Sunday, May 29, 2011

It's Not Accounting Fraud When the Government Does It: California Pensions Edition

Ever wonder why broke states like California have such a hard time doing anything about their monstrous unfunded pension liabilities? In addition to the usual corruption and irresponsibility we've come to expect from our government, Daniel Borenstein finds an interesting culprit in today's Contra Costa Times: sketchy pension-accounting practices. In general, differences in federal accounting rules between public and private pensions allow government plans to overstate their assets, understate their liabilities, and spread out debt payments over ridiculous lengths of time.

When determining how much money they have, pension plans typically "smooth in" the effects of gains and losses in investments, so as to minimize the impacts of market volatility. By the law, private pensions are only allowed to spread out the effects of changes over a two-year period, and only if the adjusted portfolio value doesn't differ from its actual value by more than 10%. In contrast, CalPERS spreads its gains and losses out over a 15-year period, and has allowed the adjusted value to deviate from the actual value by as much as 40%. As such, CalPERS has yet to account for the losses in investment holdings that occurred in 2008-09, and is assuming it has much more money than it actually does. When it comes to liabilities, private pensions are required to assume a conservative market return on their existing holdings in calculating the value of those assets toward future payments. According to people like Warren Buffett and the 20th century's record of returns, a reasonable rate of return would be about 6%. Yet CalPERS assumes a 7.75% rate of return, based on similar returns over the past 20 years (though it's only gotten a 4.3% return in the past 10). In other words, CalPERS is almost certainly assuming that the value of its assets will be exceedingly high when they're needed to pay retirees. And finally, when it comes to unfunded liabilities, private pensions are required to amortize these payments over a seven-year period. CalPERS, in contrast, amortizes them over a 30-year period, which pushes down the amount of each individual payment against these liabilities.

It's depressing enough that California's unfunded pension liabilities are now estimated at a half-trillion dollars. What's especially sad about Borenstein's analysis is that accounting for those liabilities in a straightforward way is probably politically unacceptable. As he points out, if CalPERS and other public pensions in California held to the same accounting standards as private retirement plans, the required payments would likely triple and devastate government budgets at all levels. Yet we're not so sure that that wouldn't be a better approach to continually whitewashing over the problem. Somehow we think the consequences will be much harder to accept when the money literally runs out.


  1. Past Fund Values from 1996-97 – 1978-79 for 5 California County Pensions; Los Angeles(LACERA), Santa Barbara(SBCERS) Ventura(VCERA), Kern(KCERA), and Contra Costa(CCCERS) County can be found @

  2. Proving there is corruption and fraud with the Santa Barbara County Employees Retirement Systems Pension Fund. Based on the Data in this Story we are talking about close to a 2 BILLION Dollar Discrepancy!

    Hello my name is Larry Mendoza and I am here to expose corruption and fraud with the Santa Barbara County Employees Retirement Systems S.B.C.E.R.S. pension fund. Through my research I can prove that it is mathematically impossible for the SBCERS pension fund to currently have any type of negative fund value and or future deficit. Furthermore when you apply the factual data over the previous 26 year period, the SBCERS pension fund should currently have a surplus.

    So what is the mathematical equation I am trying to prove here? Well If the SBCERS pension fund started out in 1986 as 100% funded. And Santa Barbara County also contributed the required minimum percentage of payroll for the last 26 years. Then the pension investment returns earned the 8% assumption rate for the last 26 years, can we all agree the pension fund would currently be 100% in a perfect world?

    But what if the fund again started at 100% funded in 1986 and earned an additional 20% above the yearly 8% assumption rate for 26 years. And then the County over contributed by 48% above the normal contribution minimum for 26 years what would we have then? Can we all agree we would have an extremely over funded pension, because that is exactly what we have and I can prove it.

    My research shows that in both 1986 and 1991 Santa Barbara County reported to the Municipals Securities Market on Wall Street that the SBCERS pension was at least 100% funded. The data I found from Santa Barbara County records show that for last 26 years the County’s pension’s investments have earned a yearly return average that exceeds 9.55%. Finally based on a 2009 pension cost history sheet produced by the Santa Barbara retirement board, I found that Santa Barbara County has been over funding the SBCERS pension by an unbelievable 48% above the required minimum. So now I ask, how can Santa Barbara County elected officials currently claim that the County pension fund has a 1 Billion dollar future unfunded liability? It is MATHMATICALLY IMPOSSIBLE based on the data I have just shared with you!

    My research data comes from 3 sources, The California State Controller’s Office, Santa Barbara County and Retirement Board and the Municipals Securities Market on Wall Street. Truth be told Santa Barbara County elected officials are ultimately the providers of all data my three sources posses.

    Below is the 26 year average return for their SBCERS investment returns and a link to its location on the web. Take a look at it, check my figures and tell me what you come up wih.

    Santa Barbara County Employees’
    Retirement System
    Exhibit 7b: Net Return on Assets vs. Increase in Consumer Price Index

    26-Year Compound Average Net Return at Market Value 9.58%
    26-Year Consumer Price Index Average 2.8%
    * Based on All Urban Consumers - U.S. City Average,
    ** Only available data for investment return yield for 1986 was book value which was 24.2%
    *** Only available data for investment return yield for 1987 was book value which was
    16.6%. I have found that Book Value on average tends to be lower than Market Value but I played it safe for this example..
    This data can be. Found @
    The place where COMMON SENSE never goes out of style!