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CalPERS Investment Returns: 1984-2009

Going For Broke: Reforming California’s Public Employee Pension Systems
Howard Bornstein
et al.
Stanford Institute for Economic Policy Research
April 2010

"While above-average returns are available for savvy investors, taking risk, particularly in correlated asset classes, opens up the possibility of large investment shortfalls. Again using CalPERS as an example, as we can observe in Figure 6, the CalPERS portfolio has had returns averaging 7.91 percent over the last 25 years, with a standard deviation of 11.91 percent. As expected, the high standard deviation means that 68 percent of the time, returns range from –4.0 percent to 19.82 percent. Historically, if CalPERS had simply invested in investment-grade corporate bonds, the fund could have earned 7.25 percent, only .66 percent less than it has earned with its highly volatile portfolio.16 This small reduction in earnings would have allowed CalPERS to reduce volatility by a full 7.68 percentage points." (pg.6)

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California pension funds have massively hemorrhaged since the economic downturn of 2008. Indeed, Gov. Schwarzenegger “told reporters last week that the big pension funds could face an estimated $300-billion shortfall in covering the cost of pensions to current and future retirees.” According to the LA Times, this “tremendous drop in the portfolios' value is...

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That's the finding from a study released Monday by Stanford University's public policy program, confirming a recent report with similar, stunning findings from Northwestern University and...

Merrill of the Mercatus Center at GMU states that "what's happened is that states can and do promise to public employees benefits that are unrealistically high given the state's financial forecasts -- in part...

Whoriskey writes that the current market downturn “is ravaging public pension funds across the United States, with many state and local governments seeing more than 20 percent of their retirement pools swept away in the turmoil.” With roughly 60 percent of public pension assets invested in stocks, it’s of little surprise that pension funds are experiencing such...

Edmondson writes, “Portraying government employees as the ‘haves’ and private sector employees as the ‘have-nots’ is a creative, but inaccurate twist on historical reality.  This strategy is a sad new chapter in the painful story of an excruciating economic downturn that has negatively affected every citizen. It is a tactic that pits hardworking people on both...

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Even though the “state issued $10.1 billion in pension obligation bonds in 2003 to reduce unfunded liabilities, the borrowing is a gamble because the state must repay the money with interest over 30 years. To do this without turning to taxpayers, the state will have to earn average annual returns on investments that exceed the 5.05 percent interest rate on the...

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...

The practice is getting more attention amid growing concerns about the sustainability of guaranteed pension payouts for public employees after...

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401(k) plans have behaved so badly that many are now calling for significant reform, or even these plans' outright abolition. Yet before you...

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This CNN article discusses how New Jersey plans to deal with their massive $34 billion dollar pension shortfall—money which goes towards the retirement packages of teachers, firefighters, and cops. “For years, states nationwide have shortchanged the retirement programs that cover teachers, police, and other public employees; now the stock market plunge has wiped...

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"The three lines in each graph show aggregate state pension fund assets under three return scenarios: a 6% return (the dashed line), an 8% return (the solid line) and a 10% return (the dotted line). The top graph shows assets under the assumptions that contributions only fund new liabilities. The middle graph shows assets under the assumption that states contribute...

"As of 2006, around 60 percent of public pension assets were held in domestic or foreign equities and slightly over one-quarter in bonds, with smaller allocations to real estate, cash, alternate investments such as private equity, or other asset classes. (Figure 1) Public sector pensions tend to allocate around 10 percentage points more of their assets to equities...

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"The State of California understates teachers’ pension unfunded liabilities by as much as $101.2 billion. to put this in perspective, California’s total budget was about $89.5 billion for FY2009-2010."

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"The chart ... is taken from Table 5 of the ... study [The Revenue Demands of Public Employee Pension Promises] on page 40 which ranks the states (from highest to lowest) in terms of the size of the necessary tax hike, per year, to achieve solvency of the state’s public pension system. As you can see, New Jersey ranks top in the country at $2,475 while Indiana comes in last at $329."

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"Figure Q plots the distribution of investment return assumptions. As with inflation assumptions, investment return assumptions for many plans have been reduced in recent years. In particular, all investment return assumptions in the Public Fund Survey above 8.5 percent have been reduced. The median and modal assumption remains 8.0 percent."

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Analysis Report White Paper

Introduction
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Abstract:
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Abstract:     
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"State and local employee pension plans, which are primarily defined benefit plans, have
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Introduction:
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"Funding public pension systems represents one of the greatest financial challenges for state and local governments today. About 84 percent of state pension systems are underfunded, with enough assets to cover only 80 percent of their future pension commitments, according to Wilshire Research. The unsustainable growth in pension funding requirements could easily crowd out opportunities...

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"In this study, we consider the case of New Jersey, which operates five defined benefit pension plans for
state employees. ... The New Jersey Senate unanimously passed legislation in February 2010 that would
put a question on the November ballot to constitutionally require the state to begin to make its full
annual payment to the state’s pension system. ... The bill requires the...

"States report that their public-employee pensions are underfunded by a total of $438 billion, but a more accurate accounting demonstrates that they are actually underfunded by over $3 trillion. The accounting methods that states currently use to measure their liabilities assume plans can earn high investment without risk. Should plan assets fall short, as is...

"We calculate the increases in state and local revenues required to achieve full funding of state and local pension systems in the U.S. over the next 30 years. Without policy changes, contributions to these systems would have to immediately increase by a factor of 2.5, reaching 14.2% of the total own-revenue generated by state and local governments (taxes, fees and charges). This represents a...

"California has promised its public employees lavish pensions and retiree health benefits without setting aside nearly enough money to pay for those benefits. As a result, California already admits to a $75.5 billion shortfall in paying for these promises to public employees—$40.5 billion for the teachers’ retirement plan (California State Teachers’ Retirement...

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This brief examines the reasons why some public pension plans are less well funded than others. The authors write that “while state and local pensions as a group are about as well funded as plans in the private sector, significant variation exists. More than 60 percent are adequately funded, but almost 40 percent are not. Low levels of funding means that future...

Video/Podcast/Media

"The interactive map is based on Table 2. Market valued funding ratios and unfunded liabilities on page 42 of An Options Pricing Method for Calculating the Market Price of Public Sector...

Discussants address the pension crises threatening to sink cities and states.

Fox Business News interviews Joshua Rauh of Northwestern University regarding the $3 trillion aggregate shortfall for public pensions. He recommends moving public employess to defined contribution plans and 401k-type plans for new workers, though he does...

"Panelists talked about the possibility of a federal bailout of state pension funds. Among the topics they addressed were recent losses and market value declines as a result of the weak economy, challenges for future sustainability of public pension programs, and potential pension system reform. They also responded to questions from the audience."

Governor Schwarzenegger of California discusses the state's public pension crisis, something he calls the single biggest threat to the state's fiscal health and future. He says that promises were made that cannot be made and that the unfunded liability to California is $500 billion.

Primary Document

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EMPLOYEE-...

"Given the current expected shortfall of Social Security retirement funding, there are considerations to privatize all or some of the Social Security trust fund's 'portfolio.' Although it is often assumed that this is a new idea, the...

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"My dear Mr. Steward:

 

As I am unable to accept your kind invitation to be present on the occasion of the Twentieth...

David Johns comments before the Social Security Subcommittee on the positives and negatives of our British counterpart's public pension policies, and the lessons that we should take from their experiences.

A report established by a committee of chief investment officers (CIO's) by the Association of Public Pension Auditors which outlines the various risks that publicly funded actuaries may encounter, and how to avoid such risks.

"The purpose of this report is to provide updated information on actuarial accrued liabilities as they relate to Other Postemployment Benefits (OPEB) for school districts in Minnesota."

Introduction:
"Mr. Chairman and members of the Subcommittee, I appreciate the opportunity to testify today on Chile's private pension system, especially since it has become the model for countries around the world that have reformed their public pension systems or are considering doing so.

In 1924 Chile was the first country...

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