By Ed Mendel
Monday, October 26, 2015

Still underfunded after a $100 billion loss during the recession, CalPERS plans to slowly shift over decades to more conservative and lower-yielding investments, raising employer rates but reducing the risk of another financial bloodbath.

The Brown administration, repeating a request made in August, again urged the CalPERS board last week to promptly begin phasing in a rate increase over the next five years.

“I think we are missing an opportunity and putting off the day of reckoning, and it may come back to bite us,” said board member Richard Gillihan, Brown’s human resources director.

But the majority of the 13-member board, public employee union members and their allies, support the go-slow “risk mitigation” policy expected to be adopted in November or December after more than 1½ years of study.

“There are public agencies (local governments) that don’t have the money to move forward on a policy to reduce our risk right now,” said board member Theresa Taylor, elected by state workers.

In the fall of 2007, CalPERS had investments worth $260 billion and 101 percent of the projected assets need for future pension obligations. By March 2009, the investments had dropped to about $160 billion and the funding level to 61 percent.

Since then the Standard & Poor’s 500 index of big stocks has nearly tripled. But the California Public Employees Retirement System is only about 74 percent funded now with investments totaling $286 billion at the first of the month.

Experts have told CalPERS that in the maturing system, where retirees are beginning to outnumber active workers, some investment funds are needed to pay pensions, reducing earnings.

“It’s been very challenging to dig out of that hole,” Andrew Junkin, a Wilshire consultant, told the board last August.

CalPERS expects investment earnings to provide about two-thirds of the money needed to pay future pensions, with the rest coming mainly from employer contributions and a lesser amount from employees.

Critics say the CalPERS earnings forecast, now 7.5 percent, is too optimistic and overstates the projected funding level, concealing massive debt. The investments needed to support an optimistic earnings forecast have a higher yield because they are riskier.

For example, government bonds yield a certain amount with little risk of an investment loss. Stocks that can produce much bigger yields than bonds are more risky, because they also can yield big losses.

The risk mitigation policy shifts the focus from whether employer-employee rates are high enough to properly fund the system. The new policy seeks more investments that reduce the risk of another big loss and an even harder-to-dig-out-of hole.

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