By Ed Mendel
Monday, August 1, 2016

Twice in recent decades CalPERS fell below 100 percent of the funding needed for promised pensions, and twice CalPERS climbed back. But since a $100 billion investment loss in 2008, the CalPERS funding level has not recovered.

Now with about 75 percent of the projected assets needed to pay future pensions, CalPERS has had low investment earnings during the last two fiscal years. Experts expect the trend to continue during the next decade.

“We have some challenges to confront in what is, both for ourselves and all institutional investors, moving into a much more challenging low-return environment,” Ted Eliopoulos, CalPERS chief investment officer, told reporters last month.

If the investment fund earnings that are expected to pay two-thirds of future pensions remain low, the annual payments to CalPERS from state and local governments may continue to grow.

So far, the CalPERS board has resisted Gov. Brown’s calls to raise rates even higher, citing the pressure on local government budgets of recent rate increases. The last one, covering longer lives expected for retirees, is still being phased in.

Many employer rates are already at an all-time high. For 80 miscellaneous plans, rates are over 30 percent of pay. For 135 police and firefighter plans, rates are over 40 percent of pay.

“Employers are reporting that these contribution levels are putting significant strain on their budgets and limiting their ability to provide services to the people in their jurisdictions,” the annual CalPERS funding and risk review said last November.

Low earnings also would undermine a new CalPERS “risk mitigation” strategy that over the decades could very gradually, without triggering a major rate increase, reduce the current earnings forecast, 7.5 percent a year, which critics say is too optimistic.

When earnings are 11.5 percent or higher, the strategy switches half of the money above 7.5 percent to investments with lower yields but less risk of loss. The CalPERS board rejected a Brown aide proposal for a five-year phase in of a 6.5 percent forecast.

After the CalPERS board adopted the risk mitigation strategy last November, Brown said in a news release: “This approach will expose the fund to an unacceptable level of risk in the coming years.”

Some CalPERS board members and union officials predicted CalPERS would once again recover when investments plunged from $260 billion in the fall of 2007 to $160 billion in March 2009, dropping the funding level from 101 percent to 61 percent.

But among the differences this time, in addition to the size of the loss, were low interest rates, stagnant or shrinking payrolls, a wave of Baby Boom retirements, and a maturing fund with negative cash flow requiring the sale of investments to pay pensions.

When the funding level remained low after a lengthy bull market in stocks, which are half of the CalPERS fund valued at $302 billion last week, board members began to mention a new threat.

The board has been told by experts that if the funding level drops low enough, perhaps around 40 to 50 percent, pushing rate increases and earnings forecasts high enough to get back to full funding becomes impractical.

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