News last week that California’s largest public pension fund — the sixth largest in the world — badly missed its target rate of return in 2015 should send new shudders through people who make a habit of worrying about the solvency of such funds.
California Public Employees’ Retirement System (CalPERS) 2015 rate of return came in at a dismal 0.61 percent on its $300 billion in investments. It was, according to Forbes, CalPERS worst year since “the stock market meltdown of 2009.”
CalPERS performance actually makes the Colorado Public Employees Retirement Association (PERA) 2015 return of 1.5 percent look good. That ought to tell you something.
Like PERA, CalPERS needs to earn an average annual rate of return of 7.5 percent to get to full funding in some hazy, halcyon day far in the future. But, Forbes reports, the preceding two years weren’t that much better for CalPERS: 2.5 percent in 2014 and 1 percent in 2013. That makes the fund’s 20-year return 7.03 percent (and that includes some years when the stock markets soared), and the number is likely to drop further in coming years.
Why does this matter to the average taxpayer? Forbes sums up the issue nicely:
Simple: if you’re a taxpayer, you’re on the hook to make good on the promises politicians have made with the government employee unions that helped elect them.
When CalPERS belatedly and prudently lowered its expected rate of return from 7.75 percent to 7.5 percent in 2012, the state of California was hit with an extra $167 million annually to make up for the reduced expectation of investment income. Local governments, including school districts, where hit with even larger costs.
Also, the Forbes article points out, taxpayers and pension fund members should remember that
Under pressure to boost earnings, state pension fund managers may increasingly turn to riskier investments. For instance, CalPERS had almost $30 billion invested in private equity funds which provided its strongest long-term return at 14.4 percent over five years. But, high returns mean high risk and, in the case of government pension funds, taxpayers are liable to make up any shortfall in pension obligations due to investment losses (emphasis is ours).
And Kevin Drum also warned last week in the left-wing publication Mother Jones that CalPERS’ bad year raises a host of troubling issues, which, he said, liberals must confront in a non-ideological fashion:
This year’s return is unusually low, but as CalPERS acknowledges, investment returns are likely to be modest for quite a while. This is one reason I’m more sympathetic to 401(k) funds than a lot of liberals. There’s no magic here. If returns are low, then returns are low. Even if you run a big fund with professional investors, you can’t defy gravity forever.
If these past few weeks of turmoil in the U.S. tell us anything, it’s that the uncertain times in which we live aren’t going to resolve suddenly into a stable and orderly era of widespread prosperity. Expect many more gloomy reports from big public sector pension funds.