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CalPERS Lowering its Investment Target?
Adam Weintraub of Bloomberg reports, Calif. pension fund may reduce investment target:
The
nation's largest public pension fund could make a small accounting
change that would carry a large price tag for taxpayers when board
members meet this week.
Staff of the California Public
Employees' Retirement System have recommended that the board reduce its
estimate about how much money the fund's investments will make in
future years, dropping the so-called "discount rate assumption" from
7.75 percent to 7.5 percent.
While
it's a relatively small change, the reduction could force the state
and other employers with workers covered by CalPERS to increase the
amount they pay into the pension fund, probably by $200 million or
more. The pension fund could take all or part of that from California's
general fund, the part of the state budget that pays for day-to-day
operations but is facing a $26.6 billion deficit.
Gov. Jerry
Brown's budget proposal, now pending in the Legislature, was based on
the assumption that the giant pension fund would lower the rate. A
committee of the pension fund's board is scheduled to consider the
change on Tuesday.
"If the assumed rate of investment return
is lowered, it has the effect of increasing contributions by
employers," said Edd Fong, a spokesman for the pension fund.
In
this case, the employers are government agencies that typically pay
their bills with tax dollars. That puts the CalPERS accounting decision
in the middle of a national debate about public pension reform.
As
of February, the pension fund estimated a shortfall of about $75
billion between its accrued liabilities and the market value of its
assets. The state's second largest public pension fund, the California
State Teachers' Retirement System, had an estimated shortfall of $40.5
billion as of June 2009 and is expected to update that figure this
spring.
Assemblyman Allan Mansoor, R-Costa Mesa, welcomed the recommendation to lower CalPERS' expected rate of investment return.
"It
brings us closer to reality in what we're facing," said Mansoor, who
has introduced a bill to ban collective bargaining over pension
benefits by public employees. "Any time there's a shortfall, the
taxpayers have to make up the difference because there is a guaranteed
benefit. What we have is not sustainable."
Some
economists say pension funds should adopt even more conservative
assumptions about their annual rates of return -- in the range of 4
percent to 5 percent. CalPERS, which serves 1.6 million current and
former government employees and their families, says it has averaged a
7.9 percent return on its investments over the past 20 years.
The
fund had assets valued at $230 billion in February. It was valued at
$251 billion in mid-2007, before the recession hit, and fell as low as
$165 billion in early 2009.
The defined benefit plans enjoyed
by many government employees across the nation, where retirees are
guaranteed a benefit for the rest of their lives, are rapidly
disappearing from the private sector. Republican lawmakers, taxpayer
groups and certain business interests say the current public pension
systems provide an unsustainable level of benefits and are pushing for
reforms.
A recent report by an
independent state auditing agency, the Little Hoover Commission,
estimated a $240 billion shortfall for the 10 largest public employee
pension plans in California. The report said some cities will have to
devote from one-third to one half of their budgets to support retiree
benefits in the near future.
Defenders of the system say most
pensions are reasonable and justified, and can be sustainable over the
long term with small changes. They argue that the large gap between
their assets and liabilities can be blamed mostly on the recession and
its effect on investment portfolios.
In California and elsewhere, public pension fund managers say the financial problems will ease as the national economy recovers.
The
staff recommendation to lower expectations for investment returns is
based on a general consensus that investment returns are likely to be
lower than historical levels over the next 10 years. It also reflects
recent changes in CalPERS' mix of investments, including shifting money
from fixed-income securities to inflation-linked bonds and Treasury
instruments.
The investment mix approved by the board is
expected to produce a compounded return of 7.38 percent over the next
10 years, but the same portfolio in 2007 would have been expected to
generate more than 8 percent.
Cutting the discount rate
would require an increase in employer contributions to the pension
fund, with increases of anywhere from 1.5 percent of total payroll to 5
percent for various groups of workers with different retirement
benefits.Fong, the fund spokesman, said the financial impact
on the state likely would be $200 million or more, but more precise
figures were not immediately available.If the board
approves the change, it would be the second year in a row the fund
needed a cash infusion. Last year, it demanded as much as $600 million
more from the state but reduced that amount to about $400 million after
state labor unions agreed to increase worker contributions to their
pensions.
CalPERS can act on its own to increase the state's
contribution. The fund representing teachers, which has a portfolio
valued at $147.6 billion and serves 852,000 California public school
educators and their families, can do so only with legislative approval.
Because
the state faces a massive budget deficit, pension fund staff also said
the board could choose to leave the discount rate assumption unchanged
and thus eliminate the need to take bring in more money in the coming
fiscal year. Doing so would still meet accepted guidelines for
government accounting, according to the report prepared for the board.
aiCIO also reports, CalPERS May Lower Investment Target, Raising Rates:
The
$230.1 billion California Public Employees' Retirement System
(CalPERS) may make a small accounting change that would reduce its
investment target.CalPERS
staff has suggested that the board lower its estimate about the amount
of money the fund will make in the future, reducing its discount rate
assumption from 7.75% to 7.5%. The decrease in the investment earnings
forecast could put greater pressure on the state and municipalities,
forcing them to increase the amount they pay into the pension fund,
probably by $200 million or more. If approved, the contribution
increases would reportedly be effective July 1 for the state and July
1, 2012, for municipal agencies.
“There appears to be a consensus that returns are expected to be lower than historical returns over the next 10 years,” Alan Milligan, CalPERS' chief actuary, said in a report. "Given that the median investment return net of administrative expenses
is 7.80%, we recommend that the discount rate assumption be lowered to
7.50% per year to have a margin for adverse deviation similar to that
currently used. Given that the state of the economy has put severe
pressure on employers’ budgets, we recognize that it may be appropriate
to reconsider the level of margin for adverse deviation," the report
noted.
As of February, CalPERS,
the nation's largest public pension, estimated a shortfall of about $75
billion between its accrued liabilities and the market value of its
assets.
Last year, a report released by the Stanford institute for Economic policy Research (SIEPR) showed that the shortfall or unfunded liability of the three state retirement systems was not $55 billion as reported, but instead
about $500 billion. The calculations from the SIEPR study, conducted
by Stanford University graduate students, revealed that California’s
three main public employee pension funds -- CalPERS along with the
California State Teachers' Retirement System (CalSTRS) and University
of California Retirement System (UCRS) -- are in more serious financial
difficulties than previously believed, resulting in more pressure on
the state’s budget and a shortage of pension funds in the future.
According to the report, titled “Going For Broke: Reforming
California’s Public Employee Pension Systems,” the state of
California's real unfunded pension debt had so far been understated due
to the accounting rules used. The Stanford report confirmed a recent
report with similar, alarming findings from Northwestern University and
the University of Chicago.
In response, CalPERS Chief Investment Officer Joe Dear wrote an article published in The San Francisco Chronicle,
opposing the validity of the findings. “The study is fundamentally
flawed because it is based on a what-if scenario that does not reflect
how most public pension funds invest their assets,“ he wrote.
According
to Dear, the “purely hypothetical” study uses a controversial method
of calculating government pension liabilities, which he said doesn’t
match with governmental accounting standards. “The Stanford study used
an artificially low investment return assumption that's about half of
our historical average,” he asserted.
Dropping the so-called "discount rate assumption" from 7.75% to 7.5%
isn't dramatic but it's a step in the right direction. Should the
discount rate be closer to 5%? I don't think so but 7.5% is still too
high. Mr. Dear is right to point out that the Stanford study used an
"artificially low" investment return assumption that was about half
CalPERS' historical average but there is nothing to suggest that the
next ten years will look anything like the last ten years. The problem
is that if the new investment assumption doesn't pan out over the
long-term, then at some point drastic measures will be taken to address
their pension deficit.
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If you backtest to 1990, a dead-simple allocation of 50% world bond index and 50% S&P would have returned 8.65% annually. They would be ahead of their investment target assumptions and would have outperformed their actual portfolio by 110 basis points annually over the last 20 years.
The whole thing could have been run by software for a few thousand bucks per year and would have absolute transparency insofar as any citizen could know precisely what the portfolio contained and what its performance was at any point in time. There would be no opportunity for corruption, graft or nepotism.
If I were a California citizen, before anyone pays a dime to bail this shit out, I would demand to understand why this hadn't been done.
Yet another cut-and paste pile of crap from ZH's resident retard on public pensions
What's Leo Kockupalotis' single brain wave to 'add value' to his usual cut-and-paste job nicked off someone else?
"Should the discount rate be closer to 5%? I don't think so but 7.5% is still too high."
Dear God he's so clueless and dreary he can't even answer the question he posed!! Mr Kockup throws 2 balls in the air and they both fall on the floor because dimwit butter fingers can't decide what the discount rate should be. What a f'n genius!!!!
A 13 year old could post brighter articles than this indecisive, brain-dead, copy-cat, poison pensioned Canadian crone
Calpers loading up on Greek debt, and other junk to get that 7.5%?
Nice round up of facts Leo. Excellent shot of that new fancy shmancy opulent CalPERS HQ building...
-10% will be more realistic, especially when the increased risk the funds are forced into comes back to bite them in the ass - of course Leo didn't consider that.
Nice, there's no guaranty that any return will be to the right of the Zero line.
Thanx for this, Leo. On the revenue side for Cali, the property tax revenue must continue to deteriorate for the foreseeable future. The data on MLS listings versus NODs is horrifying for the mid-tier/upper-tier markets in California, which means the growing shadow inventory will continue to put downward pressure on pricing. The State's unemployment rate is 12%.
Hard to find a silver lining to save the public pension scheme without a death cocktail of income/sales tax increases. Jerry will certainly not foresake his union handlers with benefit adjustments. If he did, the Wisconsin protests would be a garden party compared to the People's Republik of Kalifornia.
I'd vote for 6% as a realistic target. The real trick would be to adjust payouts based on actual results. But that would involve math and we all know how many politicians can add 2 + 2.
6% is realistic? Is California's economy growing at 6%? The greater fool theory only works until you run out of fools.
Maybe CalPERS will catch a break and hire Larry Summers -- he really knows how to handle large investment pools and is an expert at turning things around.
Leo, you are going in the right direction. The 8% rate is a joke. The new rate of 7.5% is a joke. You say it should be lower. I agree. I think it should be no higher than 4%.
Two questions:
-How much does Cali have to pay each year if the actual results are 5%?? (answer: Far more than they can pay)
-What is the the cumulative return in the past decade???? (This is the rate rate that should be used to value the future. Not some bullshit rate that will never been seen)
Agreed at 4%... no chance in hell 7.75 or 7.5 are going to be hit over that time. The unions here in Chi-town are still regularly using 8.25.
$200 million just to move it a lousy .25 points
so how much would it actually cost to move BELOW 5% where it truly belongs.....over $2 Billion extra a year ??
better to just let the whole corrupt pension ponzi collapse
I'm chuckling over here at Leo using "reality" as one of the tags on today's cut/paste job.
Those tags are automatically generated. Cut & paste but the truth is nobody else would be delivering pension news to you if it wasn't for me, so I suggest you read my comments which you get for free and appreciate that I actually take the time to educate you guys on pensions and markets. :)
Don't wish to appear skeptical, Leo, but ALL of the pension news that you bring us, extolls the excellence of public-sector union, defined benefit pension plans.
If they get really, really good at buying the dips, they might muster a little over 0%.
California (my home) and it's tax payers will be on the royal hook (shaft).
Or the FED could continue printing and the 7.75% would be too low even for Treasuries. The only answer for US pensions is continued devaluation ... that way a single California resident might be able to payoff all the pensions
Or the FED could continue printing...
The frbank Will continue printing and buying US treasury issued interest bearing paper with their vapor backed issues. Mr. Geitner has no other alternative due to the US being a debt based monetary system. He certainly has no inclination to use the US mints for their constitutionally appointed purpose to provide the nation with sound currency.
We continue to march our way to increased servitude, indebtedness and debasement. But we do get to look at pictures of all the pretty "collectible" coins of intrinsic worth, dubious "face" values and inflated "numismatic" valuations.
What a joke. Hoarded sound currency is as effective in promoting commerce as qe efforts are at improving the value of vapor backed paper/ ciphers.
Oooh. This calls for a lot more popcorn.
... and more than a few grains of salt to go with it!
CalPers is a union and Democrat slush fund for their pals. They make a LOT of politically motivated alternative investments.
7% return! I want in on that. I only get 0.5% on my little bank deposit.
you are not investing in top hedge funds, private equity funds and public market funds. If you take no risk, 0.5% is what you get...
Oy vey Leo...
...how much does the house in Vegas make?
...how good of a bet is craps?
C'mon, get your head out of the gambling halls with your Mom's money already.
Do I have to beat you over the head with a dead fish with a two week old New York Times already?
"In California and elsewhere, public pension fund managers say the financial problems will ease as the national economy recovers."
Now that, is funny.
Would that be like the projections of 8% returns ad infinitum?
They may as well start doubling the contributions now because the mismanagement and leeching by managers and Wall Street will not abate.
How can anyone, ANYONE, with half-a-brain and not stoned out of their mind believe in our financial systems?
The delusion continues via "recalcuculations" and "regulations" and "rebalancing" of portfolios; it is really astounding that it continues.
Is a 7.5% annual return any more silly that 1% core CPI; 4%+ GDP growth baked into the $3.7 trillion budget; govt employees receiving 100% of pay at retirement; electric cars with a $7000/car Federal tax subsidy, QE2+??? Where does this all end?