California is $175 Billion in the Red

When you start looking at the real numbers, then they get really scary. California isn't alone. Big blue cities like New York and Chicago are in deep trouble. And entire states are next.

Although its 2014-15 budget was balanced, California’s state government ended the fiscal year $175.1 billion in the red, thanks largely to state retirement obligations that had to be included in its balance sheet for the first time.

Under new rules by the Governmental Accounting Standards Board, state and local governments must list unfunded pension liabilities as debts alongside the more traditional bonds and other forms of debt.

Counties and other local governments have been rolling out their annual financial reports this year, some showing multibillion-dollar deficits for pension obligations, so the state’s report was not unexpected.

And this is just the beginning.

The newly revised state data are contained in the “comprehensive annual financial report” that Controller Betty Yee issued on Friday. And she noted in a cover letter that the debts for “postemployment benefits” will jump again in the report for the 2017-18 fiscal year, when state retiree health care must be included under GASB’s rules.

Don't expect anything to actually change though.

If you think the stock market's steep slide this month hammered your personal portfolio or 401(k), imagine what it's done to California's state pension system, CalPERS. Years of overoptimistic stock purchases and inadequate contributions have left it terribly vulnerable, and just a few years of down markets could leave it insolvent.

CalPERS actuaries rely on earning a 7.5% annual return on investment to meet the current and future pension obligations to 1.8 million participants. But current stock market conditions make achieving that goal much harder — if not impossible — over the next several years. And that will leave taxpayers on the hook for billions.

Even before the recent market downturn, CalPERS was struggling. In the fiscal year that ended June 30, the fund earned a net return of only 2.4% on its $301.1 billion of invested assets. If CalPERS had earned its target 7.5%, it would have made $22.6 billion; instead it made only $6.6 billion. To make up that lost ground this fiscal year, it would have to earn 12.8% — hardly realistic in this volatile market.

Unmentioned is that CalPERS went for progressive investments. You know, government subsidized garbage that doesn't make money. Like them.

Leading the charge after becoming state treasurer in 1999 was Phil Angelides, who announced that he wanted to “mobilize the power of the capital markets for public purpose.”...

By 2011, according to a Mercer Consulting report, CalPERS had adopted 111 different policy statements on the environment, social conditions, and corporate governance, all dictating or restricting how its funds could be invested.

Many socially conscious investors then turned their attention to another industry that didn’t pollute: finance. One social-investing research firm named Fannie Mae the leading corporate citizen in America from 2000 through 2004.

Desperate for higher returns, CalPERS also bought the riskiest portions of collateralized-debt obligations, accumulating $140 million of them by 2007. These were the packages of debt, largely subprime mortgages, whose defaults helped trigger the 2008 financial meltdown

Well you've gotta be socially responsible. No matter what it costs.