Archive for March 12th, 2010

CalPERS & CalSTRS: still down $100 billion

March 12, 2010

The nation’s two biggest public pension funds, CalPERS and CalSTRS, lost a combined $170 billion by the time the stock market hit bottom last March. Since then, they have regained about $70 billion.

Just getting back to where they were two years ago will take another $100 billion, a big hole to fill for retirement systems that have been relying on investment earnings to cover 75 percent of their costs.

A year after the bottom, there is no sign of a major market rebound that will recover most of the losses. Experts who have been predicting a period of slower growth may be right.

The powerful California Public Employees Retirement System has already begun a painful three-year phase in of major cost increases for employers. The California State Teachers Retirement System is planning to ask the Legislature for more money.

Now there also may be more scrutiny of investment practices, not only by pension boards entrusted with securing the retirement of workers but by lawmakers and a public concerned about rising pension costs.

There is room for improvement at both of the big California funds. The latest available reports show that CalPERS and CalSTRS investment earnings were below the median for public pension funds during the last decade.

CalPERS peaked at $260 billion in 2007, dropped to $160 billion last March, and was back up to $205 billion earlier this month. That’s a rebound since the bottom of about 28 percent.

CalSTRS peaked at $180 billion in October 2007, dropped to $112 billion last March, and was back up to $133 billion by the end of last month. That’s a rebound of about 19 percent.

A quarterly Wilshire report shows that the CalPERS fund at the end of December was up 11.8 percent during the previous year, below the median 19.8 percent for public pension funds. Ten-year earnings were 3 percent, below the 3.7 percent median.

A semi-annual Pension Consulting Alliance report shows the CalSTRS fund at the end of last June was down 25 percent during the previous year, below the median loss of 19 percent. Ten-year earnings were 2.6 percent, slightly below the 2.9 percent median.

Though the reporting periods were six months apart, the broad asset allocations of the two funds were similar.

CalPERS: stocks 54 percent, bonds 24 percent, private equity 12 percent, real estate 7 percent, inflation-linked assets 2 percent, and cash 1 percent.

CalSTRS: stocks 54 percent, bonds 22 percent, private equity 12 percent, real estate 11 percent, and cash 1 percent.

Public pension funds nationwide are said to be putting more money into riskier investments to make up for losses, while private-sector companies are reducing risk by shifting more money into bonds, according to a New York Times story this week.

Public pension funds, with a government sponsor and no end in sight, expect to get most of their money from investments. But private-sector pension funds, tied to companies that can go out of business, tend toward less risky investments.

Last year, both of the big California pension funds increased their target allocation for private equity, a riskier type of investment expected to yield a higher return.

There are several types of private equity strategies, including venture capital investments in startup companies. But most private equity investments have been leveraged buyouts, using the assets of the purchased company to finance debt.

A book last year, “The Buyout of America” by Josh Kosman, contended that leveraged buyouts have bankrupted many companies, eliminated thousands of jobs and may result in a new credit crisis.

Private equity firms paid kickbacks in a New York pension fund scandal resulting in a sixth guilty plea this week. New York banned the use of “placement agents,” who collect big fees for helping private equity firms and others get pension fund investments.

CalPERS launched a “special review” last fall after discovering that the firm of a former board member, Al Villalobos, received about $60 million in placement agent fees from private equity firms for helping them get CalPERS investments.

Nonetheless, private equity investments, properly conducted, have strong support. Last year CalPERS boosted its private equity target from 10 to 14 percent of total investments, while CalPERS went from 9 to 12 percent.

In addition to charting investment strategies for the future, pension funds also would like to avoid another major loss. The New York Times story mentions a rare chief investment officer who pulled money from stocks in 2007.

The move is said to have helped limit Boeing pension fund losses to 14 percent, compared to other pension funds that lost 25 to 30 percent in the historic stock market crash.

The issue came up last November when the CalSTRS board, after looking at several competitive bids, renewed its contract with Allan Emkin’s Pension Consulting Alliance.

In response to a question from a board member, Emkin said he regretted not advising the board to pull back from stocks before the crash. He used the metaphor of telling the board a train was coming, but not urging them to get off the tracks.

Chris Ailman, the CalSTRS chief investment officer, said he checked with the investment officers at about 80 state pension funds. He said none were told by their consultants to adjust their investments before the crash.

“I’m right there with you on frustration and anger at losses we suffered last year,” Ailman told the board. “I told you I personally accept part of the responsibility for not having positioned the fund better.”

CalPERS has had a string of well-publicized losses on real estate investments, including nearly $1 billion on the failed Land Source development near Los Angeles. Another loss could result in a rupture with a famous money manager.

Larry Fink, BlackRock chairman, told the CalPERS board last summer that it’s annual earning expectation of 7.75 percent, now being re-evaluated, is too optimistic. “You’ll be lucky to get 6 percent on your portfolio, maybe 5 percent,” Fink reportedly said.

An article in the April issue of Vanity Fair magazine says BlackRock controls or monitors “more than $12 trillion worldwide” and that Fink “may be the most powerful man in the post-bailout economy.“

Now CalPERS is reportedly re-examining its relationship with BlackRock after an apparent $500 million loss on a large New York apartment complex. Fink is quoted as saying he loses sleep over these problems and is embarrassed by them.

“Then his voice drops to a whisper,” said the Vanity Fair article. “’I mean, my mother gets her pension from CalPERS.’”

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at http://calpensions.com/ Posted 12 Mar 10


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