Wall Street Journal, 5/19/11.by Michael Corkery
The nation’s biggest pension fund is on target to notch one of its strongest annual returns in the past 20 years, performance that is helping the fund regain its health and its confidence.
But state residents still are being stung by the California Public Employees’ Retirement System’s funding gap, showing the deep hole into which many pension funds have dug themselves.
Calpers reported to its board Wednesday that it had earned 18.6% for the first three quarters of its fiscal year. Like many pension funds, Calpers is riding the overall market’s rebound. Its recent gains are in line with those at other large funds, according to industry data.
Calpers officials say the results show the resilience of public retirement systems that rely largely on investment gains to cover guaranteed payouts to retirees.
“The financial crisis was an anomaly,” said Calpers Chief Executive Anne Stausboll in an interview. “We learned from our mistakes, made some changes to our risk management, and are moving forward with stronger convictions than ever.”
But Calpers will be playing catch-up for years, which likely means large contributions from public employers, such as cities and school districts, and from many of their workers who contribute to the fund.
With $236 billion in assets, Calpers has recovered from a low of $160 billion in March 2009 and is nearing its pre-crisis high of $260 billion in 2007.
In fiscal years 2008 and 2009, Calpers lost a total of 29%. The fund earned 13.3% the next year and an additional 18.6% through March 31, putting it on track to wipe out its financial-crisis investment hit. But its long-term obligations are about $300 billion. To improve funding levels, it isn’t enough to return to precrisis asset values. Calpers needs to make up for lost years of returns.
Faced with this gap, Calpers increased the contributions it demands from public employers in the wake of the financial crisis, putting pressure on strained budgets. Calpers officials say they can’t predict when costs will come down, saying much depends on the market. But after two years of winning returns, “we are headed in the right direction for lower contributions in the near future,” fund spokesman Brad Pacheco said.
“I am glad returns are improving, but I am not jumping for joy,” said Andrew Green, finance director in Pasadena, which will see its pension costs increase 6% in the next fiscal year after a slight increase in the current year. Costs would be higher, he said, except Pasadena eliminated jobs amid the recession. It faces an additional two years of pension-cost increases, he says.
Mr. Green expects Calpers’s investment gains will eventually help pension costs level off. The pension fund spreads its investment gains and losses over several years, so it takes time for the fund to recognize recent winning returns.
Pleasanton, a city of 70,000 people 40 miles east of San Francisco, is one of dozens of cities that have had their contributions increased; in Pleasanton, public employees will cover the city’s increased costs. “We are trying desperately to avoid cutting services,” said Pleasanton City Manager Nelson Fialho. “Pension costs make that difficult to accomplish.”
The state of California’s contributions to Calpers are going down in the next fiscal year, starting in July, partly because state workers will see their contributions increase, Calpers said this week. “We realize local governments are facing challenging times. But pensions are not the only cause of the budget crisis,” said Ms. Stausboll, the CEO.
Some state pension funds are in far worse shape than Calpers, with funding holes that may prove impossible to fill without a major overhaul.
The average funding ratio of state pension funds was 69% for fiscal year 2010, ending June 30, according to Wilshire Associates, a Santa Monica, Calif.-based investment-consulting firm. That figure is based on the market value of the assets. The current ratio for Calpers is an estimated 70%.
Some of Calpers’s problems are the result of the state expanding retirement benefits at the same time government payroll costs were swelling.
The fund has expected to hit an average annual return rate of 7.75%; it managed 2.9% on average over the past decade thanks to two big stock-market hits during the tech bust and the financial crisis.
Still, Calpers hasn’t curbed investment expectations. In March, the fund defied its own actuary’s recommendation to lower its expected rate of return. Chief Investment Officer Joseph Dear says Calpers has exceeded its expected rate of return over a 20-year period.
Calpers officials say they now see the fund playing a leadership role in the national debate over whether to overhaul public pensions and replace them with 401(k)-style plans popular in the private sector, a change Calpers opposes. In a series of news releases, the fund has rebutted recent studies critical of Calpers and pensions generally.
The fund sends out almost-daily Twitter messages and is organizing groups of retired workers to act as “ambassadors” whose job, a spokesman said, is partly “to dispel some of the common myths around pensions and incorrect information.”
Critics of pension costs say Calpers’s investment gains may undercut efforts to overhaul the retirement system.
“When people see headlines that Calpers has had a great year, it takes some of the pressure off” for change, says David Crane, a former adviser to ex-Gov. Arnold Schwarzenegger. “But life is not getting better for taxpayers, college students, welfare recipients and others who will continue to be squeezed by rising pension costs.”
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