One Big Gorilla

There's an 800-pound gorilla lurking around the California State Capitol in the form of the California Public Employees Retirement System (CalPERS).

As we noted yesterday, the Los Angeles Times has reported that the real estate and stock market dives have taken their toll on CalPERS' investments, and the value of the fund's total portfolio has gone from a high of $247.7 billion at the end of June, 2007, to $239.2 billion in June, 2008, to $184.2 billion as of last Monday.

And there are likely to be other large losses working their way through the CalPERS investment pipeline. A reader forwarded us a 7/23/08 energy policy speech by U.S. Senator Dianne Feinstein on the Senate floor in which which the senator criticized some largely unregulated energy futures speculators, including CalPERS:

But as we continue to learn more about what's really going on with energy futures markets, it's clear that more work remains to be done. We're learning about additional loopholes that must be closed. And the legislation before us is critical to ensure that we can level the playing field in energy markets, that there's transparency there.

First, the problem of large institutional investors like pension funds -- this is what's new in this market.

From 2003 to 2008 institutional investments in commodity index funds rose from $13 billion to $317 billion. That's in five years -- from $13 billion to $317 billion. Now, you might say, what does that have to do with it?

....So the implications are potentially devastating. And here's why. Unlike gold, energy and agricultural commodities meet essential needs in every day life of average people. They are limited. They aren't pork bellies. Energy is limited in the amount we have.

And these institutional investors, the big pension funds like my own, the California Public Employee Retirement Fund or CalPERS, has invested over $1 billion in these markets. [emphasis added -ed.]

These institutional investors are trading long on energy futures prices. In other words, they are betting that the prices in these future markets continue to rise. They're not hedging against the risk of changing oil prices as airlines and utilities frequently do. They never take delivery of a product They participate in the oil markets only on paper.

Now, $1 billion is a small percentage of CalPERS' portfolio, but it's still a significant amount, and given the fall in oil prices, one would expect CalPERS to have lost a good chunk of their energy futures investments.

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Our state and local lawmakers don't want to talk about CalPERS because many of them depend heavily on largesse of public employee unions and their campaign donations. (See Torres, Norma.)

Our elected officials, needing to placate their largest constituency, reward those public employees with retirement plans that are much more generous than almost any available to workers in the private sector. Many of these plans offer 75% or more of the employee's salary at retirement for those fully vested. Unfortunately, legislators give little thought to the risks inherent in the lavish benefit giveaways they commit the public coffers to, and they give even less thought to the conflicts of interests involved.

California public employees will argue that they don't receive Social Security retirement benefits, so they need what their currently getting. They will also argue that they're contributing to their own retirement accounts, which is true. However, because of the way CalPERS figures its benefits, when a city like Claremont hikes their retirement benefits, as they did several years ago for its non-public safety workers, they're instantly responsible for retroactively funding employees' retirement accounts back to the date of hire, which is why Claremont now finds the non-public safety workers' retirement accounts possessed unfunded liabilities of $6.67 million as of June, 2007 - a shortfall Claremont taxpayers, not the employees are responsible for covering.

The state of the city's CalPERS accounts came up on Saturday, November 8th, at the City Council's special priorities meeting. The Council and staff discussed some contingency plans for cutbacks in the event of a deepening economic crisis and a decline in city revenues. They also raised the possibility of going to a two-tiered retirement plan grandfathering in benefits to present employees and reducing benefits to new employees.

The staff report's section on the city's finances should give one pause:

Topic Description: Due to current economic conditions, situations may arise during this or next fiscal year that the City will have to take action in order to maintain a balanced budget. During the adoption process of the budget, staff brought forward some ideas for potential reductions, and after discussions with the council, it was clear that the council would need to give direction to staff about where and what types of cuts they would be interested in. The items listed below are some actions that could be taken to facilitate the discussion.

Current Status: Currently, the City s expenditures are inline with the balance budget that was adopted by the City Council in June. The impact of recent events in the stock and housing markets have not yet been realized by the City. The state legislature may be going back in to session to deal with the ongoing state budget crisis and the City potentially could lose more money to the state. Should the state successfully take money from the City, or if revenues come in much lower than anticipated some action, including those listed above, may be required of the council to rebalance the budget.

Among the possible measures: Contracting out city services, expanding the City's early retirement DROP program, reduction of benefits, and layoffs.

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You might remember when the Claremont City Council was discussing the pension increases, we witnessed the spectacle of the our public employees lined up in the front row of the Council Chambers cheering and applauding themselves for having successfully coercing the Council into approving the retirement increases. These weren't rank-and-file street cleaners and clerical workers. These were senior staff members like then-Assistant City Manager Bridget Healy, who benefited greatly from the new package.

That's one of the ironies of Healy's current candidacy for City Council. Healy claims that she has been engaged and involved in the Claremont community for 30 or so years. The truth, however, is that she was a highly paid employee, a mercenary, who left Claremont in 2005 to go to the City of Indio where she could be even more highly compensated. Healy did not stay here to help remake City Hall's management culture into a more open, more responsive, friendler one. Instead, she followed her mentor, former City Manager Glenn Southard, to Indio, chasing dollars and deserting the community she purports to have served in an unbroken chain of decades.

Claremont's day of fiscal reckoning is coming, and Healy, one of the people most responsible for placing the city's finances at risk, will get elected to the City Council next March. When she takes her seat at the dais, Healy might do well to follow the advice given to new doctors: First, do no harm.