Monday, July 16, 2012

FAIL: CalPERS Posts 1% Return for Fiscal Year Ended June 30, 2012.

CalPERS is the largest pension fund in the United States with assets of $233 Billion.
California taxpayers are on the hook for any shortfall in investment gains vs. the benchmark.

We have dozens of posts on the behemoth, does anyone else remember this from Patricia K. Macht, Assistant Executive Officer, Office of Public Affairs in March '09

Read more here:
Beware of the anti-pension ideologues who come out of the woodwork during market downturns. Like vultures, they prey on the highly charged and negative investment environment, looking for ways to convince you a temporary performance downturn will be typical for all time!

They know -- but don't tell you so -- that we set our rates based on a fiscal year investment return. They don't tell you that our assumed rate of return is made based on advice from a range of experts within CalPERS and within the industry and that it is regularly evaluated every two to three years in public session. They don't tell you what you would learn from a textbook on pension management: that some years investment returns are as expected; other years, they will be more than expected and yes, some years they will be less than expected...
They put that out when the fund assumed a 7.75% annual return.
They only this year were shamed into lowering it to 7.5%.

Following up on January's "CalPERS Earns 1.1% in Calendar 2011, a Bit Less Than the 7.75% They Need".

Here's today's press release:

CalPERS Reports Preliminary 2011-12 Fiscal Year Performance of 1 Percent
Real estate portfolio earns nearly 16 percent exceeding benchmark
SACRAMENTO, CA – The California Public Employees’ Retirement System (CalPERS) today reported a 1 percent return on investments for the 12 months that ended June 30, 2012, falling short of its benchmark that returned 1.7 percent. CalPERS assets at the end of the fiscal year stood at more than $233 billion.
The small gain – despite continued volatility in world markets and economies – was helped by improved performance of CalPERS real estate investments. Investments in income-generating properties like office, industrial and retail assets returned approximately 15.9 percent, outperforming the pension fund’s real estate benchmark by more than 3 percent.

CalPERS performance was negatively impacted by significant allocations to U.S. and international public equities.

“The last twelve months were a challenging period for all investors as the ongoing European debt crisis and slowing global economic growth increased market volatility and reduced equity returns,” said Joe Dear, CalPERS Chief Investment Officer. “It’s a clear reminder that we must remain focused on performance, risk and internal controls in today’s financial environment.”

CalPERS 1 percent return is below the fund’s discount rate of 7.5 percent, a long-term hurdle lowered recently in response to a steady decline in inflation and as part of CalPERS routine evaluation of economic assumptions. CalPERS 20-year investment return is 7.7 percent....MORE
The smaller California newspapers are using the word "dismal".  They don't know the half of it. From our May 2010 post "Public pensions: "Calpers Dreaming of Dow 28,000,000?" But for now asks Bankrupt California for an additional $600 Million":
...Blah, blah, blah.
Here's someone who actually knows what he's talking about, Leo Kolivakis at Pension Pulse:
David Crane of the WSJ reports, Dow 28,000,000: The Unbelievable Expectations of California's Pension System:

In 1999 then California Governor Gray Davis signed into law a bill that represented the largest issuance of non-voter-approved debt in the state's history. The bill SB 400 granted billions of dollars in retroactive pension boosts to state employees, allowing retirements as young as age 50 with lifetime pensions of up to 90% of final year salaries. The California Public Employees' Retirement System sold the pension boost to the state legislature by promising that "no increase over current employer contributions is needed for these benefit improvements" and that Calpers would "remain fully funded." They also claimed that enhanced pensions would not cost taxpayers "a dime" because investment bets would cover the expense.

What Calpers failed to disclose, however, was that (1) the state budget was on the hook for shortfalls should actual investment returns fall short of assumed investment returns, (2) those assumed investment returns implicitly projected the Dow Jones would reach roughly 25,000 by 2009 and 28,000,000 by 2099, unrealistic to say the least (3) shortfalls could turn out to be hundreds of billions of dollars, (4) Calpers's own employees would benefit from the pension increases and (5) members of Calpers's board had received contributions from the public employee unions who would benefit from the legislation. Had such a flagrant case of non-disclosure occurred in the private sector, even a sleepy SEC and US Attorney would have noticed.

Eleven years later, things haven't turned out as Calpers promised....