08:41 PM PST on Tuesday, December 15, 2009


For many years the California Public Employees Retirement System, known as CalPERS, had a gilt-edged, well-managed portfolio with a steadily increasing return based on conservative investment principles.

CalPERS had a fine reputation with confidence in its management. Nearly 2 million retired or active government workers shared that confidence and felt their retirement funds would be there for them. In recent years, that confidence has been severely shaken.

In the recent near-depression, net assets in the retirement fund fell from a peak of $260 billion in late 2008 to slightly less than $180 billion at the beginning of this year, a drop of almost 30 percent.

That would never have occurred had CalPERS followed the initial investment policy established when the system began in the early 1930s. Originally the fund was invested in government bonds and was considered actuarially sound. Retirees were guaranteed a defined benefit. Government, at all levels, benefited too because investment of the retirement fund in municipal, school district, state and federal bonds helped keep interest rates low. That also was a boon to taxpayers.

But anxious to take advantage of a rising stock market, four decades ago the state’s voters allowed the fund to invest in stocks and other speculative ventures. It wasn’t just the retirees who anticipated greater benefits. Local governments, which contribute to the plan for their employees’ retirement, believed that a rising stock market would mean that they would contribute less.

That was true while the market soared. When it collapsed, local governments had to make up the difference. They are paying the price today as they must cut budgets for other services but are required to continue paying the guaranteed retirement benefit contracted for by their employees.

Had the system remained as it was created, CalPERS managers could not have made the serious investment mistakes of recent years. When the system was allowed to invest in Wall Street, the managers initially purchased only high value stocks and bonds. In the giddiness of the rising stock market, they diversified, investing in hedge funds and real estate.

Any California resident knows that real estate is risky and subject to wide fluctuations in value. CalPERS watched its holdings plummet with an extremely large loss. Its most notable of several financial disasters is the hole in the ground that it owns in Sacramento. Once touted as the site of the tallest building on the West Coast, the 53-story Sacramento Towers didn’t get off the ground, costing the fund millions of dollars.

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