Friday, October 24, 2008

Wall Street Journal: Pension Funds Taking Serious Hits

Some of the information in this story is just rich. First, since California's pension plan has taken such a large hit, there is potential for cities and counties to have to increase contributions - in the face of a municipal disaster via lack of funding that is now hitting and will increase next year (lower tax revenue via real estate, sales taxes, business taxes). There have been a few similar stories I've been reading the past few days - since many pensions are underfunded we have to invest in the stock market to make up the shortfall. Works great on the way up; not so much on the way down.

Second (and that much more darling) are the folks at our investment banks who were able to sell our national pension guarantee organization in D.C. on the 'safety' of mortgage backed securities. Seriously, I cannot make this stuff up. There is so much damage left behind by these used car salesmen with MBAs who left with the commission, whose executives left with the stock options and bonuses, and saddled the nation (and world), with the garbage. As a reward for this behavior? We're bailing them out. Something seems amiss....
  • The California Public Employees' Retirement System, the nation's largest public pension fund, said recent investment losses from the financial crisis could cause cities, counties and other state employers to pay more money to the pension fund, starting for some in July 2010. Calpers said that assets have declined by more than 20% from the end of the June 30 fiscal year through Oct. 10; total assets as of Oct. 20 were about $193 billion. It would lead to an estimated increase in employer contributions to the fund of 2% to 4% starting in July 2010 for some employers, and for the rest in July 2011, unless those losses are reversed, according to a Calpers memo.

  • The increased contributions would be greater if the fund's assets decline further by the end of the fiscal year of June 2009. However, the contributions would be smaller, or even nothing, if the fund reverses those losses.

  • The declines are taking a toll on Calpers funding status, which is the fund's assets divided by its liabilities. That ratio would be down to 68%, based on the market value of its assets, unless Calpers reverses the current level of declines. Analysts suggest that the ratio for healthy pension funds should be at least 80%. At the end of the June 2008 fiscal year, Calpers was 92% funded. It was at 102% funded at the end of June 2007. (how quickly things can change)

  • Separately, a House committee said the U.S. Pension Benefit Guaranty Corporation lost at least $3 billion in stock investments in the 11 months through August. Documents obtained by the House's Education and Labor Committee show the agency invested a "significant portion of its funds in mortgage-backed securities," according to a statement by the committee. (ahhhhhh!!!! - can we sell them to the government??? wait! this is already owned by the government! Well we are told that if we hold them for a very very very very very very long time - that we will make money so I'm sure this is just a short term problem. Yep. That's what King Paulson told us - the magic TARP makes all values go up over time) PBGC is a government agency that insures private pension plans, manages failed pension plans, and pays benefits to workers in those plans. (on the plus side, at this stage in the economic cycle I anticipate very few failed companies whose pension plans we need to bail out, so we can wait a very very very very very very long time for these mortgage backed securities to return to 'fair value' - ahem)

  • Charles Millard, head of the PBGC will testify before the House Education and Labor Committee Friday regarding the "agency's financial problems that may threaten the retirement security of millions of Americans," according to a statement by the committee. The committee said Mr. Millard "rebuffed a committee subpoena in July that demanded the agency to turn over documents regarding a report into the agency's mismanagement and lax governance practices."

Notice a pattern? The ones lecturing Wall Street are no different - in fact interchangeable.

What a mess.

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