CalPERS Needs Bailout Despite 21% Gain

JULY 19, 2011

By WAYNE LUSVARDI

CalPERS made an anemic 3.41 percent return over the last five years and only 0.98 percent over the last three years, falling far short of the 7.75 percent annual target return it needs to meet pension obligations.

But that is not what you probably have been reading in the mainstream media, which has reported an annual gain of 21 percent this past year up through June 2011, the highest returns for Cal-PERS in a decade.

CalPERS and CalSTRS pension funds are funded at only about 70 percent of liabilities, even after the large gain this past year.  Jack Ehnes, chief executive officer of the CalSTRS, was quoted in the Asian Venture Capital Journal, not the U.S. mainstream media. He said, “Even given this past year’s impressive performance, CalSTRS would need more than a 20 percent return each year for the next four years to achieve full funding in 30 years, an impractical expectation.”  Ehnes added that without legislation to raise contribution rates, the systems will “struggle.”

Were CalPERS and CalSTRS fund managers “geniuses” to get nearly a 21 percent annual return this past year?  Apparently that was not the case.

S&P 500 Did Better

The public stock component of Cal-PERS’ investment portfolio had a 30 percent return, while the Standard & Poor’s 500 Index had about a 31 percent return over the same time interval.  So in public stocks, at least, the CalPERS fund slightly under-performed a plain-vanilla index fund.  Politicians couldn’t help make public union pensioners any windfall profits over investing in index funds invested in a 401(k).

An index fund is a passively managed fund designed to match the performance of the whole market or mix of funds.  So whatever commissions CalPERS paid all its external fund managers to invest in public stocks apparently could have been saved just by passively investing in the S&P 500 Index.

Here’s the reported breakdown of profits in the financial statements of CalPERS and CalSTRS compared with a passive index mutual fund:

Percent

Of Total Fund

Cal-PERS

Percent Return

Cal-STRS

Percent Return

PASSIVE INDEX FUND

Fund Balance as of
June 30, 2011

N/A

$237.5

billion

$154.3

billion

N/A

Gain 2010-2011

N/A

$37 billion

$29 billion

N/A

Est. Underfunding

N/A

$101.8 billion

$66.1 billion

N/A

Private Equity Gains

14

25.3

22.5

22.9 to 27.6

Public Equity Gains

49

30.2

31.9

31.0

Fixed Income Gains (bonds)

20

7

5.4

6.8

Real Estate

10

10.2

17.5

27.6

Inflation investments: commodities, forest land, infrastructure, inflation adjusted bonds

5

13.6

13.6

5.8 to 43.6

Cash

2 percent

N/A

N/A

N/A

Source:http://www.bearseatbulls.com/2010-mutual-fund-performance-review/
http://www.avcj.com/avcj/news/2094886/calpers-calstrs-announce-annual-gains-excess?WT.rss_f=News&WT.rss_a=CalPERSpercent2C+CalSTRS+announce+annual+gains+in+excess+of+20 percent25

Perhaps more importantly, the CalPERS and CalSTRS pension funds would require an additional infusion of about $167 billion to be fully funded, an unrealistic expectation.  And even if $167 billion could miraculously appear, this would do nothing to protect the funds from the volatility of market cycles that occur about two to three years out of every 10 years, and bank panics or long-term structural corrections such as we are now experiencing.

Reporting annual percentage gains is one thing. But what does a 30 percent gain in CalPERS investments in public stocks mean?  It appears to mean that the public has flooded their money into stocks, and out of bonds and real estate, after the bursting of the real estate bubble.  When the bubble in stocks deflates, CalPERS can’t expect to sustain such returns.

After the Bust

The CalPERS fund had roughly $225 billion in September 2008. That was just before Lehman Brothers Holdings Inc. went bust, resulting in a bank panic that wiped out $6 trillion in the value of the stock market in only half a year.  Zillow.com reported that real estate lost an additional $9 trillion since the peak of the real estate market in 2007.  This is 12 times the cost of the Iraq War, which cost $750.8 billion up to September 2010.

CalPERS’ 21 percent gain, though welcome, is not nearly enough to make up for its shortfall during the Great Recession.

 

 

6 comments

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  1. GSL
    GSL 19 July, 2011, 15:24

    We gave our take on this yesterday. We’d echo your points, and re-iterate that the real question isn’t how well the two funds did, but where they stand with regard to their liabilities. Remember, as shaky as they look with respect to their unfunded liabilities, both CalPERS and CalSTRS employ accounting assumptions that allow them to overstate their cash holdings and understate their liabilities.

    Reply this comment
  2. Rex ther Wonder Dog!
    Rex ther Wonder Dog! 20 July, 2011, 09:46

    CalTURDS should be above $350 BILLION today if it had returend JUST the 7.75% ROI it uses for growth, yet it is still $100 BILLION short.

    CalTURDS is at a 48%-60% funded level if you use GASB standards that are used for private sector pension funds.

    If CalTURDS wants to go to Vegas with their members funds for that elusive 7.75% ROI that is fine with me, but as long as they want TAXPAYERS to backstop their losses (while they keep all the gains) then I want legislation stopping it.

    Reply this comment
  3. Rex ther Wonder Dog!
    Rex ther Wonder Dog! 20 July, 2011, 09:47

    BTW-I don’t know if this is happening to anyone else, but when I try to submit my posts the website says the session was “timed out”, and I have to refresh the page to make these submissions post. This has been going on for a week or two now.

    Reply this comment
  4. Wayne Lusvardi
    Wayne Lusvardi 20 July, 2011, 12:47

    One of the problems is that Cal-PERS keeps putting out information releases on fund earnings without stating assumptions – something that if you did in a real estate appraisal or accounting statement would end up with you losing your professional license. Cal-PERS makes their own standards and apparently doesn’t account for the periodic downturns in the market.

    Let’s say they make 7.75% per year gain but in only seven out of ten years — the other three they make, say, 3%. The weighted average of that is 6.3%, which falls short of their target.

    Reply this comment
  5. Wayne Lusvardi
    Wayne Lusvardi 20 July, 2011, 12:47

    One of the problems is that Cal-PERS keeps putting out information releases on fund earnings without stating assumptions – something that if you did in a real estate appraisal or accounting statement would end up with you losing your professional license. Cal-PERS makes their own standards and apparently doesn’t account for the periodic downturns in the market.

    Let’s say they make 7.75% per year gain but in only seven out of ten years — the other three they make, say, 3%. The weighted average of that is 6.3%, which falls short of their target.

    Reply this comment
  6. LetThemEatCake
    LetThemEatCake 21 July, 2011, 08:04

    With 3/50 retirement (or there-about) & no annual benefit ceiling – it’s IMPOSSIBLE for the system to remain SOLVENT.

    Greed eventually destroys the guilty (as well as the innocent).

    Reply this comment

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