SEC Investigates Country's Largest Public Pension Fund

Friday, January 07, 2011

CalPERS headquarters in Sacramento, Calif. (Wikipedia Commons/Wikipedia Commons)

Louise Story, Wall Street and finance reporter for The New York Times, discusses her  breaking story on a new investigation by the Securities and Exchange Comission against the California Public Employees' Retirement System, known as Calpers. During the financial crisis, the fund lost a significant portion of its portfolio, leaving the California on shaky financial ground.

Now, investigators are looking at whether California adequately disclosed the risky nature of Calpers' investments. The country's largest public pension fund's shakedown could send tremors through the pension world, which is already suffering.


Louise Story

Comments [3]

Owkrender from USA

Everyone lost a lot in the meltdown, and everyone is doing better. The next valuation will be far rosier. And things would be better still if employers were not excused from making contributions a decade ago.

Jan. 07 2011 03:33 PM

Well at least California has new fresh faces like Jerry Brown, Barbara Boxer and Nancy Pelosi to deal with this ruinous financial mess.
Elections do indeed have consequences.

Jan. 07 2011 12:53 PM
EliminateCIT from Denver/CO/USA

While it is not known what the specific interest in the investigation might be, the most obvious finger to point to would be the ultra aggressive discount rate assumption that pension plans use to calculate their PBO, pension benefit obligation (for CALPERS, this figure is 8.0%). Now pension plan accounting allows for States/Munis to use the same discount rate as they use investment rate assumption for their future assets. Remember that corporations typically use discount rate assumptions for the PBO that are close to high grade corporate or treasury bond yields (long term AA corps = 5.2% and the 30 yr US Treasury = 4.3%) which is the closer to the rate that one would pay for an annuity of guaranteed payments. In fact, for those US corporations that have reported fiscal 2010 financials so far, their average discount rate assumption is 5.1%. This is a far cry from the 7.5-8.5% that the average State/Muni pension plan is calculating. Remember also that as the interest rate moves toward zero, the value of the PBO rises exponentially, not linearly. This is why it is believed that California's total underfunded pension liability could be 3x what the stated liability is.

The other misleading accounting item is that State/Muni pension plans smooth the gains and losses of their investment assets over a 4-5 year period. Thus most plans today are reporting inflated assets given the steep declines in assets during the 2008/2009 period. We look forward to seeing the year end financials of the State/Muni pension plans as they are reported, but it will be unfortunate that while the stated funded rate that we read in the US newspapers will be 55-70%, the actual funding levels will be in the 40-50% range. And there will be a few that could be below 40%.

Of course a bill introduced by Rep. Devin Nunes (CA) in December will make State/Muni pension fund accounting transparent which will help not only Muni bond investors but also State Legislatures and Governors make decisions with better information about the health of their entities. Let's hope that it passes through Congress.

Jan. 07 2011 10:59 AM

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