There are many negative effects throughout both the private and public sectors that have resulted from the plummet of stock values on Wall Street. In the public sector, throughout the country, public pension funds were heavily invested in the market — and the results have been a plummeting of the value of these funds. The problem, of course, is that while nationally there has been a massive "evaporation of value" — the liabilities on these funds remain — with public employees expecting their defined benefit pensions to be fully funded and paid on promptly.
Here in California, the California Public Employees’ Retirement System (which is the fund for most state and local government employees and pensioners) has seen the value of its holdings fall by literally tens of billions of dollars. According to the Los Angeles Times, it’s holdings were around $240 billion last July — but have now (with the downturn and then a slight upturn in the market) down around 23% — a massive drop. The Times goes on to say that in order to make sure that there is enough money in these funds to cover the calculated costs of paying out pension benefits, public entities would see a massive jump in their annual contributions to CalPERS — from 16.9% to 24.8%.
That is very sad, but predictable. And necessary, no doubt, without some legal mechanism to reduce pension obligations.
**There is more – click the link**
June 18th, 2009 at 12:00 am
Interesting enough yesterday I was interviewing a muni bond manager out of Illinois with about 2 billion under management. He said he started pulling out of CA a couple years ago, but as bad as shape as CA is… Illinois is much worse. He said Illinois is sitting on 80 billion of unfunded liabilities ready to blow– and the only reason CA was getting more press was because the CA economy is much bigger. He said Florida is also suffering from the same problem and not far behind. He said he likes Indiana bonds and Texas where they are governed by “conservative Republicans”. (Money managers are not really partisan, they just recognize where and go to the place money can be made.) He also said Utah is very friendly. However when CA interest rates goes up, which he anticipates, he will come back into CA. Of course interest rates on CA bonds will go up because no one wants to take the risk on CA bonds- that really are junk bonds. And when interest rates goes up on CA bonds, our CA budget will be in even worse shape.
Bad times ahead for CA, but it seems other states will join us. Everyone should be preparing for what is coming.