Monday, November 20, 2011 – 11:00 a.m.

One things for certain.

The sluggish stock market and record low interest rates has been and will continue to be a bad recipe for California government pension funds.

The combination is undoubtedly a formula for under-performance.

Pension funds derive their returns from the investments where they place employer and member contributions.

The primary categories are stocks, bonds, real estate, and in some cases quirky derivative or hedge investments.

Most pension funds, particularly government, must meet benchmark annual returns of between 7 and 9 percent.

In an investment climate such as today that’s not going to happen.

Equity or stock markets are vacillating at best, interest rates have been pressured lower by actions of the U.S. Federal Reserve Bank. And real estate, particularly residential, continues to depreciate.

However, commercial and industrial income-generating properties have provided some level of support recently. But don’t expect it to last.

The aforementioned scenario pressures local and state governments who must guarantee the funding level or solvency of the pension funds in question.

The funding shortfall created by poor investments returns or “unfunded accrued actuarial liability” is steadily increasing over time and must be addressed.

Expect the demand for employees to increase their participation in their own pension plans to increase as the situation worsens.

And it this point it may be justified.

However the bulk of the deficit will still rests on the shoulders of government regardless of how mush government workers pony up.

The financially-strapped condition of the state and its local governments makes the situation grim.