Bear market bites CalPERS and CalSTRS pension funds

California’s two big pension funds for public workers lost money on their investment portfolios in the fiscal year ended June 30, the funds reported today.

The red ink at the California Public Employees’ Retirement System and the California State Teachers’ Retirement System wasn’t a surprise, given the stock market’s dive over the last year. (Despite the funds' diversification, stocks still make up more than half of their holdings.)

But too many years like this one would be bad news all around -- because, dear fellow California taxpayer, guess who risks getting stuck with the bill if the pension funds can’t earn enough to pay the benefits already promised to public-sector workers?

CalPERS said it lost 2.4% in the June 30 fiscal year on its $239-billion fund. CalSTRS’ $162-billion fund had a loss of 3.7%.

The numbers are preliminary, and the final losses probably will be worse because both funds measure their holdings in real estate and private-equity investments only through March 31 when calculating the total portfolio returns. (It takes a while to collect final quarterly data for that stuff.)

The numbers also are before investment fees. In CalPERS’ case, fees reduced the gross return by 0.3 percentage point in the previous fiscal year.

CalPERS’ portfolio performed better than CalSTRS’ in part because CalPERS last year moved a small portion of the fund into commodities -- just in time to catch the latest big rally in raw materials, including crude oil. The "inflation-linked" portion of the fund’s portfolio, which includes commodities, soared 22.9% in the period measured.

By contrast, CalPERS lost an estimated 12% on its U.S. stock portfolio in the 12 months. CalSTRS’ U.S. stock portfolio lost 13.4%. The broad Russell 3,000 stock index fell 12.6% in the period.

How the funds fared with other assets:

--The teachers’ fund did better with its foreign stock holdings: It lost 5.8% on those issues compared with a 7.8% drop at CalPERS.

--Returns on bonds and other fixed-income investments came to 7.7% at CalPERS and 6.1% at CalSTRS.

--The funds continued to earn decent money on their real estate holdings, although CalSTRS fared much better in that sector, earning an estimated 11.8% in the period measured, compared with 8.1% for CalPERS.

--Private equity returns, such as from investments in firms taken private in leveraged buyouts, totaled 19.6% for the period measured at CalPERS and 11.6% at CalSTRS.

CalPERS said its overall portfolio loss "will have no immediate or significant impact, in and of itself, on California employers’ budgets next year or on the pension fund’s ability to pay benefits." That’s because the fund calculates the contributions it needs by smoothing portfolio returns over a 15-year period.

Measured over the last five years, the CalPERS fund's average annual return was 11.4%, well above the 7.75% it says it needs to earn to finance its promises to public workers. CalSTRS’ five-year annual average return was 11.5%, compared with its target of 8%.

For their own sakes, California taxpayers should hope the good times resume soon.

Comments

[Bill]

Tom says

"But too many years like this one would be bad news all around -- because, dear fellow California taxpayer, guess who risks getting stuck with the bill if the pension funds can’t earn enough to pay the benefits already promised to public-sector workers?"

It would take a hell of a lot of years to deplete these funds assuming that the stock market and everything else in sight collapse which is unlikely. Remember, they have more that $100billion each to begin with.

[blair]

With all of the special dealing where a public worker gets a 25% pay increase in one year (San Luis Obispo City, for example), the investments cannot take care of the situation because the way their pension amount is set up is based on the top 3 years of earnings.

I think that an appropriate constitutional initiative to make sure that the tax payers are not stuck with such a bill if the funds are depleted. Since the judges live off of these funds, I wouldn't put it past them to say that an ordinary initiative is not constitutional -- even though that they participate in getting funds -- conflict of interest.

[Gene Chaney]

Hey Tom,
This would be a good time for you to respond to the idea George Bush had for private investment of workers earnings in retirement accounts.
Here, we have the best of the best managing the government's money which makes me want to know what you think about the past retirement fund proposals.

[Barney Rosen]

People should remember that CALSTERS members have been putting their own money in to their pension for years, in my case 33and a half years. We have had no choice about this, it was a condition of our employment, our districts have matched our amount. Neither us or the district received any interest on the money. This was a contract between us and the state. As teachers we are notoriously underpayed as it is, my daughter 2 years after she graduated was making $3,000 more a year than I did in my best year. In fact as a retired veteran of the Air Force Reserve I payed each month into social security and did so for many years, I should get between 5 and 7 hundred dollers a month from Social Security but qualify for $140 per month and am drasticly limited in what I can earn. I would like to suggest to Blair that instead of wining about the so called 25% raise he complain about the idiots that gave that much to the person, and Blair you can bet it wasn't a worker but an administrater that got the money

[Santa Claritan]

What irritates me is that this year CALPERS lost its original $870,000,000 investment in the LandSource real estate development project, and paid untold millions to Lennar and MacFarlane Partners in asset management fees for LandSource.

Yet, when asked to comment on the loss of close to $1 Billion in principal, CALPERS employees said that it was no big deal because CALPERShas beens so profitable over the long run. These comments were made in 2008, after CALPERS effectively abandoned its interest in LandSource when LandSource filed Chapter 11 Bankruptcy.

I think any sane human being would be very upset about losing nearly $1 Billion in assets, and looking to see who dropped the ball. Perhaps CALPERS is not managed by sane human beings.

[clopper]

From our teacher:
"...I should get between 5 and 7 hundred dollers a month ....."

Yikes!

[Anthrodiva]

I'm not sure this is much of a story, but once it was decided to run it, shouldn't it have merited a place above the Pio Pico acromegaly story? It's not like almost everybody I know has a stake in one or the other of these funds.

[John]

So, public employees are rapacious capitalists. And getting what they deserve?

[KavJack]

If Mr. Barney Rosen is a Teacher he seems to be ignorant of the past participle for the verb Pay. In these comments we all make typing mistakes but he makes the same mistake twice. I'll be generous and assume that his misspellings of drasticly, doller, and administrater are mere typos. "Wining" is mentioned instead of "whining". There are grammatical errors as well. It wouldn't really matter but he does claim to be a Teacher.

[W.C. Varones]

CalPERS is lying about its performance:

http://wcvarones.blogspot.com/2008/07/calpers-magical-performance-numbers.html

[Jeannie Brown]

**I'm stunned that anyone believes that average state workers would get a 25% raise in one year. Since 9/11, the total raises the average state worker has made (in over 7 years) doesn't come close to that. Sounds like you're talking about a high level administrator. Trust me. Most people working for the state will never be rich.

[Rocky]

CalPers did much better than my IRA, which did better than the Vanguard 500 index fund. But I'd much rather be collecting a nice fat government pension, like one retired California public school teacher I know. She received $90,000 in 2007. Annual cost of living increases and generous medical subsidies round out her retirement package. I doubt that most private sector employees in this state will do as well when they retire.

[Rita]

I am amazed and saddened by many of the comments. Uninformed and ignorant for starters and then that wonderful old attitude - "I don't have that and you shouldn't either". That's right - who cares if a person has worked 35 years at a lower salary specifically because there was more security in govmt service. That 25% raise or that $90,000 per year retirement may just be two special cases of two special "appointees" by some elected or appointed official who brought his entourage and "took care of them". And perhaps those of you that are most vociferous in your complaints were instrumental in electing these types of officials.
People shld be consistent in their opinions - Everyone wants to jump on the government pension bandwagon and take the proceeds.You need a new bandwagon - realistically everyone needs and shld have a pension. Trying to steal someone else's really isn't the answer but it certainly shows your colors.

[Dennis]

"It would take a hell of a lot of years to deplete these funds assuming that the stock market and everything else in sight collapse which is unlikely. Remember, they have more that $100billion each to begin with."

Possibly with current number of retirees that it funds but with the number of the baby boomers in the government that are about to retire it's going to pay out a lot more starting in the next 3-5 years, it will be like wave after wave of retirees.
This is going to put a strain on Calpers with the current economic climate it will hard for them to generate the huge leaps in income like they have in the past.

[Bud John]

The last month has significantly altered pension funding requirements. How does this affect the asset allocation, actuarial assumptions and risk management efforts of the pension industry over the next decade? I would be interested in the comments of knowledgeable folks.