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 https://calpensions.com/ Posted 12 Mar 10
Calpensions 
March 12, 2010 at 3:03 pm
“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.”
Well, then he should be fired or forced to resign. Simple enough.
March 12, 2010 at 8:02 pm
Dear Sirs:
You now need to investigate the role of CPA auditors in enabling the financial fiascos. Each of the debacle companies had CPA auditors who assured the public that the financial statements were all just fine.
AIG – PricewaterhouseCoopers LLP
Merrill Lynch – Deloitte & Touche LLP
Lehman Brothers – Ernst & Young LLP
Fannie Mae – Deloitte & Touche LLP
Freddie Mac – PricewaterhouseCoopers LLP
Washington Mutual – Deloitte & Touche LLP
Wachovia – KPMG LLP
Bear Stearns – Deloitte & Touche LLP
Countrywide – KPMG LLP
IndyMac Bank—Ernst & Young LLP
As you may know that the County of San Mateo and the City of Ventura are suing Lehman Brothers officials and CPA auditors Ernst & Young on tens of millions of dollars of losses. CalPers and CalStrs should be doing the same. The CPA firms have very deep pockets.
In addition, you can help reform this industry. Here are essential reforms:
1. Fully fund the Public Company Accounting Oversight Board.
2. Double the SEC enforcement budget.
3. Triple the FBI white collar budget. It was decimated in 2002.
4. Require CPA firms to put all their partners at risk for the misdeeds of the firms. They should not be allowed to be Limited Liability Partnerships. They should all be required to go back to General Partnerships, as they were until the 1990s.
5. Encourage state boards of accountancy to discipline CPA firms. No significant penalties have been imposed on Big 4 for over a decade. For example, California’s Board of Accountancy has 3 investigators for 80,000 CPA licensees.
Let me know what you will do to fix this truly weak link in the chain of financial accountability. See our website http://www.cpawatch.org. Direct all replies to our West Coast Office.
Sincerely,
Carl Olson
Chairman
Fund for Stockowners Rights
P. O. Box 6102
Woodland Hills, CA 91365
818-223-8080
March 13, 2010 at 1:09 am
Cities and counties with “civil service” probably can’t reduce pensions in new contracts. Evidently such employees are “vested” with a right to the highest pension level during employment. In my view,it is inconsistent to let employees have pensions which can’t be funded,because the pensions are so expensive the taxpayors can’t possibly pay for them. It is time for the state to take the position that a “financial emergency” exists because of the high cost of public pensions. During the “state of emergency” all public pensions would be altered to conform to financial reality.Pretend it is like a pension war and contractual claims must be lowered so that society can function. The Ca. Supreme Court would ultimately decide whether a suuficient emergengy exists.
March 13, 2010 at 2:34 am
State & City Budgets are stressed all over the nation with supposed one-time “fixes”. Let me tell you something … this isn’t going to be a one-shot fix. Most States, cities, & towns have a FUNDAMENTAL structural problem which MUST be addressed.
Long ago, Civil Servant “cash” pay was quite a bit less than Private Sector pay in comparable jobs. This justified a better pension & benefit package.
Per the US Gov’t BLS, cash pay alone is now higher in the Public Sector than in the private sector. This justifies AT MOST comparable (but certainly NOT better) pensions & benefits.
More valuable Public Sector pensions comes from multiple sources: (1) higher formula per year of service, (2) basing pensionable compensation on the final 1 year instead of 3 or 5 years of service, (3) including post retirement COLAs, (4) arbitrary end-of-career promotions or excessive raises to “spike” the pensionable compensation, (5) allowing the soon-to-be retired to load up on overtime includable in pensionable compensation, (6) including payouts of unused vacation, unused sick days, uniform, parking, and other miscellaneous “allowances” in pensionable compensation, etc.
In MOST Corporate Pension Plans NONE of the above are included. Why? Because the cost would have to be paid for by the employer, and none of these being really justified, employers are not foolish enough to waste THEIR money this way.
In the Public Sector ALL, of the above are generally included/allowed. Why? Our Politicians aren’t spending THEIR money, their spending YOUR money (via your taxes) while they curry favor for campaign contributions and election support.
Sometimes, Corporate Sector Pension Plan sponsors realize that the plan is no longer affordable, so they reduce cost via formula reductions, increases in the retirement age, etc., for NEW employees and for FUTURE years of service for CURRENT (yes CURRENT) employees. This is ROUTINE in the Private Sector and is allowed by ERISA (the Federal Law that governs Private Sector Plans).
Just as in the Private Sector, CURRENTLY EMPLOYED workers in the Public Sector have already “accrued” pension benefits for PAST service. To this will be added benefits for FUTURE years of service. However, in the Public Sector (and there are variations from State to State) the ability to reduce the pension formula for FUTURE years of service for CURRNT employees is “questionable”.
Of course, the employees and their Unions say it cannot be reduced for anyone already employed (even for those very recently hired). There are many variations, e.g., NJ’s Office of Legislative Service said that cannot be changed only for current employees who already have 5 years of service. In some States, the rules that govern such potential Plan changes are in the State Constitution. In others, in Laws/Regs., and in others via Court Case law.
One important consideration in examining the DIFFICULTY in reducing pension for (FUTURE years of service ONLY) for CURRENT employees is that the legislators, judges, and staff (such as in the NJ example above) that “opine” that such reductions are not allowed are THEMSELVES participants in these same pension Plans and would be negatively impacted by such formula reductions.
Hence, they are hardly disinterested parties, but come with a built-in conflict of interest. These persons should not be making decisions that favor THEM (as beneficiaries of their own decisions) but add to the taxpayers’ burden.
The financial situation across the country is getting more dire, and the ROOT CAUSE must be addressed. Stated another way, we must once and for all, address the STRUCTURAL imbalance between income and expenses.
Way too much focus has been placed on the government entity’s neglect to “fully fund” the Plans. This is certainly true (to varying degrees across the nation). What is often given short-shrift is the “expense” side of the income statement. No one ever says …gee … funding a VERY generous pension plan is VERY expensive, and then moves to the logical next questions, that being, is it too expensive BECAUSE it is too generous and perhaps we such make it less generous.
But what exactly is “too generous”? Well, given that “cash” pay in the Public Sector now exceeds that of the Private Sector in comparable jobs, maybe a Public Pension Plan that is more than MARGINALLY higher is too expensive.
Above, I enumerated 6 items which make Public Sector Plans more expensive. Few people not educated in pending funding understand just how VERY valuable (and hence EXPENSIVE) these differences are. One thing is certain, the Public employee Unions know. That’s why they fight tooth-and-nail to stop changes.
Here is an accurate comparison of the costs of Public vs Private Sector retirement packages (pension plus retiree healthcare, if any) …. The value (i.e., cost to purchase the pension/benefit package) at the time of retirement of the employer-paid (i.e., Taxpayer) share of the typical (non-safety) worker’s retirement package is 2-4 times that of employer-paid share of the comparable (in pay, years of service, and age at retirement) Private Sector worker, and that multiple increases to 4-6 times for safety workers (policemen, firemen, corrections officers, etc.).
I’ll bet you had no idea that this HUGE disparity exists. Given that it does, and given that Public Sector “cash” pay by itself is higher, is it surprising that States, cities, towns are being so squeezed to fund this? Not at all.
So what is the solution? Of course Civil Servants deserve “fair” pay as well as “fair” pensions & benefits, but “fair” should mean COMPARABLE to what their Private Sector Taxpaying counterparts get. Right now, this is anything but true.
The EXPENSE side of the income statement has been neglected far too long. To reach a “structural balance” we need to reduce current pensions (as well as retiree healthcare subsidies) in the Public Sector to a level comparable to that of the Private Sector. A few more progressive States & Cities (or perhaps, those in the greatest financial pain) know they must look at this and are beginning the baby steps.
But the BIG problem is the conflict-of-interest conundrum that reducing pensions for CURRENT employees will (in many cases) reduce there own pensions. So, they ONLY propose plan reductions for NEW employees. To be fair, this may be happening not because they just “cave” on addressing such reduction, but because they really believe it is not possible.
A disinterested party might look a bit harder. Perhaps we need to get opinions from outside this circle, e.g., from university scholars. Or perhaps challenges should be brought in the Federal Court system where the conflicted parties are no longer the decision-makers.
Not addressing the huge cost of future accruals for current employees is wishing-away current financial reality. The dire financial problem is here NOW. Reducing pensions ONLY for NEW employees will have little impact for 20-30 years until they begin to retire. We will never make it. But also, given that most (objective) observers agree that current pensions & benefits are overly generous (compared to Private Sector plans … while appropriately taking into account compensation levels), why should we CONTINUE to layer on MORE excessive pension accruals?
It’s been said that the first step in getting out of a big hole is to STOP DIGGING. Well, every day we allow the current plan to continue, the hole gets deeper.
Somehow we need to find the way to reduce pensions (not for PAST) but for FUTURE years of service for CURRENT employees. That, along with a significant reduction in the retiree healthcare subsidy just MAY save us.
March 20, 2010 at 1:57 am
In response to John Moore’s post…Taxpayers don’t pay for our pensions, we do. In lieu of paying into social security, we pay into CalSTRS. We also surrender any previous monies we paid into SS.
March 20, 2010 at 11:08 pm
RE; Mztreus: I was not referring to teachers. I am only involved with Calpers pensions. Here in Pacific Grove, Calpers has lost 60 million dollars of tax payors money in just 8 years. When Calpers loses the employees share of annual contributions,taxpayors must replenish the losses. Pension losses have stripped Pacific Grove clean of most services and at twice the cost,our police dept. is down by one-third. Calpers is like the lottery,except everytime our number comes up our little city losses 20 million dollars.It is unconscionable and unbelieveable,but our city atty. and city managers take the position that the city is just done-in and nothing can be done.In 1999,Calpers promised it could sustain 3@50,but it has not and does not have the guts to admit that it can’t.
March 25, 2010 at 2:15 am
Re john moore’s assertion that his laundry list of pension abuses is standard and done all over: WRONG. There are certain places where they occur, and they are more common (though not universal by any means) in public safety situations, but the general worker doesn’t get that. As with corporate, only the favored and the top levels (managers+) get it.
State-level PERS retirement does not and cannot include credit for overtime, vacation, or any other benefit – only real salary. The only “bennie” that helps is sick leave – not cashable, but 1/4 of it can be credited as service time (helpful especially for somebody that hasn’t used much – has provide service instead – but hardly enough even in gross cases to make much difference). The Contra Costa problem with vacation etc payments as part of final salary that has gotten so much press was advised against even by their own Counsel because various decisions had said it can’t be done – is that a problem with all govt pensions or with that particular system? The only way a normal state employee can get even as much as their final salary is to have another pension from a different job. So if you want to take issue with how a particular govt agency has run its business (and cities and special districts are fairly notorious about higher than average pay/bennies and lower than average provision for covering them) then go after that one. PERS and state employees for the most part don’t participate in that gold.
You also need to check your facts about govt salaries. You’ll find that the lowest-paid workers in most categories work for retail/service firms and the state (with a few conspicuous exceptions like engineers and some public safety); county and medium-sized private firms a bit higher; next higher (and quite generous in many cases) cities, public utilities, special districts with fee/user charge income, and the higher levels of private firms. Then of course there’s the executive suite – anywhere but the State itself ($140K to run CT???). Miscellaneous State employment is mostly competitive in salary only with basic service organizations in the private realm – the ones where most of the employees get minimum wage or close to it. If you’re going to work for the State, you need to be motivated by something other than the money.
March 25, 2010 at 3:16 am
mrek, you have attributed touch loves “list” to me. My only complaint is that Calpers has cost us our library,teen center,and all child and senior services. Calpers promised it could produce and it failed and apparently is in denial.
May 6, 2010 at 7:56 pm
john moore -I empathize with you. PG is screwed unless something can be done about the CalPERS contract. It’s my understanding that the Mayor recently proposed that a full investigation be launched into the validity of the 2001 contract signed by PG gov’t officials and CalPERS reps – there might have been some wrong doing??? – but she only got 1 other councilor to vote with her. However, maybe the Mayor should revisit her proposal in light of the news announcement today that the CA. AG is suing CalPERS officials for fraud.
May 6, 2010 at 9:06 pm
To Coastal Waters: Re the Pacific Grove increase in public safety pensions from a max of 60% @ 30 yrs. to 90% @ 30 yrs, the fraud practiced on the council to obtain that increase was absolute. There was no position opposite. Concealed from the council was a 10 million dollar deficit at the existing pension level and a misrepresentation of $750,000 per yr(under actual cost) about the cost of the increase.Mayor Cort and the City Atty convinced four other council-members it would be “messy” to set the increase aside. Now Mayor Garcia voted to petition a court to set the increase aside because of the fraud.The present council could do that,if it cared at all.
May 7, 2010 at 12:39 am
john moore – please consult a lawyer and ask him whether what you know might be covered by California’s False Claims Act.
February 25, 2011 at 10:27 pm
This 100 Billion in lost revenue. How long did it take for the stock market to appreciate that much in the first place. If the whole enchilada is based on the stock market, how will changing the pension funding process fix the problem? The problem is not with collecting the funds or with dispersing the funds, the problem is with investing the funds. Everyone’s pension plan lost 20% to 30%.Since then, the stock market has rebounded somewhat. Give it a few more months or years and it will bounce back. There is no need to re-invent the way government functions every time the stock market takes a dive.
September 13, 2011 at 6:40 am
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