CalPERS Seeks To Escape Fiscal Reality of Failing Pensions by DAVID TAWIL Investor's
Business Daily 03/10/2015
05:57 PM ET
To the outsider, CalPERS — the largest U.S.
pension fund, created by California state law and run by an arm of the state of
California — may seem like the champion of the working man, fighting for the
rights of municipal employees and pensioners. But that perception may be undeserved,
per the Chapter 9 bankruptcy of Stockton, Calif., where CalPERS sought to shift
to taxpayers (an even larger and more sympathetic party than CalPERS) the
financial burden to support what some consider CalPERS' outrageous costs.
U.S.
Bankruptcy Judge Christopher Klein openly opined, "CalPERS has bullied its
way about in this case with an iron fist, insisting that it and the municipal
pensions it services are inviolable." The result of these recent events is
positive for municipal bondholders because, with Stockton and Detroit, the
judges have stated that municipal pension obligations can be restructured, like
other unsecured debt of the municipality.
In
the current environment, where municipal distress, restructuring and bankruptcy
are increasingly common, some of the onerous provisions included in pension
servicing agreements are finally being recognized, leading to some long-overdue
pressure on pension programs.
In
May 2014, CalPERS filed a friend-of-the-court brief with a bankruptcy court in
Detroit, triggered by an advisory opinion by Bankruptcy Judge Steven Rhodes
stating that Detroit could impair current employee and retiree pensions in its
bankruptcy process. CalPERS argued that the judge's ruling "threatens the
country's entire public pension system."
Though
Rhodes' decision appears to have laid the groundwork for compromise between
Detroit employees and pensioners, helping to achieve what is now known as
"The Grand Bargain," CalPERS alleged that he decided the issue only
to "facilitate negotiations and administration of the case,"
maligning the credibility of one of the most respected bankruptcy judges.
Most
people know CalPERS as the pension system for California state employees.
However, in addition, CalPERS has contracted with local municipal California
governments to administer their pensions. CalPERS has contracted with 1,580
local public agencies and 1,513 school districts to service their pensions.
Only 32% of CalPERS' members are state employees; the rest are local government
and school employees.
So,
it seems, CalPERS challenges the adjustment of pension benefits through Chapter
9 bankruptcy (to which states do not have access), because servicing local
government pensions is big business for CalPERS.
According
to Judge Klein, "once a municipality agrees to a CalPERS contract, the
CalPERS board gets into a position to block changes in the municipality's
pensions by saying a local change would adversely affect the system."
Even
worse, as became clear in Stockton's case, it is almost impossible for a
municipality to terminate its contract with CalPERS because of a provision
saying that any cut to pension benefits would be equivalent to ending the
contract between the city and CalPERS. State law gives CalPERS a lien on the
city's revenues — a mechanism that Judge Klein called "a poison
pill."
If
a municipality's contract with CalPERS is terminated — voluntarily or not —
CalPERS moves the municipality's plan assets to a special termination pool. The
move could cause a municipality's pension plan to be dramatically underfunded
because the new pool has a more conservative investment strategy.
In
Stockton, CalPERS claimed that upon impairment of pension payments or
termination, Stockton's liability to CalPERS would explode from $211 million on
an actuarial basis to $1.6 billion under the termination methodology, making
termination or non-consensual impairment impossible.
Judges
Rhodes and Klein each handed CalPERS and pensions systems a serious defeat. As
much as they have tried to make public pension benefits inviolable, two
prominent bankruptcy courts have held otherwise.
The
upshot is that pension systems can't stop municipalities from modifying
pensions in bankruptcy, thereby benefiting bondholders, other municipal
creditors and taxpayers.
As
Judge Klein said of CalPERS, "The bully may have an iron fist, but it also
turns out to have a glass jaw."
•
Tawil, co-founder of Maglan Capital, previously served as director of leveraged
finance at Credit Suisse. Prior to that, Tawil was an attorney with Davis Polk
& Wardwell, specializing in workouts and bankruptcies.
Comments
We in private industry have abandoned Defined Benefit Pension
Plans for lots of reasons. The main reason was that private businesses don’t
last forever and couldn’t really guarantee that they could deal with pension
obligations. Stock market slides hit these DB Plans and PBGC premiums go up
making these DB Plans unsustainable.
So, private businesses adopted the 401k type Defined Contribution
Plans. Unlike DB Plans, these 401k plans actually belonged to the employee. The
reality is that these plans would actually work better if we had “sound money”,
but we don’t.
We have a Federal Reserve that has resulted in the US dollar
decline for over 100 years that made the dollar then worth 3 cents now. Federal over-spending and over-borrowing
these past 15 years will ensure that the dollar decline will continue.
Defined Benefit Pension Plans were a scam based on the bet that
most retirees would die shortly after age 65.
That is no longer the case. Retirees are working well into their 70s.
Newly formed cities are adopting 401k plans. They are also
avoiding direct employment, preferring to hire “temp agencies” to staff the
city. This has its own problems that result in the “temp agency calling the
shots on city spending decisions. This sets up the corrupt crony dynamic we saw
with Arthur Anderson and Enron.
Government entities and Utilities need to shed Unions and the DB
Plans to keep costs in line going forward. This can be done by terminating the
DB Plan and setting up an “age weighted” DC Plan to roll the balances into
while maintaining the 401k Plan. The “age weighted” plan ensures that those
close to retirement when the DB plans are terminated receive higher benefits
from the “age weighted” plan.
Norb Leahy, Dunwoody GA Tea Party Leader
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