Response to CalPERS: A note about public pension fund investment return targets


Dear Journalists and Elected Officials:

Yesterday CalPERS issued a statement in response to the email I sent you on July 15.

Contrary to the CalPERS headline, my email misses nothing. That’s why the text of the CalPERS statement confirms the principle I expressed in that email. But then CalPERS goes on to raise a separate issue that has to do with what happens when investment earnings are not sufficient to keep an unfunded liability (UAL) from growing. I’m glad they raised that issue.

The answer is that taxpayers must provide more money. That’s why CalPERS concedes in its statement that “liabilities do grow at 7.5% per annum and, if there are no contributions towards the UAL, assets would have to grow faster than 7.5% for there not to be an increase in the UAL. However, at CalPERS, contributions are being made to pay down* the UAL.” (Ital. and bold added.)

In other words, CalPERS is effectively saying, “The reason we didn’t have to earn 9.7% is because taxpayers were forced to contribute more money.” That’s true, and until California joins the ranks of states that requires employees and not just taxpayers to finance UAL’s, citizens will see ever-larger sums diverted from public services even if CalPERS earns its assumed rate of return. That’s why it’s important to compare pension fund returns with more than the assumed return. If you’d like to learn more about how this works, feel free to contact me.

CalPERS’s statement is another sad example of a half-truth issued by an important public agency. Notice how the statement makes no reference to where the additional contributions come from (taxpayers) or what it means for public services when money gets diverted to UAL’s (they get cut). Another recent example of less-than-full-truth disclosure is CalPERS’s unwillingness to provide information about the fees and carried interests being earned by private equity and other capital managers who have been allocated capital by CalPERS. It is not difficult to derive that math. The Texas County & District Retirement System provides it (see page 55 of this document), I and other investors who allocate money to capital managers always know the cost of fees and carried interests, and friends working at private equity and other capital management firms always know how much their pension fund and other clients are generating in fee and carried interest income for their firms because that’s how they justify the highest possible bonuses for themselves. If you would like to learn more about this subject, feel free to contact me.

I recognize that fine people operating under difficult political conditions staff the CalPERS organization. But as public servants, they should commit the organization to full disclosure to citizens. They would gain our highest respect for doing so.

David Crane

*As an aside, the CalPERS statement is inconsistent in claiming contributions are being made to “pay down” the UAL but later conceding that no pay down of the UAL actually took place (because the additional contribution was not enough to offset the growth of the UAL).

Link to the original email: A note about public pension fund investment return targets