Largest Public Pension Fund Earns Dismal 1 Percent
The nation's largest public pension fund reported a dismal 1 percent return on its investments, a figure far short of projections that will likely add pressure on California's state and local governments to contribute more, officials said Monday.
The California Public Employees' Retirement System reported its returns for the fiscal year that ended June 30. The 1 percent return is well below its projected annual return of 7.5 percent.
"The last 12 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 chief investment officer Joe Dear. "It's a clear reminder that we must remain focused on performance, risk and internal controls in today's financial environment."
Dear said the fund was most impacted by a minus-7 percent return on global equities. Half the pension's assets are in equities, he said.
CalPERS, which has yet to recover from the recession, runs a $234 billion pension system for more than 1.6 million state employees, school employees and local government workers.
The preliminary returns reported Monday were even lower than the state's teacher pension fund, which earned 1.8 percent from investments.
Dear said the returns would result in increased pension contributions from the state, school districts and municipalities, most of which are already financially stressed.
He said the fund's long term 7.5 percent target remains "realistic" but noted that recent returns have been the lowest in a generation. For the last five years, CalPERS earned just 0.1 percent. Over 20 years, the fund earned 7.73 percent.
"It does imply that we're going to have to employ new strategies in terms of where we invest and how we manage risk if we were to retain that 7.5 return target," Dear said.
The investment returns are critical because taxpayers are on the hook for the difference if the pension funds fail to meet their performance targets.
California taxpayers are already on the hook for billions of dollars in pension and health care benefits promised to public workers when they retire. The state said pension contributions accounted for 2.4 percent of state spending in 2006. It's expected to reach 3.9 percent of this year's $91.3 billion budget.
Local governments have seen their pension burdens increase even faster.
So far, Gov. Jerry Brown and Democratic lawmakers have not been able to strike a deal on statewide pension reform. Talks will continue after lawmakers return from a monthlong recess next month.
Brown, a Democrat, issued a comprehensive proposal last fall that focused on raising the retirement age to match Social Security and moving new workers to a hybrid system in which defined benefits are combined with a 401(k)-style plan widely used in the private sector.
Lawmakers said they want to allow workers to retire before age 67 with reduced benefits. They are refusing the governor's call for a defined contribution plan that places some of the risk on employees.