Nov.14, 2014 – Daily Brief

The LA Times story on "underfunded" pension funds is only the beginning. They aren't "underfunded" they are "over-promised." Public employee union pensions will bankrupt California eventually. Soon we will be paying more to no working people than we at actual present day workers. This is unsustainable. It's a matter of time. Mybe if those teachers taught arithmetic and economics instead if watching their unions negotiate ridiculous pensions we might have an electorate smart enough to see through the BS of measures like prop 2 in the last election. California will be the next Detroit and Stockton. It's just a matter of time.

What is interesting is that CALPERS lost close to a billion dollars on their investment in the Newhall Ranch development.

Actually, CALPERS lost more than $1 Billion in its indirect investment in LandSource, which was Newhall Land's parent company. Overall, during the 2000's CALPERS management wildly over estimated the value of its real estate investments and the percentage of return on investment it would receive, long term, on those real estate investments. Other mistaken assumptions were made on other categories of CALPERS investments, all of which led to its public agency employers contributing too little money toward their employees' future pensions. CALPERS actual investment in "Newhall Land" was an investment in MW Housing Partners II LP, where CALPERS held a limited partnership interest with a Macfarlane entity and a Weyerhaeuser entity as general partners and managers of the limited partnership. MW Housing Partners II LP owned 50% of LandSource. Lennar California owned 25% of LandSource. An entity owned and managed by an investment group called Cerberus owned 25% of LandSource. The most important news story every written about CALPERS' LandSource investment is found in a homebuilder trade magazine: http://www.builderonline.com/land/developm In essence, that deal was a work-out of a previous investment by MW Housing Partners II called a "land bank" where using CALPERS' money funneled through MW, MW purchased ownership of single family home lots in California, Nevada, Texas and several other states which were then sold-back, as needed, to various Lennar subsidiaries when they needed land to build homes. CALPERS investment in the deal went well over $1 Billion in loss because it was paying investment management fees to the general partners of MW and its share of property management fees to Lennar as LLC manager of LandSource. As the value of the lot inventory declined beginning in 2006, MW negotiated with Lennar to contribute ownership of those lots to LandSource, with CALPERS contributing additional cash through MW, so that MW ended up buying 50% of LandSource from Lennar California and Cerberus. That deal closed in early 2007, with LandSource taking out a mortgage on all of its real estate, and handing over those loan proceeds to Lennar and Cerberus. The massive loan was the first one made by the U.S. branch of investment bank Barclays Capital, a subsidiary of British Barclays Bank. Barclays in turn fractionalized ownership of the mortgage loan and sold off pieces to a large number of other banks and investment funds. Less than a year after those deals closed, the land appraised at a fair market value less than what Barclays Capital had required under its loan terms. Barclays as "lead lender" made demand on MW, Lennar California and Cerberus to "balance the loan" by paying down its principal balance. At least one of the three "partners" refused. Barclays as "lead lender" then sent ot a notice that the mortgage loan was in default. LandSource filed a Chapter 11 bankruptcy in Delaware, and CALPERS thereafter simply walked away from its investment, leaving Lennar California and the Cerberus entity to deal with the bankruptcy court and the mortgage lenders. If you bothered to look at the Bankruptcy Court's docket, you would see only one or two documents filed by CALPERS in the LandSource bankruptcy case. By using the search engine of builderonline.com and using the key word LandSource or Haddad, one can follow LandSource through the trials and tribulations of the bankruptcy court. Ultimately, Barclays Capital proposed a Chapter 11 Plan for LandSource, where Barclays Capital and the other owners of "pieces" of the fractionalized mortgage loan would end up owning LandSource through the equivalent of a deed in lieu of foreclosure. Immediately after that deal closed, Barclays and the other owners of pieces of the loan sold their interests to a group of investment funds (often called hedge funds) and Lennar California. Because ownership of LandSource brought with it ownership of Valencia Water Company, the "new owners" immediately filed an application for transfer of indirect ownership of the water company with the California Public Utilities Commission, where the new owners disclosed the names of the investment funds/hedge funds who along with Lennar California indirectly controlled the water company. One later step in recouping their post-bankruptcy investment in LandSource was the later sale of the Valencia Water Company stock to Castaic Lake Water Agency. Public news reports of the minor stir caused by CALPERS of its $1+ Billion investment in LandSource elicited news stories that said (1) it was CALPERS senior employees, not CALPERS Board of Directors, who approved the investment described in the builderonline.com story linked above and (2) CALPERS terminated its relationship with the Mr. MacFarlane who was the "M" in MW Housing Partners. In the "small world" department, it turned out that the deal described in the bigbuilderonline.com news story linked above had been negotiated FOR MW Housing Partners II and its majority owner CALPERS by a male partner in a big San Francisco law firm who had a reputation for being not-particularly-nice to young women real estate lawyers. It turned out that after the bankrupty "someone" associated with CALPERS hired another big California law firm to "investigate the original deal" for malpractice or other misconduct by the parties on CALPERS' side of the LandSource deal. One of the lead investigative lawyers was married to a Harvard educated woman lawyer who had been the brunt of that not-niceness to young women real estate lawyers, so the deal got some clear eyed scrutiny after the fact. That second law firm did not find actionable misconduct, due to a mountain of written delegations of decision making authority with and between CALPERS and MW, and indemnification agreements and releases of third parties. In short, the investigation determined that CALPERS lost the $1 Billion not through third party trickery, but through a combination of decisions by CALPERS staff, CALPERS real estate investment advisors and MW's lawyers who followed the instructions of the staff and investment advisors.

Calstrs unfounded liability was addressed last year. Teachers increased their contribution to the fund as did districts and the state. The increases are spread out over the next seven years. Teachers are not part of calpers and can't negotiate pension increases. It is strictly based on base income and years of service. Any additional income a teacher receives, say for coaching, goes into a separate account and is not allowed to be used to increase pension amounts. The only ones in the strs system with large monthly pensions are district office administrators.