CalPERS reported a 0.61 percent gain in investments in its latest fiscal year, the second straight year of subpar results for the big California pension fund.
After a difficult 12 months in the stock market, the announcement by the California Public Employees’ Retirement System wasn’t a surprise. A few weeks ago, Chief Investment Officer Ted Eliopoulos told The Wall Street Journal that CalPERS essentially broke even for the year ending June 30.
Still, the meager gains are sure to heighten concerns about the $302 billion fund’s long-term sustainability and its impact on taxpayers. In part because of the lingering effects of the 2008 market crash, which wiped out nearly a quarter of its portfolio, CalPERS has imposed significant rate increases on the state, local governments and school districts in recent years. Pension reform advocates frequently cite CalPERS’ investment woes when they argue for lower retirement benefits for public employees.
The latest results come on top of a gain of just 2.4 percent in the previous fiscal year. Both results are well below CalPERS’ official annual target of 7.5 percent.
In previous years when investment gains were low, CalPERS officials have been quick to point out that the fund’s performance was still strong over the long haul. But now, with two straight below-forecast years in the books, CalPERS’ long-term performance has fallen below the 7.5 percent threshold. Its average annual return for the past 20 years, for instance, now stands at 7.03 percent, Eliopoulos said.
Eliopoulos said Monday that CalPERS did well just to earn 0.61 percent, given that its stock portfolio shrank by 3.3 percent. Stocks make up slightly more than half of the CalPERS portfolio.
“In a year of volatility and turbulence in the markets ... I’m proud on behalf of our entire team to report this modest positive return,” Eliopoulos said on a conference call with reporters.
CalPERS has said it expects investment markets to become increasingly uneven in the coming years and has implemented a plan to gradually reduce risks in its investment portfolio. That same plan is also expected to reduce its annual target of investment gains.
“We can expect a low investment return environment ... in the coming years,” newly hired Chief Executive Marcie Frost said last week. “There are challenges ahead of us.”
While CalPERS’ stock holdings lost ground, the pension fund earned 7 percent in real estate and 1.7 percent in private equity – investments in companies that aren’t publicly traded.
CalPERS estimates that it’s 68 percent funded. That means that it has more than enough cash to deal with short-term needs, but has just 68 cents on hand for every $1 in long-term pension obligations.
Besides the impact of the 2008 crash, CalPERS is also wrestling with longer expected retiree lifespans and the growth in public payrolls, all of which have prompted the pension fund to raise contribution rates. This year, for instance, the state’s annual payment to CalPERS jumped by $600 million, to a total of $5.4 billion a year.