CalPERS Really 53% Under-Funded Per SEC’s Fair-Value Method

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solutions
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CalPERS Really 53% Under-Funded Per SEC’s Fair-Value Method

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It would appear that the amount of CalPERS under-funding using the Fair-Value Method required by the U.S. Securities and Exchange Commission for corporations is MORE THAN TWICE AS LARGE (53% vs. 26%) as CalPERS admits when it uses the “GETTING AWAY WITH MURDER” RULE for estimating under-funding.

As noted in the Q&A’s and in “CalPERS and the Fair-Value Method of Measuring Under-Funding,” both of which are posted in this section of the Bulletin Board, CalPERS not only refuses to use the Fair-Value Method but also refuses to disclose what the amount of under-funding would have been if the Fair-Value Method had been used.

It is impossible for outsiders to calculate precisely the amount of CalPERS under-funding using the Fair-Value Method.

But it is possible for outsiders to make a shrewd estimate!!!

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Step 1 = The amount of CalPERS assets at 1/31/2013, the most recent date for which this statistic was disclosed, was $254.9 billion.

Step 2 = The amount of funding at 6/30/2011 USING CALPERS’ “GETTING AWAY WITH MURDER” RULE was 74.8% and the CalPERS Chief Executive Officer’s letter accompanying the 6/30/2012 financial statements estimated that the amount of funding at 6/30/2012 would be 74% (USING THE “GETTING AWAY WITH MURDER” RULE).

Step 3 = If $254.9 billion represents 74% funding USING THE “GETTING AWAY WITH MURDER” RULE, then $344.5 billion would be 100% funding USING THE “GETTING AWAY WITH MURDER” RULE. Accordingly, UNDER THE “GETTING AWAY WITH MURDER” RULE, the under-funding is $344.5 billion - $254.9 billion = $89.6 billion.

Step 4 = The Non-Partisan Congressional Budget Office (“CBO”) Report on “The Under-Funding of State and Local Pension Plans” reported that for the entire nation, state and local pension plans assume on average an 8%/year return (income and appreciation) on their assets in computing the extent to which they are under-funded, pursuant to which they only admit $0.7 TRillion of under-funding, but if a 4%/year return were used instead, they would have $2.9 TRillion of under-funding!!!

Step 5 = Since the CalPERS Chief Executive Officer’s letter accompanying the 6/30/2012 financial statements admits that CalPERS assumes a 7.5%/year return in calculating its under-funding of $89.6 billion (USING THE “GETTING AWAY WITH MURDER” RULE), the question becomes what the CalPERS under-funding would be if a 4%/year return is assumed rather than the 7.5%.

Step 6 = To apply the CBO ratio of total state and local under-funding at 8%/year vs. 4%/year to CalPERS $89.6 billion of under-funding at 7.5%/year, it is necessary to estimate the total state and local under-funding at 7.5%/year. As previously noted, the CBO Report stated total state and local under-funding at 8% was $0.7 TRillion and their Report also states that at 6% it was $1.6 TRillion. Therefore, at 7.5% it would have been $0.9 TRillion.

Step 7 = If the CalPERS share of the total state and local under-funding of $0.9 TRillion under-funding at the “GETTING AWAY WITH MURDER” 7.5%/year rate is $89.6 billion, then the CalPERS share of the total state and local under-funding of $2.9 TRillion under-funding at 4%/year is $288.7 billion.

Step 8 = Accordingly, the total liability of CalPERS using a 4%/year rate is the $254.9 billion of existing assets at 1/31/2013 + the $288.7 billion of under-funding = $543.6 billion.

Step 9 = Under-funding at 4%/year = $288.7 billion divided by $543.6 billion = 53%.

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THIS RATE IS MORE THAN TWICE THE 26% OF UNDER-FUNDING THE CALPERS CHIEF EXECUTIVE OFFICER CLAIMED (USING THE “GETTING AWAY WITH MURDER” RULE).

And the amount of CalPERS under-funding at 4%/year ($288.7 billion) IS 3.22 TIMES AS LARGE as the $89.6 billion of under-funding USING THE CALPERS “GETTING AWAY WITH MURDER” RULE!!!

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