Posted on 03/07/2009 7:59:47 AM PST by TigerLikesRooster
CalPERS: Thinking the unthinkable
By Ed Mendel
Last spring CalPERS doubled the amount of a program that uses the pension fund’s gold-plated credit rating to help state and local governments borrow more cheaply, moving the cap from $5 billion to $10 billion.
Now as the economy crumbles, CalPERS is taking a look at what seemed unimaginable last year: What happens if the government borrowers default on their debts and CalPERS has to repay the loans?
“In exchange for only a couple million dollars you are taking on a heckuva a tail risk,” Michael Schlachter of Wilshire Consulting told the CalPERS investment committee last week.
CalPERS earned $3.9 million last year as it guaranteed $748 million in loans, bringing its total commitment to back the borrowing of government agencies in California and other states to $2.3 billion.
When the program cap was doubled to $10 billion last June, CalPERS officials thought that troubles for municipal bond insurers and a tightening credit market could be an opportunity to earn more fees while providing a public service.
Schlachter said in a letter to a CalPERS investment official last month that the “credit enhancement program is one of the areas where we believe that CalPERS ‘does well by doing good.’”
A CalPERS board member who also is a Kings County supervisor, Tony Oliveira, said his dual role gives him conflicting views of the program. He asked the staff for a white paper on local governments and the risk for CalPERS in the credit program.
“I looked at the amount of yield versus the potential macro liquidity risk factor and it scares me,” Oliveira told the committee. “To be honest with you, I’m one that thinks it’s not worth it.
“On the other side,” he said, “I must tell you as a local government representative in California we appreciate it, because it helps, obviously. It facilitates.”
Schlachter said the risk of local governments defaulting on their debt is “very remote,” but should not be ignored. CalPERS staff said the credit program uses careful screens and is grounded in studies going back to the U.S. Civil War.
A senior portfolio manager, Arnold Phillips, told the committee that he is responsible for a type of investment that has not been served well by looking at history as a guide: mortgages.
“I think we really do need to look at this because it does appear in some sense we are in a new world here,” said Phillips. “So I agree 100 percent that probably this needs to be looked at, a white paper and so on, to really decide this.”
In the program, CalPERS issues a letter of credit or similar backing that allows a government agency with a lower credit rating to use the pension fund’s top rating, lowering the cost of the loan.
But the credibility of the ratings issued by the three major Wall Street rating agencies — Standard & Poor’s, Moody’s and Fitch — is being questioned for two reasons now, even though they continue to be used in the bond market.
The ratings agencies have been criticized for giving top ratings to complicated mortgage-backed securities that have since been declared “toxic,” a leading cause of the financial crisis.
Rosy ratings are said to have been given to the shaky financial products of firms that paid the rating agencies fees, pumping up their profits. There are reports that the rating agencies are under investigation.
“The story of the credit rating agencies is a story of colossal failure,” U.S. Rep. Henry Waxman, D-Beverly Hills, said during a congressional hearing last fall. His committee released messages exchanged by two Standard & Poor’s employees.
Rahul Shah said a deal is “ridiculous” and “should not be rated.” Shannon Mooney replied that the rating model “does not capture half the risk … We rate every deal … It could be structured by cows and we would rate it.”
Before the financial meltdown last fall, state Treasurer Bill Lockyer launched a drive urging the rating agencies to stop holding government bond issuers to a higher standard than corporations.
The treasurer said history shows that the government agencies are far less likely to default than corporations. He said the unwarranted lower ratings “cost taxpayers billions of dollars in higher interest rates and bond insurance premiums.”
Lockyer said the interest paid on a bond rated “A” was 0.38 percent higher than a “AAA” rating. He said the difference on $61 billion worth of 30-year California infrastructure bonds would be $5 billion.
Another Lockyer example of credit-rating costs: California paid $102 million from 2003 to 2007 to buy “AAA” insurance for bonds, which would not have been needed if the state were rated by the same criteria as corporations.
Some rating agencies appeared to be considering Lockyer’s complaint, co-signed by 10 other state treasurers. But a Lockyer spokesman said movement stopped when the financial crisis erupted last fall.
Then last month Standard & Poor’s, citing state budget problems, dropped California’s credit rating from “A+” to “A.” California had been tied with Louisiana, but now has the lowest Standard & Poor’s rating of any state.
“We know we have fiscal management problems, but a rating downgrade from any of these guys is tough to swallow,” said Tom Dresslar, a Lockyer spokesman. “Taxpayers are getting screwed by a rating agency that helped create the problem.”
In recent years, the state has made some use of the CalPERS credit program, which now backs two bond issues totaling $297 million. The state also has purchased backing for three bond issues totaling $549 million from the California State Teachers Retirement System.
The CalSTRS credit enhancement program began in 1994, about a decade before the CalPERS program. The next annual report on the CalSTRS program is expected in April.
In a quarterly report filed at the end of last year, the CalSTRS program said it was backing loans totaling $2.5 billion and had earned $3 million last year, bringing total earnings since the beginning of the program to $46 million.
CalSTRS had partnered with Union Bank to back one or more bond issues by the City of Vallejo, which declared bankruptcy last year. A Vallejo spokeswoman, Joann West, said the CalSTRS letters of credit expired and were not renewed.
But one of the top creditors listed in the Vallejo bankruptcy is Union Bank, owed $49 million.
Ping!
wouldn’t that be funny if they went broke?
after burdening ca taxpayers with their bloated government of unions,
and destroying public education?
in the name of progressivism.
Frankly, I’m surprise the California legislature hasn’t been able to rape CalPERS like the Feds have destroyed Social Security.
CALPers provides defined pensions for millions of pensioners. Many of us earned those pensions and paid into the program, fair and square.
It would NOT be funny.
They’re leftists. They don’t care. If their shenanigans work, then they’ve advanced progressivism. If they fail, then they’ll blame Bush and demand a bailout.
Nahh, wouldn’t be funny, because the way it’s set up, every city, county and the state would be on the hook, just as they always are, to make up any losses that CALpers has. The next report should show CALpers took a significant loss, and the assessment to each government should be more than enough to toss us into the next crises and round of tax hikes.
Anyone hiring out of California? There’s three conservatives who really need to find sanity again.
It is only fair that public sector employees help out the county governments and cities of California that employ them. That bestow such outrageous compensation packages on them via sweet heart deals
The private sector is being decimated so I have no sympathy for any downward adjustments in the public sector. I am hoping it comes and by bankruptcy if necessary. Same as GM will very likely be filing some kind of bankruptcy because it is the only way to open up the “inviolate” labor and pension contracts
State of California is definitely heading for total collapse.
Now why did you have to say that? LOL I had this flashback to my Dad screaming at the TV when those old Grape Nuts commercials with Euell Gibbons would come on. He’d tell ol’ Euell to go eat pine bark and grass! The only commercial that ever upset my Dad!
You’re right about the eco-nuts but with all the smog out there I’m afraid their healthy bark-and-grass gruel may give them cancer...
I’ll bet CALPERS has all kinds of Harvard and Ivy League wise guys running the show.... Along with geniuses from the California university system
I could be wrong but I think the state of California is obligated to bail out CALPERS for any losses it takes. Total bs if this is true
Before obama,thanks to the fools smd parasites that put ihm in power, every pension fund in the United States of Amrica including Social Security will be out of money. All property will be confinskated by the Federal Government. Food will be rationed and evryone that is alive will be living in a government camp under governmental control.
And I thought I had a warped sense of humor.
Even two years ago Freepers were predicting California would get a Federal bailout for its budget. Freepers were wrong in the sense that all states are getting Federal stimulus now AKA bailouts
It certainly wouldn’t be funny to my husband and I. He’s retired, and they pay his retirement!
“Many of us earned those pensions and paid into the program, fair and square.”
And CalPers, along with the state and localities that fund your and many others pensions has a good chance of going into bankruptcy, fair and square leaving you with a fraction of your pension, if any at all.
The revolution required to fix socialism and big government won’t come until the checks don’t come because nobody will believe it until then.
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