CalPERS Devastates Itself & Will Charge Taxpayer

Posted on December 17th, 2008 in Daily Mortgage/Housing News - The Real Story, Mr Mortgage's Personal Opinions/Research

This story is just so tragic. This did not have to happen. This is not supposed to happen. I will leave the reading and comments up to you because I don’t think I can go much further without profanities.

When reading this story, note that it makes it sound like the losses are known and it could get better. In a tumbling real estate market where everything is distressed, they likely do not have their holdings marked correctly and will experience much higher losses.

At least we know now why the CalSTRS and CalPERS were all over press, including all of the financial television media blaming short sellers. -Best, Mr Mortgage

Risky, Ill-Timed Land Deals Hit Calpers



-one of its worst annual declines since its 1932 inception.

Calpers has lost almost a quarter of its assets since July 1, the start of the current fiscal year.

-has been without its top two executives for nearly half a year.

Tax payer to bail out stupid, greedy moves:

Calpers is now warning California’s cities, towns and schools that they may have to cough up more money to cover the retirement and other benefits the fund provides for 1.6 million state workers. Some towns are already cutting municipal services, and at least one is partly blaming the Calpers fees.

-Calpers in recent weeks said it expects to report paper losses of 103% on its housing investments in the fiscal year ended June 30.

-Calpers invested not only its own money, but billions of dollars of borrowed money that must be repaid even if the investment fails. In some deals, as much as 80% of the money invested by Calpers was borrowed.

-Calpers became much more aggressive than other pension funds in making nontraditional investments — real estate, foreign stocks, even forestland.

-Unless Calpers’s returns bounce back by June, the fund says it expects that the rates it charges governments to participate in the pension could rise starting in 2010, leaving them with less money to spend on other services.

“Even under the best-case scenario…taxpayers are still going to have to put more money into pension funds.”

-Its real-estate portfolio fell 14.4% for the 12 months ended in September, underperforming its benchmark, which rose 5.3%.

There is always hope! That’s about all they have left

-Calpers stresses that it’s a long-term investor and can earn back the declines in the future, just as it erased declines suffered in the dot-com bust a few years ago.

In Denial – I knew not to invest in Real Estate and these areas were the worst long before this. Why didn’t they.

-“No one in the marketplace knew how swiftly the housing market would fall — not the Federal Reserve, not the Treasury,” said Ted Eliopoulos, head of Calpers’s real-estate portfolio, in an interview.

-The fund has also added “checks and balances” on property-investment decisions, Mr. Eliopoulos said. “Calpers has always attempted to learn from downturns,” he said.

In recent years Calpers gambled on:

-Three large parcels near Phoenix, one of the nation’s hardest-hit property markets. Last month, Calpers effectively walked away from one of the three, after having invested $140 million.

-On one of the others, to start earning a return, Calpers’s investment partner recently started selling ground water from the property.

-A massive block of land with room for about 8,000 units near the small town of Mountain House, Calif., the nation’s most “underwater” housing market by one measure. As of June 30, Calpers valued the investment at negative $305 million, reflecting the fact that it has repaid borrowed money used in the deal.

-About 10,000 acres near Jacksonville, Fla. The plan was to sell timber from the property, as well as residential lots. But as real estate collapses, it could take five years before the venture can start selling lots.

Big hit coming to tax payers

-Calpers recently estimated that if its declines for the current fiscal year are greater than 20%, it would trigger an increase of 2% to 5% of an employer’s payroll.

-A 5% increase in California’s rate would be the largest increase to hit public employers since the dot-com bust.

More Denial:

-Any rate increases aren’t a certainty, Calpers says, since the fund could still earn back its declines.

Real-estate losses aren’t the primary reason Calpers is taking a hit. Its biggest declines have been in the stock market: Its stock portfolio is down 41% so far this fiscal year.

-Robert Carlson, a former Calpers board member who left the board earlier this year, said publicly at that time, “We believe taking no risk is the biggest risk you can take.”

This is beyond ‘pushing the envelope’

-Amplifying the risk, many of Calpers’s land investments used borrowed money.

-“Calpers said, ‘If we can do it with 300 houses, let’s do it with 3,000.'”

-Between 2001 and 2002, it raised the amount permitted to an average 50% from 25%.

-in 2005, the trustees sanctioned use of borrowed money in residential deals at an average rate of 60%.

-some individual deals used as much as 80% borrowed money, Mr. McCook recalls. That level is more aggressive than many pension funds or land developers would use

Trusting the exact wrong people

-Home builders like to do this because it lets them essentially control land without having it weigh down their balance sheets. And Calpers hoped for big returns by selling that land to the builders in a booming market.

-Calpers’s investment partners worked with major home builders including Hovnanian Enterprises Inc. and Beazer Homes USA, according to two people familiar with the matter.

By being guarantor, Calpers used its rock-solid reputation to obtain lower borrowing costs. But today, as projects struggle, the guarantees mean Calpers is pouring additional cash into projects from which it might otherwise prefer to walk away.

-Calpers teamed up with Lennar Corp., the giant Miami-based home builder. Lennar was known in the industry for its sophisticated use of land deals.

-“We based it on our research, our judgment and on MacFarlane’s track record,” he says.

Ya Think? Its About Time:

-Amid the losses, Calpers is making some changes in its investment-decision process. In February 2007, shortly after Mr. Eliopoulos became head of Calpers’ real-estate group, the fund set a new policy requiring deals to be vetted three times — by the internal investment committee, an independent fiduciary and, finally, by an outside consultant. Previously, much of the oversight came from Calpers’ staff and consultants.

Calpers is creating a new computer database to more closely track “balance and diversification” in the real-estate portfolio. It also is proposing to reduce the maximum amount of borrowed money that can be used in housing deals, and cut back on loan guarantees.

Not Much Smarter Now:

George Diehr, vice-president of Calpers’ board, said that in the future the fund will have less of its money invested in residential property, although that’s partly because its current holdings have fallen in value.

Source: Wall Street Journal.


15 Responses to “CalPERS Devastates Itself & Will Charge Taxpayer”

  1. This is some crazy shiznit! Imagine living off of your pension and then finding out that it is primarily invested in ISA’s(incredibly shrinking assets). Well, there is always social security, the government would never stop……..

  2. We saw this coming. From July:

    What a coincidence. While things that have easily observable market prices (i.e. stocks) went down, everything that is valued subjectively went up! Private equity? It does great during a credit crunch when stocks are crashing! Just ask noted private equity players Blackstone Group or Babcock & Brown. And real estate? Well, whose real estate portfolio is not up at least 8% this year?

    Nice numbers, CalPERS! Especially considering your investment in toxic waste CDOs at the beginning of the mortgage crisis, and your $1 billion dollar investment in the now-bankrupt LandSource at the peak of the real estate bubble.

    Mark my words: CalPERS is lying about its performance, and there will be serious consequences for California retirees and taxpayers.

  3. Oh my…

    Really though, does this surprise anyone? Everybody was in on this gang-bang of easy credit and expected returns of easy wealth. The lure was simply too strong and the promise of exponential profits, to great a force to resist.

    And now? Well they do what any self-respecting government agency would do in times of falling revenue:


    Now refer to comments I made a few days back in another post regarding the coming ‘tax revolts’ as predicted by a well-known and respected trends analyst.

    This is how social unrest begins. And we’re just getting started.

    Peace –


  4. Is it just me or is just about anything and everything that the Government is backing now (which is almost everything) is defaulting. It is almost as if when the Government announces it will back an industry or specific company they just start folding up shop. They walk away with the profits and leave the losses to be socialized (paid via the Tax Payers). This is getting totally out of control.

    Off course Calpers took major risk seeking major returns. It wasn’t their money they were playing with, but they sure as heck made a lot of profit over the past few years now didn’t they.

    Where were the keepers of the gate so to speak? Why is nobody minding the fort on all of these companies going under? Where is the SEC in all of this and why are people not doing a perp walk? We have literally billions in money simply disappearing with no accountability, responsibility or anything.

    Is the Government just thinking that the tax payers will just pick up the tab for it all.

    We don’t have enough tax payers to do that!

  5. CC

    The state will come to you and say “this is what you owe for our employee’s pension”

    The city will come to you saying the same thing, then the county will come saying they need some too. Then you are going to start wondering why your “servants” are getting a better deal while you have to rely on a 401k and SS (LOL) and nobody is kicking in to fix your losses… All the companies with defined benefits ran into trouble. As government expands and retires, that trouble is going to get pushed off on us.

  6. and to think they want to crucify Bernard Madoff for his Ponzi Scheme against his Jew friends, this is so much more a bigger Ponzi scheme against EVERYONE

  7. This is a tragedy, driven by the avariciousness of the CALPERS fund managers, who couldn’t resist the allure of playing in the same exciting arenas as hedge fund managers and brokerage houses, and the seduction of outsized returns financed with other people’s money with seemingly low risk. But there is a deeper problem: the fact that the US, and even the global economy, is not generating the investment returns to fund existing obligations and fulfill investor expectations that have become absurd. Hence, money managers assume more and more risk in the hope that they can somehow evade the icebergs and bring home sufficient returns to please their fund participants. Or, even worse, they just resort to outright fraud, like Madoff. One suspects that he is going to be the first among many exposed during this downturn.

  8. Javagold: government (in 99% of its forms) *IS* a ponzi scheme. Once you realize that, all these “big spending, big government” plans you see really come into perspective.

    pardon me, I need to throw up

  9. Thank you Democrats in California for ruining the state. This has been a one-party monopoly and they transferred money from the productive citizens to the leeches and state bureaucrats.

  10. Richard Estes: NAILED IT

    Bert: 100% correct.

    And this is why it is vitally important to keep all debt at a minimum and maximize your cash while you can. There will be very few defenses for the average wage-earner/salaried/small businessman to protect his wealth in the future.

    Next up will be your retirement account. And don’t buy the B.S. that it’s ‘not on the table for discussion’ or, they won’t try to finagle a way to commandeer those accounts as a means to shore up balance sheets for unfunded liabilities in the face of this current maelstrom of government debt. Ideas are always ‘floated’ first to gain a reaction and see what the level of resistance will be. Followed later by incremental steps (mission creep) to achieve the goal.

    I’m still waiting for my creamed corn…



  11. Like a gambling addict, CalPERS kept doubling down betting on black, but red kept comming up.
    California was also taken to the cleaners by Enron.

    They failed to see that the casino was built on the loses of the players.

    They had no business playing at developer in other states.

    With California munis yielding over 5%, they could have bought local.

  12. “[Modifications] make the home owner a trapped, underwater, over-leveraged renter for years, if not life.”

    ….Those trapped people will get little sympathy from the general public, since no one put a gun to their head and told them to buy at the peak. Call me bitter, but I’ll take the zombie economy if it means people will maybe learn economics the hard way. Mr. Mortgage has altruistic reasons for his position which are very respectable, and his intentions are for what is best for the economy in the “big picture”, but as for me, I am too worried about the future faith in US Contract Law should cram-downs become the norm and make a mockery of it.

  13. Don’t know how many of the previous comments are from CalPERS pensioners, but I am one. Criticisms of CalPERS investment failings are fair and to be encouraged. People – pensioners and tax payers – should hold the Governing board accountable for the successes and failures of the retirement fund. These are big losses and they should have been avoided, but looking at the longer term CalPERS still reported a 5 year ROI of 4.4% (period ending 10/08). We are in a depression (in my opinion) and losses of 50% or more in wealth are not uncommon. CalPERS has a long history of out performing its earning requirements and the buildup and drawdown time for the fund is really 30 years. I suspect that while some increase in employer payments will be levied in the short term (five years), they will be offset by reductions in employer contribution requirements when the economy turns more robust. As a pensioner and a tax payer, while I agree CalPERS needs to improve its investment management, I am much more worried about the economic threat possed by corrupt wall street investors and lenders as well as the criminal incompetence of federal fiscal and monitary policy administrators by a significant measure.

  14. fair enough – but Calpers still lost control and jespordized their constituants for greed.

  15. To admin – I agree. The good news is that the “spotlight of exposure” will be focused on CalPERS Board and its executive team’s performance. My guess is, what can be done, will be done to tighten up risk management. Fortunately, CalPERS is well diversified and its real estate holding are a relatively small part of its overall investments.

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