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Is CalPERS set to have a Bob Citron moment?

June 17, 2023

Within two weeks we’ll have one of the most important numbers of the year: The funding level of the California Public Employees Retirement System, the nation’s largest public pension fund.

It serves 2.2 million members and pays out monthly to 669,876 retirees.

On June 30, 2022 it was only 72% funded, down from 81.2% a year earlier.

It’s desperately trying to raise that percentage to make sure it doesn’t head down toward Chicago’s eight pension funds which, combined, are only 34% funded.

The June 12 Financial Times reported CalPERS “is planning a multibillion-dollar push into international venture capital as the $442 billion fund tilts toward riskier asset classes in a hunt for higher returns after a ‘lost decade.’”

It would increase venture capital funding by $5 billion to $57 billion, or 13% of investments.

That’s not risky, John Moorlach told me. He became well known in the financial world, and later in many public-finance textbooks, when he predicted Orange County’s 1994 bankruptcy, during a failed election bid to replace Treasurer-Tax Collector Bob Citron. After Citron resigned, Moorlach was appointed to replace him. He later also served as a county supervisor and as state senator; in which later post I was his press secretary.

But what’s risky, he said, was a decision in 2021 in which CalPERS’ board, as described by Smart Asset, “approved an investment policy change on November 15 to use borrowed money and alternative assets to reach its investment-return target.”

Moorlach called that CalPERS’ Bob Citron Moment because that’s what Roulette Wheel Bob did: borrow to invest. If private persons or companies do it, that’s their business. But when public funds do it, the taxpayers are on the hook. That’s because of what’s called the California Rule, under which courts have ruled all collective-bargaining agreements with unions on pensions must be fully funded.

Moorlach pointed to a Nov. 17, 2021 comment on the CalPERS decision by investment guru Garret Jones: “‘Necessary’ returns are becoming increasingly more difficult to produce. When ‘safe money’ pensions are forced to take on risk to meet their objectives, the writing is on the wall. Just imagine what will happen when a ‘never ending bull market’ is no longer there . . . and when stocks, bonds and real estate decline in unison.”

Who knows, maybe it will turn out well. Moorlach compared it to “going to Vegas.” A friend of mine recently won $3,000 there.

I’m joking. That’s what logicians call the Gambler’s Fallacy, in which you expect a recent bout of good luck to continue.

The FT article also pointed out CalPERS “lost about $77 million on its investments in Silicon Valley Bank and Signature Bank, both of which collapsed earlier this year.” Not a lot in this huge fund, but an indication of a failure to do due diligence.

Another problem is Senate Bill 252, by state Sen. Lena Gonzalez, D-Long Beach. It passed the Senate, 23-10, on May 25.

In the bill’s language, it would ban “making new investments or renewing existing investments of public employee retirement funds in a fossil fuel company,” by July 1, 2030.

But as an editorial from this newspaper’s editorial board in February noted, CalPERS invests only $9.3 billion in fossil fuels, while the global oil and gas market is $4.3 trillion.

The Saudis and Russians and other major oil producers only will laugh at this legislation, which won’t do anything to the fossil fuel industry but could end up hurting California’s pension system.

And when CalPERS divested from tobacco funds in 2001, according to Wilshire Associates, it lost $3.6 billion by 2018.

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But publicly funded pensions should be about one thing: Paying out pensions to retirees at the least cost to taxpayers. Anything else is ideological grandstanding.

Moorlach pointed out CalPERS’ expectations its fund will return 6.8% a year are unrealistic.

Instead, CalPERS should be holding 3.75% government bonds, which is what public pension funds started out doing years ago, making them much safer.

But then it would have to get more funding from state and local governments – meaning the taxpayers.

That gambling with the taxpayers’ money to gain unrealistic returns was the problem with Citron. He was returning 10% a year.

It was “free” money for local governments. They could increase salaries ad libitum. Until they lost it all.

John Seiler is on the SCNG Editorial Board. He previously worked as press secretary for Sen. John Moorlach. His email: [email protected]

Orange County Register

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Is CalPERS set to have a Bob Citron moment?

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