As readers who have been with us for a while know, we are convinced that CalPERS return assumptions are too high and suspect that management may be borderline incompetent. And this was before risk-free rates went to 0-1%.What a mess.
Following up on May 25's "Pension Plan Fail: The S&P Index is Up 5.1% Annualized for the Last Decade":
It was only in 2012 that the largest of the public employee pension plans, CalPERS at $290.15 billion, was shamed into lowering their assumed rate of return to 7.5%. Way back in 2009's "Public pension funds’ rosy forecasts pose problems" we quoted the behemoth fund's response to criticism of their fantasy numbers:And the headline story from the Orange County Register:
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!...CalPERS is on a June 30 fiscal year so folks are curious how this year's performance will compare with last year's 2.4%....
Public workers are pumping more money into retirement funds. Public agencies are pumping more money into retirement funds.
Yet the market seems distinctly unimpressed.
The California Public Employees Retirement System – the nation’s largest – lost about 2 percent of its market value in the fiscal year that just ended, according to unofficial numbers published last week on the CalPERS website. This came despite doubled-down efforts to beef up its bottom line.
The value of CalPERS investments was $293.7 billion on June 30, down from $301.9 billion one year earlier, according to CalPERS’ daily valuation report. That number accounts for daily movement of some assets but not others, which are updated quarterly.
Challenges are expected to continue for years, even as the wave of graying baby boomers heads into retirement.
CalPERS is slated to release its official 2015-16 numbers next week, and declined to discuss details with the Register beforehand (though officials noted that the fund’s July 7 value was nearly $295.7 billion.) But last month, Ted Eliopoulos, CalPERS’ chief investment officer, tried to prepare officials for a bumpy ride going forward.
“Last fiscal year, our return was 2.4 percent,” Eliopoulos said during a committee meeting. “And this fiscal year, as we head into July, we’re likely to be flat, which is a nice way of saying zero.”
The next three to five years are shaping up to be “a challenging market environment, not just for CalPERS, but for all investors,” Eliopoulos added. “It’s going to test us.”
Projections from independent third parties are “materially lower” than what CalPERS forecast just two years ago, he said. With its current mix of investments, CalPERS can expect a total return of just 6.4 percent over the next decade.
It has assumed a return of 7.5 percent.
That difference is of great import, because investment income is the bulk of public pension payments. And since pension payments are guaranteed, any shortfall would have to be made up by taxpayers.
Whether this represents a bump in the road or a major sinkhole depends on who you ask.
“What this means is simple: employers, employees and taxpayers will pay more to keep CalPERS afloat in the future,” said Joe Nation, a professor of public policy at the Stanford Institute for Economic Policy Research and a former Democratic Assemblyman.
A zero return this year would likely drag CalPERS’ 10-year average rate of return below 6 percent, yet the system continues to assume returns of 7.5 percent per year, Nation said. That means unfunded liabilities grow.
Those unfunded liabilities – the difference between what CalPERS has and what the agency has promised to pay people for work already performed – are about $150 billion, compared with $93 billion just two years ago, Nation said....MORE
We've been on this problem for a while and have so many posts on CalPERS (and the slightly smaller CalSTRS) that it is easiest, if interested, just to do a Google search rather than list individual posts which run into the hundreds:
CalPERS Playing with Fire":
In our July '09 post "CalPERS Clipped for $970 Mil. in Real Estate Fiasco" I said "It's called reaching for yield. And it's stupid, especially when a fiduciary does it."
We have dozens of posts on CalPERS. This outfit is going to cost the taxpayers of California billions over the next decade as markets refuse to accommodate the fund's requirement of 8.5% average annual returns. They have made promises to their public sector retirees that they won't be able to meet and are trying to make up the difference by engaging in behavior that no fiduciary should even contemplate, let alone execute.
If you recall, they were one of Goldman's* largest "long-only index investors" in oil and the GSCI, scaling back only after their commodity bets lost billions. They also engaged in loser hedge fund behavior, selling their most liquid investments at the bottom to prop up their non-trading investments.