California’s Real Wildfire

Hot dry winds have returned to the land of fruits and nuts.  After baking away all summer long in the blistering sun, the dense sage and chaparral covering the coastal hillsides and canyons and the inland mountain forests are dry and toasty.  Vegetated areas are a giant tinderbox.

What happens next is as predictable as night follows day.  Just one spark – from a downed powerline or a backfiring semi-truck – and the whole thing conflagrates into a blistering windblown wildfire.  The Golden State goes up in smoke.  The sky turns to an orange haze; the sunsets are magnificent.  And ash sprinkles down and coats the pavement with residue.

Of course, this happens every year.  And every year is the worst year ever.  The fires rage until the mild winter weather arrives.  Then everyone seemingly forgets the fires ever happened…until the mudslides.

Indeed, California is a whacky and wild place.  The Governor’s an absolute loon who fancies himself a leading presidential candidate for the 2024 election.  State and local governments are largely socialist.  The general populace generally wants first rate infrastructure, at a second rate price.  And nearly half of all U.S.’s homeless people live here.

Yet the real story with California.  The story only geeks and dweebs will tell.  Is a story of its state and local governments.  It’s a story that’s also being written in a state or city near you.  The story has nothing to do with wildfires, per se.  But it does have to do with conflagration.

This is the story of an army of public servants.  And the promise of retirements that are unaffordable.  More so than the wildfires ravaging the state are the wildfires ravaging the big pension fund.  This is the story of grand promises that must be broken.  And the painful level setting that comes with it.

Where to begin?

Doing Time

Over a decade ago, while providing consulting services to a county sanitation district, we crossed paths with a grumpy fellow who had only a secondary interest in providing industrious work.  His primary interest was deliberating on his upcoming retirement.  He had only six months to go before he met an important milestone.

This grumpy fellow was closing in on two important marks: (1) his 55th birthday, and (2) exactly 36 years of doing time at the district.  As he explained it, after 55 years of age the retirement formula went from 2 to 2.5.

So after collecting a paycheck every two weeks for the past 36 years, something special was about to happen.  He could take 2.5 and times it by 36 to equal 90.  Specifically, he would now receive 90 percent of his final year’s pay for the rest of his life.  Apparently, doing another four years’ time for the remaining 10 percent was not for him.

Our son had a similar experience when he was in fifth grade.  His teacher, who had a condition that manifests when you consume an abundance of food without corresponding exercise, repeatedly shared with the class something special.  She had only a seven year stint remaining before she could call it quits and start enjoying her fat retirement.

Mr. Grumpy and Ms. Rotund, you see, are entitled members of the California Public Employees’ Retirement System (CalPERS).  The nation’s largest public pension fund.  In fact, it’s so large it takes 2,875 full time equivalent positions to administer it.

At last count, there were over 2 million members in the CalPERS retirement system.  Some of these people may have done good work prior to retirement.  Others, were likely career loafers.  All, without question, did their time with purpose and intent.

But what they end up getting may not be what they traded their time for…

California’s Real Wildfire

The real fire in California is the wildfire that’s raging at CalPERS.  The fire, you see, is a fire of arithmetic.  It’s a fire that won’t go away.  And it’s a fire that’ll burn the whole state to the ground.

Officially, CalPERS has roughly two-thirds of the money it needs to pay benefits that state and local governments have promised their workers.  However, this is based on an assumption of future investment returns averaging 7 percent a year.  Historically, CalPERS’ returns have fallen well short of this assumption.

In the 2019-20 fiscal year that ended June 30, CalPERS reported a 4.7 percent return.  Over the last 20 years, the average annual return has been 5.5 percent.  Hence, the unofficial gap between what CalPERS has and the promises it owes is much larger.  For instance, if CalPERS investment returns assumption was lowered to its historical average, unfunded liability would rise from $160 billion to over $200 billion.

Of course, there are other ways to close the gap.  Government employers and employees could chip in more.  Similarly, future benefits could be reduced.  Alas, for the latter, the state Supreme Court has ruled against it.

As for the former, state and local governments are having trouble meeting their CalPERS obligations as it is.  They’re having to shift funds from other services, raise taxes, and borrow money…all to float a giant Ponzi scheme.

Some local governments are even turning to financial gimmicks to further extend the problem and pretend everything’s fine.  The chicanery uses something called lease revenue bonds (LRB).  According to Forbes writer Elizabeth Bauer, and brought to our attention via Zero Hedge:

“Two cities in California are issuing bonds with their own city streets as collateral to pay down their unfunded pension liabilities […].

“The two cities, West Covina and Torrance, are in SoCal.  The city councils of the two communities in recent months have borrowed a combined $550 million in funds backed by their own city streets to try either to ‘refinance’ money owed to CalPERS, or to use on projects – or even more hospital beds and respirators, depending the circumstances.

“These so-called ‘lease-revenue bonds’ have one primary advantage to the local officials authorizing the borrowing.  Unlike normal general-obligation bonds, LRBs can be undertaken without a vote, and quickly enough to allow officials a range of excuses, like taking advantage of low rates.  According to Forbes, some of the money is being used to offset past under-funding of pension contributions.”

Whoever’s buying these LRBs should have their head examined.  The revenue stream of a leased street seems a tad suspect.  But what do we know.  Given the circular Ponzi of modern day finance we wouldn’t be surprised to find these LRBs in CalPERS’ portfolio.

Regardless, California’s real wildfire rages on at CalPERS.  The ultimate destruction will be breathtaking.

Sincerely,

MN Gordon
for Economic Prism

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