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Tiny Return for CalPERS: Retirements at Risk?
Posted by Teri Sforza on 01/26/2012 at 7:03 PM
So a raging debate in the pension wars has long been this: Just how much will the giant investment funds really earn over the long haul?

The more the investments earn, of course, the less that public workers — and the agencies  employing them — must stash in the retirement kitty so it all pencils out in the end.

The gargantuan California Public Employees Retirement System — the nation’s largest — has long assumed a 7.75 percent return on its billions.

But that’s pie-in-the-sky optimism, critics argue, and CalPERS should lower its expectations so it’s not stung during less-rosy economic times  (which force public agencies to put more money toward employee pensions and less toward services for their residents).

And, well, what do you know? This week, CalPERS announced that its investment portfolio “earned a small, but positive1.1 percent return for the 12-month period ended December 31, 2011.”

Pension-reformer types have their hands on their hips, saying, “I told you so.”

CalPERS says it’s been a bumpy ride, but things will work out over the long haul.

Public-types were enraged when the Stanford Institute for Economic Policy Research used lower return rates to calculate how deeply in the red California’s retirement systems might be:

  • A return rate of 6.2 percent (rather than the 7.75 percent) found  that the state’s retirement systems were $290.6 billion short of what they’ve promised to pay retirees.
  • And an even less-rosy rate of return — 4.5 percent, which Stanford called “risk-free” — found the shortfall ballooning to $497.9 billion.

The public-sector types countered the shortfall is only $90 billion or so.

CalPERS, for its part, said this in a prepared statement about the dismal earnings in 2011:

“According to CalPERS investment staff, due to the high volatility of global equity markets in 2011 (caused in large part by the ongoing Euro debt crisis and the slowing of global economic growth) the Fund experienced a 7.9 percent loss in its public equity asset classes. CalPERS U.S. equity portfolio lost .03 percent, while its international equity assets declined 13.9 percent.

“All other CalPERS asset classes had positive returns. CalPERS private equity and fixed income investments both earned a 12.4 percent return. Real estate investments returned nearly 10 percent, while inflation linked assets earned 8.4 percent.

“CalPERS 1.1 percent return beat the Pension Fund’s policy benchmark – the return expected from CalPERS asset allocation mix – by 0.2 percent.

“’We’ve been saying for a long time that we’re facing a challenging investing environment,’ said Joseph Dear, CalPERS Chief Investment Officer. ‘The shock waves of the last year in particular created a crisis of confidence that’s still impacting all investors. At the same time, the volatility can provide us with real opportunities, and we have the size and liquidity to take advantage of those opportunities. I am confident that we have the right strategy in place to achieve our investment goals over the long term.’”

CalPERS is the nation’s largest public pension fund with about $229 billion in assets. It provides retirement benefits to more than 1.6 million state, school, city and special district workers and their families, and health benefits to more than 1.3 million members.

While CalPERS stresses that the average pension is $2,220 per month, the number of  its retirees earning more than $100,000 a year has skyrocketed 99 percent – in just two years.

  • Back in 2009, there were 6,133 people in the $100K club.
  • In 2010, the number had grown to 9,111 (a 49 percent increase).
  • And an update in November showed that there are now12,199 retirees in the $100K club (a 34 percent increase over 2010 — and a 99 percent increase over 2009).

Back in 2005, there were only 1,841 retirees in the CalPERS 100K club. That means it grew by 10,358 people —  a 563 percent increase — in only seven years.

One can thank the generous pension formulas granted by state and local politicians in the early 2000s for that spike. The 3-percent-at-50 public safety and 2.7-percent-at-55 general employee crowds are retiring now, and will continue to do so for the next 20 years or so.

One can expect the $100K pension club to keep growing at exponential rates for some time.

None of the reform proposals heading for the November ballot can do a thing about that.

Keep in mind that the amount to be paid out in retirement checks doesn’t change — it’s guaranteed — though the market certainly does change, and is not guaranteed.

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