Capitol Alert

Dan Walters: CalPERS may be reforming

Paved streets, lamp posts and street and traffic signs wait for new homes at the CalPERS-owned Questa Village subdivision in the town of Mountain House west of Tracy off Highway 205. Carved out of pastureland a few years ago, the peaceful commuter town of Mountain House has become a major challenge for its lead landowner: CalPERS. The pension fund’s investment has lost $926 million of its original $1.2 billion value on paper, making it one of the single largest disasters in CalPERS’ troubled real estate portfolio.
Paved streets, lamp posts and street and traffic signs wait for new homes at the CalPERS-owned Questa Village subdivision in the town of Mountain House west of Tracy off Highway 205. Carved out of pastureland a few years ago, the peaceful commuter town of Mountain House has become a major challenge for its lead landowner: CalPERS. The pension fund’s investment has lost $926 million of its original $1.2 billion value on paper, making it one of the single largest disasters in CalPERS’ troubled real estate portfolio. mcrisostomo@sacbee.com

Sixteen years after it abetted one of the most irresponsible political acts in state history – a massive increase in public pension benefits – the California Public Employees’ Retirement System may finally be reforming.

In 1999, CalPERS told the Legislature that the benefit increase state worker unions were seeking could be financed from investment earnings with no effect on taxpayers.

Much later, it was revealed that CalPERS’ actuaries had provided several scenarios, but its union-dominated board adopted the most optimistic, giving the Legislature and then-Gov. Gray Davis the justification (and political cover) they wanted to boost benefits.

Most local governments followed suit and, for a while, it all seemed to work. But when the Great Recession struck less than a decade later, CalPERS suffered immense losses because of the high-risk investments it had made to meet its optimistic earnings projections.

In recent years, CalPERS ramped up mandatory contributions from state and local governments to cover its losses, and then again to deal with the demographic reality that as baby boomers retire in droves, payouts will increase sharply.

Meanwhile, prospects for hitting the fund’s investment earnings target have declined, leaving it with a substantial unfunded liability, roughly 25 percent of its obligations.

Ever-higher demands from CalPERS are not a huge issue for the state budget, because it spends relatively little on workers’ salaries. But they are a big burden for local governments, particularly cities, because so much of their spending is on workers’ pay, particularly for police and firefighters who enjoy high salaries and extraordinarily generous pensions.

Pension obligations contributed heavily to the bankruptcies of three California cities, but CalPERS resisted efforts to modify them during bankruptcy proceedings.

Lowering the fund’s earnings target, currently 7.5 percent a year, is long overdue, but reducing it would increase its unfunded liabilities, and force it to demand even more tax money.

Gov. Jerry Brown’s representative on the board pushed for a more aggressive reduction, but others on the board were not ready to fully bite the bullet, fearing a backlash from its member agencies as their pension costs rose even more.

Instead, CalPERS is adopting a more conservative investment strategy that would make it less vulnerable in an economic downturn, and plans to gradually lower its earnings target, technically called the “discount rate,” by as much as a full percentage point.

“We’re looking to smooth out (risk) and not take as great a hit,” CalPERS official Cheryl Eason told reporters in a conference call last week.

The pension fund is finally – very belatedly and very indirectly – acknowledging that what it told the Legislature in 1999 was baloney.

One way or the other, taxpayers will pay for it as more money goes to pensions and less is available for other governmental services.

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