaulted on $10 million in bond payments

The southern California city of San Bernardino has defaulted on nearly $10 million in payments on its privately placed pension bond debt since it declared bankruptcy in 2012, according to documents seen by Reuters.

In addition, the city has not negotiated with its bondholders since September, according to a person familiar with the stalled negotiations.

The missed payments illustrate the trend among cities in bankruptcy to favor payments to pension funds over bondholder obligations, which has increased the hostility between creditors and municipalities.

San Bernardino declared last year that it intends under its bankruptcy exit plan to fully pay Calpers, its biggest creditor and America's largest public pension fund with assets of $300 billion.

The city continues to pay its monthly dues to Calpers in full, but has paid nothing to its bondholders for nearly three years, according to the interest payment schedule on roughly $50 million of pension obligation bonds issued by San Bernardino in 2005.

The non-payment of the bond debt and the city's lack of interest in talks with its pension bondholders just weeks before it must produce a bankruptcy exit plan should serve as a wake-up call to Wall Street issuers of debt to struggling cities, according to Michael Sweet, a bankruptcy attorney with Fox Rothschild in San Francisco.
. . .
"Bondholders should be realizing that in Chapter 9 cases those who will invariably get better treatment by the cities are former and current employers, who are part of the community, and not the faceless bankers holding commercial paper," Sweet said.

But Sweet said San Bernardino's treatment of its bondholders could come back to haunt it. "Down the road, the city may find that the capital market is unavailable to it or that it will be penalized at a very high rate when it seeks to borrow," he said.

But I'm sure President Warren will just force the banks to lend to bankrupt cities at favorable rates.

Previous posts on San Berdoo's bankruptcy:

San Berdoo Goes Bust

San Berdoo Death Spiral Continues

And another chorus of San Berdoo Sunburn:

Moody's Bankrupts Six California Counties

Well, not literally, but if Moody's changes their means of rating public pension debt as they intend, six counties in California would go underwater immediately: Alameda County, Contra Costa County, Marin County, Mendocino County, San Mateo County and Sonoma County.  To make good on their debt, these counties would be force so spend essentially all their income on pension obligations.

Back on July 2, 2012, Moody’s announced proposed adjustments on how it evaluates public sector pension data... Moody’s proposed changes in evaluating pension funds are:

The assumed rate of return on pension fund investments will be lowered from 7.75 percent to 5.5 percent. The lower the interest rate on pension fund investments, the larger the cash contribution required by employees or counties. Public pension funds have assumed unrealistically high investment return rates based on inflation during the Mortgage Bubble.

Municipalities will be required to catch up on its unfunded pension liabilities in 17-years, not the 20 to 30 year period now used.

Full payment of borrowed principal and interest – called full amortization — will be required in making pension payments. This means that level payments will be required, not graduated payments that start low and rise over time.

Mind you, we're not talking about poor counties in every case here.  San Mateo and Marin counties were ranked the #2 and #3 wealthiest counties in California in 2011, with median incomes of $82,000 and $77,000 respectively.  But if you take more out of the bank than you put in long enough, you can generate a hole that virtually impossible to fill.

Catch-up pension payments will have to increase in the six counties by 192 percent. And existing aggregate pension bond payments will have to be increased by a total of $177 million total in the six affected counties to avoid insolvency. As Dickerson states, this will result in consuming 98 percent of all the property taxes in the six counties for pensions only...

The question is whether the counties affected (and others in a similar position elsewhere) will be able to find the funds to make the payments required through a combination of increased revenue and service cuts, or whether the populations of the counties will decline sharply when the taxes increase and services decrease, and people move to more economically congenial locations.

The pension bust is going to be one of the big stories for the next 10-15 years.  Money that can't be repaid, won't.