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Larry Fink Warns CalPERS; Sense on Cents Warns America

Posted by Larry Doyle on March 1, 2010 9:19 AM |

When the king of Wall street speaks, America would be wise to listen.

Despite what one may think or feel about Wall Street, prudence dictates we are fully aware of developments on the major thoroughfare of our economic landscape. The king, that is Larry Fink the CEO of the asset manager Blackrock, last year sent a note of investment caution to CalPERS (California Public Employees Retirement System) which all of America should heed.

CalPERS manages the investment portfolio for California and in so doing looks to fund the pension obligations of the largest state in our nation. In an attempt to properly and effectively meet these obligations, CalPERS assumes an expected rate of return on its underlying investments. If those investments underperform those assumptions, the state does not generate the necessary cash flow to meet its obligations.

This gap and the likelihood of an increasing gap was highlighted by Orin Kramer the chairman of the council overseeing the New Jersey state pension a week ago. I addressed Mr. Kramer’s feelings in writing, Orin Kramer Provides More Sense on Cents,

Last evening on my radio show, my guest Ronald Holland addressed how we should ultimately expect our retirement funds to be taken over by the government partially for the purpose of funding these pensions. You can listen to the entire interview with Mr. Holland here.

We wake up this morning and are revisited by none other than Orin Kramer, who provides a succinct but enlightening View From the Top interview to the Financial Times:

For more than a decade, Orin Kramer has sounded warnings about the mounting funding crisis facing nearly every US state’s pension fund. Mr Kramer is chairman of the council that oversees New Jersey’s state pension fund, one of the largest in the US, and also a highly influential behind-the-scenes figure in the Democratic party. He is deeply worried that the growth of obligations to teachers and other workers in many states has outstripped their investment returns.

FT: In a recent report, it was estimated that the funding gap in state pensions and other obligations is $1,000bn. Your estimate is even higher than that. What is your estimate and why is it higher?

OK: In simple terms, if you use the accounting standards that are applied to corporations, the shortfall for the states, what they ought to have today and don’t have, is $2,000bn-plus for the public pension funds and probably another $1,000bn-plus for the health [obligations] side.

This morning’s Wall Street Journal writes, CalPERS Confronts Cuts to Return Rate. This commentary effectively aligns Kramer’s assertions with those offered by the king, Larry Fink, to the board of CAlPERS last July. The WSJ reports,

“You’ll be lucky to get 6% on your portfolios, maybe 5%,” BlackRock Inc. Chairman and Chief Executive Laurence Fink told Calpers board members last July.

For those who would say Fink and Kramer are wrong and point to the market performance over the last 9 months, be mindful that projections for state pension obligations cover decades not individual months or years.

What are the implications of Kramer’s and Fink’s assessments?

Higher taxes. Cuts in services. Ultimately higher interest rates for municipal obligations given the increased demand for funding and increased risks in the states, cities, and municipalities themselves.

Navigate accordingly.

LD

  • coe

    Now here is the proverbial 500lb gorilla in the room…too bad he is virtually invisible and less a “clear and present danger” and more a future threat…it strikes me that tough deleveraging decisions are needed to revamp these pension fund liabilities…somebody needs to face the music, and pretty darn soon

  • Kathy

    Frightening — especially since BlackRock is notoriously unethical, at least in regard to refinancing its huge share of outstanding ARS. If they are warning something, then it must be REALLY grim.

    • MATT MANCUSO

      ISN’T IT AN 800 LB GORILLA?

  • knownothing

    Fink was probably laying the groundwork to sell the pensions something with higher yield and a lot more risk.
    I believe you are correct. The gorilla is 800 pounds.
    Taxpayers beware!






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