MOORLACH UPDATE — Public Pension Management Concerns — March 7, 2018

This Friday the Association of California Cities – Orange County will be hosting a seminar for its members on the topic of pensions. I met with a delegation yesterday morning and enjoyed speaking alongside Marcie Frost, the CEO of CalPERS. Cities are getting serious about the topic of pensions. That’s why my office reviewed the basic financial statements of the 482 cities in California to see what the per capita unrestricted net position is.

Providing additional background, I’ve provided a lengthier piece on this critical topic in Fox & Hounds in the first piece below. It’s an important topic that I’ve been focused on, in spite of packed calendar.

As if I didn’t have enough committee assignments and hearings to attend, one held a joint hearing with a brand new subcommittee. Senate Budget and Fiscal Review Committee Subcommittee One on Education joined with the Senate Select Committee on California, Armenia and Artsakh Mutual Trade, Art and Cultural Exchange last week Wednesday.

I didn’t expect to enjoy international relations at the state level, but California has two major Armenian communities who are rightfully outraged that California’s pension systems’ portfolios are not Turkey free.

The University of California has its own pension plan and its Chief Investment Officer testified. After I provided a long series of questions, two things became very clear. The first is that the UC pension portfolio has a passive investment in international bonds, which includes holdings in Turkish paper. To extract them would convert the strategy to active management, which the plan wishes to avoid.

The second is that the Board of Regents, through an Investment Committee, oversees the pension (a simpler arrangement than that of CalPERS). The passive investment manager, Black Rock, makes presentations on occasion to this committee and those opposed to Turkey’s bonds are more than welcome to attend. That provided the key information that could reasonably be obtained as a result of this unique hearing. The drama is provided by Asbarez in the second piece below.

Setting the Record Straight on CalPERS and SB 400

Senator John Moorlach

By Senator John MoorlachCalifornia State Senate, 37th District

As California continues to grapple with pension reform, it’s important to keep the record straight on how the state got into this mess. A major reason was the pension spiking of nearly 20 years ago, specifically Senate Bill 400 of 1999, by state Sen. Deborah Ortiz, D-Sacramento, which retroactively increased pensions 50 percent for California Highway Patrol officers.

That began a stampede of similar increases across California for other peace officers, firefighters and public employees in state and local governments. The argument often was made that the benefit had to be granted or local workers would shift to more generous neighboring governments that already had goosed their pensions.

In 1999, the dot-com boom seemed to assure higher investment returns than in the past, meaning the higher payouts to retirees would not impact government budgets. Yet things did not compute that way, with state and local pension funds increasingly devouring budgets, forcing cuts in funding for schools, roads, health care and other public projects.

Despite that, Wayne Harris in the Sacramento Bee recently wrote an op-ed blaming the shortfall of pension funds on “Wall Street…not cops and firefighters,” saying alternative explanations show “California needs to invest more in mathematics instruction. When The Sacramento Bee editorial board and city officials wag their fingers of blame at firefighters, teachers, police officers and state pension systems that have yielded 7 percent returns in the long run, it’s clear there’s a fundamental misunderstanding of the numbers.”

Retroactivity is a disaster when doing math calculations, Mr. Harris.

The Bee’s sensible editorial had detailed, “Loudly sounding the alarm, the League of California Cities reported this month that most members expect pension costs to jump by at least 50 percent by 2024-25. Pension payments – now about 11 percent of general fund budgets on average – will eat up about 16 percent by then.” Twenty years ago, that number averaged just 3 percent.

Harris is systems administrator for Woodland Joint Unified School District and a member of Californians for Retirement Security, an advocacy group for public employees and retirees. He continued, “In 1999, when Senate Bill 400 was passed with strong bipartisan support, CalPERS was 137 percent funded and the state was in the midst of an economic boom.”

True enough. And it’s lamentable that no Senate Republicans – long before I became a member – opposed the bill. But in the Assembly, seven Republicans voted Nay.

Also, for the record, CalPERS’ performance the past 20 years was not 7 percent, but just 6.58 percent. As Ed Ring of the California Policy Center calculated, “It doesn’t seem like very much, but the difference between a 7.0 percent rate of return and a 6.58 percent rate of return is actually quite significant.” The 0.42 percentage-point reduction “increases the required annual contribution as a percent of payroll from 23.0 percent to 25.8 percent – and as a fully funded plan becomes unfunded … the ‘catch up’ contributions start to pile up.”

Missing years

In his op-ed, Harris then skips to the 2008-10 Great Recession. But hold on, something else happened first.

Here are CalPERS’ investment returns for those earlier years:

  • 1997: +20.10%;
  • 1998: +19.5%;
  • 1999: +12.5%;
  • 2000: +10.5%.

That looks great. Silicon Valley and other high-tech centers in California were roaring in the dot-com boom.

Then in 2000, the dot-com bust struck and, over the next two years, the NASDAQ lost 78 percent of its value. Hundreds of tech companies went bankrupt. Even Cisco Systems Inc., a company that survived and is worth more than $200 billion today, dropped 86 percent back then.

The bust tanked CalPERS investments:

  • 2001: -7.20%;
  • 2002: -6.10%;
  • 2003: +3.70%.

As early as August 2003, five years before the Great Recession struck, as the market started to recover from the dot-com bust, the Sacramento Bee reported on SB 400’s early returns in its first four years: “The measure approved that day [in 1999] will cost taxpayers at least $10 billion over 20 years, plus uncounted billions for similar increases granted later at the local level. The legislation began a wave of public employee pension increases at a time when private sector employees were seeing their own retirement benefits shrink or disappear entirely. And the bill relied on a fundamentally flawed assumption – that state employees, not the taxpayers, were entitled to the fruits of the long running boom in the stock market.”

It added that SB 400 was the “brainchild” of CalPERS itself. And, “The details were negotiated behind closed doors by representatives of Gov. Gray Davis and the state employee labor unions.” So much for open government and following the democratic wishes of Californians.

And – remember this is 2003 – “Now lawmakers and pension officials acknowledge that the benefits are costing taxpayers at least $500 million a year, part of $2.2 billion in new pension costs that have added to the state’s huge budget deficit. But that price tag will surely climb even further because of follow up legislation that has given other employees pension boosts to match those granted in 1999.”

Over the next few years the economy recovered, or seemed to, in the boom of the mid-2000s, when sub-prime mortgages were driving ridiculous increases in housing prices. Here are CalPERS’ returns:

  • 2004: +16.60%;
  • 2005: +12.30%;
  • 2006: +11.80%;
  • 2007: +19.10%.

Wall Street and CalPERS

Getting back to Harris, he continued in his piece, “Then, due to the fraud and abuse by Wall Street bankers, the worst recession since the Great Depression hit and investors across the globe watched as trillions of dollars in asset values were wiped out. CalPERS lost $69 billion in the first year; over the next two years, its funded status dropped by 40 percent.

“If it weren’t for the Great Recession, SB 400 benefits would have been funded for 138 years. That’s why it is unfair to criticize hard-working public employees and their pensions, while union critics give Wall Street a free pass.”

I’ll include CalPERS’ performance for those years:

  • 2008: -5.10%;
  • 2009: -24.00%.

That last, of course, was the killer.

But, it didn’t have to be so. If the CalPERS Chief Investment Officer would have reduced the holdings in equities before the dot-com bust, and repositioned into 8 percent paying bonds, then Harris may have a point. And if the CIO didn’t buy highly leveraged real estate, prior to the subprime meltdown, then maybe those losses would have been lower.

As Pensions & Investments reported on Dec. 28, 2009, “Behind CalPERS’ staggering real estate losses lies a strategy that took on too much risk and lacked adequate oversight. Once the fund’s star asset class, the real estate portfolio of the $201.1 billion California Public Employees’ Retirement System lost nearly half its value during the one-year period ended Sept. 30…. At the heart of the problem is a freewheeling approach that took on massive leverage, gave enormous discretion to staff and experienced poor timing with its investments.”

But, it’s easier to blame Wall Street when one is asleep at the investment wheel.

I immediately need to point out that other pension reformers and I are not blaming the employees, nor giving Wall Street a pass. I’m only pointing out that the history of what happened is essential to finding solutions now – and avoiding future disaster.

I’ve been a CPA and certified financial planner for more than three decades. And I’ve been a public official emphasizing prudent use of the public purse since I became Orange County’s treasurer-tax collector in 1995, after the county’s 1994 bankruptcy, which I had warned might happen.

Although recessions, including the Great Recession, are not predictable precisely, what is predictable is that eventually the business cycle goes down as well as up. There will be rough patches that need to be guarded against as much as possible through prudent financial management, especially when the public’s tax dollars are at stake.

As Harris noted, in 1999 CalPERS was 137 percent funded. But that was the very height of the market, something that should not have been expected to continue – and before the pension spiking. Indeed, as the market was zooming upward, none other than Federal Reserve Board Chairman Alan Greenspan on Dec. 5, 1996 warned of “irrational exuberance” which has “unduly escalated asset values.”

Harris solely blamed “the fraud and abuse by Wall Street bankers” as the reason for the Great Recession. Certainly, there was chicanery there. Although President Obama never prosecuted any of the bankers, even though he was elected in part because the president at the time of the crash was Republican George W. Bush.

But a large recession commonly doesn’t have just one cause. And economists spend a great deal of time debating the causes, including in this case. Other reasons for the 2008-10 debacle have included:

  • Government interferencein the market;
  • The 1999 repealof the Glass-Steagall banking regulation;
  • Fannie Mae and Freddie Mac providingtoo many cheap loans;
  • The Federal Reserve Board printingtoo much money;
  • The Fed not printingenough money;
  • The Iraq and Afghanistan wars costing as much as $7 trillion;
  • President Bush and the Republican Congresses of 2003-06 increasing domestic spendingfaster than any time since Lyndon Johnson’s Great Society in the 1960s;
  • Turning the balanced budgets of 1998-01 into record deficits, including those $413 billion in 2004 and $459 billion in 2008.

But, let’s get back to math lessons. If you increase the benefits of a fully-funded, defined-benefit pension plan 50 percent, retroactively, then the plan becomes two-thirds funded. And for that, we have public-employee unions to thank for an immediate and massive UAAL – unfunded actuarial accrued liabilities!

More pension reform needed

Some people have learned the lesson. Take Gray Davis. According to, he received $5 million in campaign donations from public-employee unions for his 1998 election. But in 2016, he conceded in an interview in the Los Angeles Times, “If you’re asking me, with everything I’ve learned in the last 17 years, would I have signed SB 400…. no, I would not have signed it.”

And none other than Gov. Jerry Brown, a longtime ally of public-employee unions, has called for more pension reform. He even is challenging the so-called California Rule, under which public-employee pensions supposedly never can be cut after being made in a collective bargaining agreement.

Brown argued last November in a lawsuit brief defending his limited 2012 pension reform, “For years, self-interested parties, overly generous promises whose true costs were often shrouded by flawed actuarial analyses, and failures of public leadership had caused unsustainable public pension liabilities.”

So even the governor blames the problem, not on one of the periodic recessions that hit us, but on mistakes by pension experts and public officials.

That means it’s up to today’s public officials to fix these problems. Now that we have the appropriate components of the equation, all the parties should take the remedial mathematics instruction one self-interested beneficiary of the pension recommends. And if pensions are not fixed, the public employees themselves will be most hurt from the mistakes of the late 1990s.

30th Anniversary of Sumgait Pogrom Commemorated at Calif. State Capitol

SACRAMENTO, Calif. — The 30th anniversary of the Sumgait Pogroms was commemorated Wednesday at the California State Capitol during the inaugural hearing of the Senate Select Committee on California, Armenia and Artsakh Mutual Trade, Art and Cultural Exchange.

The committee hearing entitled “California, Armenia and Artsakh Trade Agreements, Civil Rights Issues and University of California Divestiture and Budget Impacts” covered a wide array of issues of importance to the Armenian-American community and featured moving testimony by attorney and activist Anna Astvatsaturian Turcotte, updates on the establishment of a trade Memorandum of Understanding between Armenia and California, and the latest in the effort toward divestment from the Turkish Government by the University of California. The Select Committee was founded by Chairman Anthony J. Portantino (SD-25) following positive impressions he formed during a visit to Armenia and Artsakh prior to his election to the California State Senate.

In her remarks, Astvatsaturian Turcotte outlined the atrocities that Azerbaijanis committed against Armenians through her own family’s experiences. “In response to this freedom movement in Karabakh, the Armenians of Azerbaijan were slaughtered in the city of Sumgait and then Kirovabad and then in my home city of Baku,” said Turcotte. “We were completely driven out of our homes, from our streets, and from the city that we built.”

In 2012, Astvatsaturian Turcotte published her book, titled Nowhere, a Story of Exile, which she wrote at the age of 14 as her family settled in North Dakota as refugees. During her testimony, she explained how the book is based on the childhood diaries she kept as her family was fleeing Baku and during their years as refugees in Armenia.

Turcotte stressed that the massacres in Sumgait were only the beginning of this anti-Armenian and xenophobic behavior that was set forth by the Azerbaijani government. “Sumgait was a turning point and a blueprint for Azeris to begin with their government orchestrated expulsion of 400,000 Armenians from their wealth, their position of power, and from their own history within Azerbaijan,” continued Turcotte.


The activist also explained that the anti-Armenian behavior in the 1980s is being repeated today by the Azerbaijani regime against the Armenians living in Artsakh. “No one should ever forget the innocent lives lost in the most brutal, horrible ways,” she concluded, stating that the circumstances today are similar to 1988 because justice in Sumgait was never properly served.

Both Senator Portantino and Senator Scott T. Wilk (SD-21), appreciating Turcotte’s remarks, explored ways of further cooperation between Artsakh and California and questioned how diaspora Armenians could get more involved in sharing the stories similar to Anna’s.

“Yesterday, was a great day for California, Armenia and Artsakh relations and I was very proud to be a part of it. Our speakers and presenters made a passionate case for the recognition of human rights abuses and the benefits of signing a mutual trade agreement between California and Armenian. The UCLA students were particularly compelling with their passionate presentation on Divestiture. It made me excited to be in the Capitol,” commented Portantino.

Following Astvatsaturian Turcotte’s testimony, Gordon Hinkle, Vice President of the California Center (Global Operations) and Valery Mkrtoumian, Deputy Consul General of the Republic of Armenia presented the benefits of signing an MOU between California and Armenia. Hinkle provided the general benefits of MOUs and discussed California’s interest in engaging with foreign governments. In the past, Hinkle has helped lead numerous executive level trade missions to numerous cities and provinces in China.

Meanwhile, Deputy Consul Mkrtoumian explained the importance of an MOU between California and Armenia and highlighted the need for a trade office to solidify relations. He added that the IT and agricultural sectors of Armenia provide great potential for further trade and cooperation between Armenia and California.

“The strength of US-Armenia relations is based on the shared values and common vision for a secure world,” said Mkrtoumian while highlighting the different methods by which both economies could excel through an MOU. “There are more favorable business conditions now which would attract investments for US companies.”

The process of potential divestment by the University of California from the Turkish Government was first explained through testimony provided by Jagdeep Bachhner, Chief Investment Officer, Vice President of Investments at the University of California, who expressed willingness to work with students to find solutions while highlighting the interests of the UC in maintaining its financial obligations and investing in emerging markets.

When discussing efforts toward divestment from Turkey, members of the Armenian Youth Federation and co-founders of the Divest Turkey movement, Arev Hovsepian, Razmig Sarkissian, and Aram Manoukian discussed their involvement and presented a timeline of the movement that was initiated in 2014. They explained that this has been a grassroots initiative organized by students and to date, resolutions to divest have passed in every one of the nine UC campuses without any “no” votes.

Hovsepian provided an overview of the movement from its inception, ultimately leading to the passage of AB1597, which was introduced in the California State Assembly by Assemblymember Adrin Nazarian (AD-46) and which passed unanimously last June by a vote of 67-0 after the issue gained great momentum through the student movement.

“This campaign, now statewide, was originally organized by a group of just 7 college students. Our objective was clear: to push for divestment from Turkish government as a result of its increased human rights violations, limiting of the basic freedoms of speech and expression, denial and perpetuation of the Armenian Genocide, and harmful policies against Kurdish, Armenian, and Jewish minority populations,” said Hovsepian. She continued to urge that investing in the Turkish Government directly contradicts long-standing unequivocal recognition of the Armenian Genocide by the State of California.

“I was very honored to have had the opportunity to present on the importance of the UC divestment from Turkey before the first hearing of the Select Committee. I believe that our testimony made a compelling case to the CIO from the University and I felt he was being very respectful of our student perspective, going so far as to invite us to formally present in the future to the University Investment Committee Directly. We are grateful to Senator Portantino for this opportunity and we are optimistic that it will lead to a positive outcome,” commented Hovsepian.

Sarkissian added that divesting from the Turkish Government is in the best interest of the University of California and State of California in addition to the countless moral and ethical reasons that justify such a move. Sarkissian then explained the corruption in Turkey, beginning from jailed journalists, human rights abuses, arrests of Kurdish politicians, and the 2016 coup to highlight the risks of investing taxpayer dollars in Turkey.

“When we started this movement, it was to move forward from Armenian Genocide recognition. I’m so proud that the State of California recognizes the Armenian Genocide. I’m so proud that all the UC campuses recognize the Armenian Genocide and I’m also proud that I was able to earn a degree in Armenian Studies and was able to learn about the Armenian Genocide in my classes. But to say we recognize the genocide and then put money in the coffers of the Republic of Turkey is a slap in the face,” concluded Sarkissian.

Manoukian, during his remarks, expressed that students like him are not satisfied with the current status quo and demand that action be taken. He explained that it should be the obligation of a respected institution to uphold the values it so diligently shares and teaches, and investing in Turkey is the exact opposite.

Commending the student leaders for their informative presentation, Senators Portantino and John Moorlach (SD-37) suggested the student representatives attend a meeting of the subcommittee of the Board of Regents to further discuss the matter. The hearing concluded with Senators Portantino and Wilk presenting a resolution commemorating the 30th anniversary of the Sumgait Pogroms to the ANCA-Western Region Chair Nora Hovsepian and the Executive Director of the Armenian Assembly of America Mihran Toumajan. “Thank you for being here on this solemn 30th anniversary. We send our prayers and well wishes to the families of the descendants,” concluded Portantino.

This first hearing of the Select Committee on California, Armenia and Artsakh Mutual Trade, Art and Cultural Exchange was successful in providing a platform to expand on relations between the State of California and Armenia and Artsakh through trade and commerce. During the public comment portion of the hearing and in response to the panelists’ presentations and positive comments by various members of the Armenian community who attended from all parts of California, several members of the Azeri community voiced their protests against the work of the Select Committee.

Select Committee Chairman Portantino, in his concluding remarks, noted the passion in the student representatives during their presentation and remained hopeful that the appropriate steps be taken by the UCs to find a solution.

Members of the Senate Select Committee on California, Armenia and Artsakh Mutual Trade, Art and Cultural Exchange include Senators Anthony J. Portantino (Chair), Senate President Pro Tem Kevin de Leon (SD-24), Josh Newman (SD-29), and Scott Wilk.

In addition to participating in the hearing, representatives of the ANCA-WR Board and Staff spent the day in Sacramento accompanying Anna Astvatsaturian Turcotte and the student activists on visits to various legislative offices to discuss key issues of importance to the Armenian-American community.

A full video recording of the hearing can be viewed at

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