Why CalPERS and CalSTRS are wise to be cautious

The CalPERS board voted last week to lower its forecast for investment returns and to keep a ban on tobacco investments.
The CalPERS board voted last week to lower its forecast for investment returns and to keep a ban on tobacco investments. The Associated Press

CalPERS, the nation’s biggest public pension fund, must balance its financial needs with the burden it places on state and local governments.

So it was prudent with its decision last week to lower its forecast of profits on its investments from 7.5 percent a year to 7 percent. It is the first reduction in four years, and it is far more realistic.

The move will require higher contributions from government agencies, school districts and some public employees hired after January 2013. But it will be phased in over three years, so the full impact on government agencies will take eight years. By acting now, CalPERS is softening a possibly more painful blow later.

The California Public Employees’ Retirement System has $303 billion in assets, but is still only 68 percent funded to pay benefits to its 1.8 million members. It has been paying out $5 billion more a year in benefits than it’s receiving in contributions and investment returns, not a sustainable trend.

With investment returns averaging 4.6 percent during the past decade, some experts urged CalPERS to reduce its forecast even more. But the board doesn’t want to risk bankrupting any local governments, which wouldn’t be good for anyone.

The decline in returns is so concerning that the staff even suggested ending a 16-year ban on tobacco investments. The CalPERS investment committee wisely decided, for policy and financial reasons, to keep the ban. The public health impact of tobacco hasn’t changed, and it’s not a sure thing that investing in Big Tobacco would be more profitable.

CalPERS says that 62 percent of its income comes from investment profits, 25 percent from government agencies and 13 percent from retirees and employees. To make up for lower investment returns, state government will have to ante up another $2 billion a year, half from the general fund.

School districts will have to pay an additional $500 million a year. California’s cities and counties are still tallying their costs, but they will be substantial. For the city of Sacramento, it means another $6 million a year. The California State Association of Counties says employer rates will increase by 2 to 5 percent to cover public safety workers and 1 to 3 percent for other workers.

The board of the state’s other large public pension fund, CalSTRS, is also wise to be cautious before signing off on a 10-story, $181 million office tower that could open as soon as 2020 next to its existing 20-story headquarters on the West Sacramento riverfront.

Its staff says that the fund will need more offices in about three years and that it could lease some of the space.

But in June 2014, the California State Teachers’ Retirement System received a bailout from the Legislature that is costing the state, school districts and teachers billions a year in additional contributions. Even with the $193 billion in assets, it is only about 69 percent funded for its 868,000 members. (It is sticking with its 7.5 percent investment forecast for now.)

In November, the CalSTRS board agreed to spend $8 million on planning and design, but also directed its staff to look at other options. State Controller Betty Yee, a CalSTRS board member, says it should see what its financial status is in a couple of years before making a final decision on such an expensive project. She’s right.

Both pension funds need to be as careful with their money as they’re forcing their members to be.