The California Public Employees’ Retirement System (CalPERS) is the biggest public pension in the country. It is also deeply underfunded. Depending on the measure used, they have just 55-75% of money needed for future expenses while 80% is considered the minimum to be safe. Their return is currently less than 99% of big pension funds.
On March 12, CalPERS voted to lower their expected return from 7.75% to 7.5%, ignoring the advice of their own chief actuary that it should be 7.25%. More than a few investment professionals consider a projected rate of 7.75% to be unrealistically high in these times and question whether 7.25% is realistic.
True, over the past 20 years the fund has returned an average of 8.8%. But much of that was during an era of prosperity and rising stock prices. But the real estate bubble and subsequent implosion has badly damaged the economy and we are hardly in stable or prosperous times now. Also, it doesn’t matter if returns averaged 8.8% if you dropped 10% last year and have obligations you can’t meet.
Such market fluctuations matter even less to CalPERS because they don’t have to hit targets and have no pressing reason to do so. If they have a shortfall, by law they can bill municipalities, school districts, and the state and tell them to make up the difference. The 0.25% drop in the CalPERS expected return will cost the California state general fund $167 million more this fiscal year, making a total of $3.7 billion owed by the general fund to CalPERS. School districts and other entities will also have to pay more. This comes at a time when school districts have already cut their budgets radically and the state is facing a projected $9.2 billion deficit. But they can’t say no. By law they must give CalPERS whatever it asks for. This hardly seems fair or prudent.
Any shortfall in CalPERS funding is, of course, eventually paid by the citizens of California. Unrealistically high projected rates of return simply kick the can down the road and solve nothing. In fact, they just makes things worse by ignoring the increasing gap between what CalPERS has and what it’s obligation to future retirees is.
