Forrest Gump and CalPERS

Right From the Start

The California Public Employees Retirement System (CalPERS) is in financial trouble.  It’s nothing new.  CalPERS, like the public employees retirement systems in big spender states (e.g. Oregon, Illinois, Massachusetts, Connecticut, and others) have succumbed to the escalating wage and benefit demands of the public employee unions to such an extent that contributions made annually by the state governments are insufficient to fund the future liability for inflated pensions and benefits.

All of these public employee pension funds are born of a Ponzi scheme.  They all assume that the number of current employees will accelerate at a sufficient rate to fund current retired employees.  That is the definition of a Ponzi scheme.  (This is also precisely the reason that Social Security is in serious trouble.)

However, these pension funds compound the problem by making employee contributions based on then current salaries but paying benefits based on either the final thirty-six months or the highest thirty-six months – a process that is actuarially unsound.  And to add insult to injury, many of these public employee pension funds invest the funds to further political agendas rather than sound investment policies.

And now we have a new wrinkle.  With all of CalPERS problems the state officials have decided to attack the problem by focusing on the source of the highest returns to the CalPERS investment portfolio – private equity investing.  That’s right, the best performing asset class by far is likely to face the axe.  Monday’s Wall Street Journal reported:
“Even though private equity has outperformed other Calpers assets over a recent two-decades period, no other invest has been so expensive.  Private-equity returns were 12.3% [annualized] in the 20 years ended June 20, 2015, but they would have been 19.3% without fees and costs.”
Compare that to the roughly 7.8% annual return that CalPERS reported for the past twenty years.  No mention is made of the asset classes that returned substantially less than that average annual return.  No, the focus has been on the best performer.

And the reasons that all the progressives running California into the ground are upset is because someone – actually several someones – have been receiving pretty handsome fees for managing that portion of the CalPERS investment class – OMG somebody is making a profit.  The Wall Street Journal reports that CalPERS has paid out on an annual basis approximately 7% of the portfolios value to these private equity managers – the normal fees for portfolio management range between 0.5% and 2.0%.  A part of the scandal that has engulfed CalPERS over the past several years has involved the awarding of these contracts, the fees paid, and questions relating to favors, political support and future employment of several of the ranking members of the CalPERS investment board.  The solution here is to better manage the selection process, negotiate better fee structures and impose stringent and verifiable ethics requirements on those CalPERS officials given the power to make the selection.

But that isn’t how the progressives of California address the problem.  No, these idiots who have driven California’s government to the brink of financial ruin with one bone-headed decision after another – always putting politics and “me first” enthusiasm to embrace the next progressive/liberal cause ahead of common sense – have decided that the best remedy is “do it themselves.”

According to The Wall Street Journal, California officials have already reduced its participation in private equity investments from 14% of its portfolio to just about 8% – good job.  When you find something that is producing at a rate nearly double everything else – squash it.  When facing a diminishing capability to meet payments to beneficiaries always reduce your best performing assets – idiots.  And these same officials – remember they are the ones that have created the financial crises surrounding CalPERS – are contemplating either buying an existing private equity investment firm and running it themselves or simply turning over the job to CalPERS employees:
“Among the options being considered are buying a private-equity firm or creating a separate company CalPERS that would make private-equity wagers.  CalPERS could also choose to act as the sole investor in more customized accounts with outside managers these people said.
“In perhaps the biggest shift being reviewed CalPERS also may ask its staff to make private-equity investments directly.”
Wow!  If you are looking to increase the opportunity to increase graft and corruption these are the sure winners.  If anyone working at CalPERS possessed the necessary skills to engage in private equity funding they would be out there in the real world pulling down six to seven figure incomes rather than working for government where you can never be fired for being incompetent.

In a list of appropriate responses to the problems with CalPERS and its investment strategies, the state officials have seized upon the worst three that they could find while ignoring all of the reasonable responses relating to contracting with third parties.  But then again, as Forrest Gump said:
“Stupid is as stupid does.”