California’s public retirement fund, CalPERS, has recently reported that it lost $30 billion in actuarial investments last year. Governor Jerry Brown has been warning the organization that it has been taking on too much risk.
He had admonished CalPERS to lower its annual return expectations from 7.1 percent to 6.1 percent. But CalPERS is the largest public employee pension fund in the world, and hubris has won the day.
Last year, an angry Jerry Brown issued this statement;
“It is frustrating that CalPERS has reversed its direction and taken up an irresponsible course of action that will keep the system reliant on unrealistic returns on their investments. This will expose the fund to an objectionable level of risk over the next few years.”
In an age when large financial institutions regularly report huge losses with no satisfactory explanation, experts worry that CalPERS willful disregard for good sense may be contagious. For the 12 month period ending in June of this year, CalPERS investment endeavors will have hemorrhaged another $8.2 billion.
Combining the loss with the pension fund’s inability to collect any of the 7.5 percent “assumed” returns on $22.6 billion, the CalPERS full investment losses amount to a jaw-dropping $30.8 billion.
Combine this with the previous two years’ total actuarial losses and we see that the CalPERS’ $293.7 billion fund has endured a grand total $46.2 billion dollars in actuarial investment loss.
For years now, the massive California Pension Fund has been auspiciously throwing money into hopeless investments in episode after episode of publicly scorned decisions. In 2013 top CalPERS officials admitted that its investments in new green energy companies have cost the fund hundreds of millions of dollars.
In what was called “A noble kind of waste,” of public retirement monies, and investment supporters thought that it was okay to throw away one of every six pension fund dollars- ultimately owed back to California citizens who are counting on those pensions for retirement.
In 2009 CalPERS reported a walloping annual loss of more than $56.8 billion in faulty investments, nearly a quarter of its total investment portfolio.
But now those monies are gone for good, and the only explanation Californians are getting is something on the order of a profound shrugging of Armani suit wearing shoulders.
In 2014, CalPERS CEO pleaded guilty to taking bribes and fees for making investments with a certain firm. The lesson we learned from this is why fund managers and bankers make such huge amounts of money.
The concept is known as “efficiency fees.” What it means is, if people who handle large amounts of money essentially have control over that money, whether they own it or not, they control the gates- and those who have an interest in those gates opening for them will pay these fund managers very well.
This, essentially, is what has been going on at CalPERS. Fund managers with terrifically poor foresight, or terrifically poor ethics, have been taking advantage of their positions as the paymasters for organizations hungry for their investments.
It works a lot like the housing bubble of 2008, really. It’s essentially a case where lenders lean toward lending- regardless of whether or not these loans have any fair chance of being returned.
The fund managers themselves stand to make so much money on simply making the investment that they are able to share the take, and the guilt, with a large and sufficiently powerful group of people that practically nothing can be done to stop them.
What’s more, one might imagine that anyone in a position to stop them might suddenly find a very expensive luxury car in their driveway with a bow on it.
The real problem here is that they are getting away with it, and they have been getting away with it for years. Sure one person here and there ends up being charged with a crime. But generally, the fines pale in comparison to the profits, and few ever see jail time.
What’s even more frightening about the ongoing case of CalPERS’ apparently throwing money away over and over again for a period of years in full view of the public is the fact that California has always been a trendsetter. Like it or not, laws passed in California, and policies followed in the Golden State usually take root in other parts of the country.
What the wild success of CalPERS executives, at the ghastly expense of Californians means is that the idea is very likely to catch on with other large public retirement funds across the country, spreading like a wildfire—and when people’s well-earned retirements are gone and spent, the experts will say, “At least they tried to save the environment.”
Regards,
Ethan Warrick
Editor
Wealth Authority
