Continuing to claw their way back from the 2008 market crash, California’s two giant public pension funds said Monday they each earned more than 18 percent on their investments in the just-ended fiscal year.
The strong results by CalPERS and CalSTRS, however, don’t erase the two funds’ ongoing financial troubles. Both are “underfunded,” which means they don’t have enough money to cover their long-term obligations, and both are implementing rate hikes that will cost taxpayers billions of dollars in higher pension contributions.
“There’s much, much work to be done,” said Ted Eliopoulos, CalPERS’ interim chief investment officer, in a conference call with reporters. “We’re ever vigilant; we try not to get too excited in good years or bad years about one-year results.”
The California Public Employees’ Retirement System said it earned 18.4 percent in the fiscal year that ended June 30. It was the fourth double-digit return in the past five years for CalPERS.
The California State Teachers’ Retirement System’s profits totaled just under 18.7 percent. “These numbers are extraordinary and very encouraging,” said Sharon Hendricks, chair of the teachers’ pension fund’s investment committee, in a news release.
The gains were substantially higher than each fund’s official investment forecasts of 7.5 percent.
On the surface, CalPERS and CalSTRS have recovered from the crippling multibillion-dollar losses they suffered when the housing bubble burst and the stock market crashed in 2008. CalSTRS’ portfolio, for example, has risen to $189.1 billion in market value, well above the pre-crash watermark of roughly $160 billion. Similarly, the CalPERS portfolio has soared 83 percent since bottoming out at $164 billion in 2009, putting it at $299 billion.
Despite the comeback, the funds spent several years after the crash with a much smaller pool of money to invest. That limited the amount of money they could earn. Even as they made gains, they’ve been unable to keep pace with their pension obligations, which have continued to rise as government workers accumulate years of service.
As a result, CalPERS is 76 percent funded. CalSTRS is 67 percent funded. They have more than enough money to pay pension benefits for now and the foreseeable future, but don’t have enough for the long term. Experts say 100 percent funding is ideal, although a funding level as low as 80 percent is acceptable.
That’s why the two pension funds are raising contribution rates. CalPERS in April approved the first in a series of rate increases to reflect longer life expectancies for retirees. When fully phased in, the increase will mean the state is giving CalPERS about $5 billion a year, up from $3.8 billion. Local governments and school districts will see higher rates, too. School districts use CalPERS for employees other than teachers.
As for CalSTRS, the Legislature last month approved a financial rescue package that will gradually increase contributions by nearly $4 billion a year combined from the school districts, the state and teachers themselves. Until the Legislature acted, CalSTRS officials were warning that the pension system couldn’t invest its way out of its troubles and would run out of cash in another 30 years or so. Unlike CalPERS, the teachers’ system doesn’t have authority to raise rates on its own.
In the latest fiscal year, both funds saw huge gains in equity markets. CalSTRS’ public stocks rose by 24 percent and its private equity returns came to 26 percent. CalPERS’ public stocks increased 24.8 percent and its private equity 20 percent.
CalSTRS’ real estate portfolio rose by 14.5 percent, while CalPERS’ gained 13.4 percent.