CalPERS’ lost decade: From boom to bust

A new CalPERS staff report shows a remarkable reversal of fortune for the giant public employee pension system.

The pension fund had a huge surplus in 2000 during a high-tech driven stock market boom, 138 percent of the funding needed for future obligations. After the stock market crash last fall, the funding level dropped to 66 percent in December.

That’s well below the 80 percent funding level regarded by some as a minimum for pension funds.

The pension system that covers half of all non-federal government workers in California warned last fall that employer contribution rates are likely to go up, beginning in July 2010 for the state and July 2011 for 1,500 local governments.

Meanwhile, the California Public Employees Retirement System plans to adjust its investment policies, making minor changes as soon as June before a regular three-year overhaul of asset allocations next year.

The CalPERS investment portfolio has had an historic drop in value, going from a peak of $250 billion in the fall of 2007 to $167 billion last Tuesday — a loss of about a third.

The staff report to the investment committee this week shows that CalPERS still has a healthy cash flow and does not have to sell off parts of its bleeding investment portfolio to make current pension payments.

CalPERS received $10 billion in contributions from government agencies and their employees last year, while paying $10.84 billion in benefits. The gap was filled with investment income from stock dividends, bonds and real estate totaling $1.89 billion.

A CalPERS senior investment officer, Farouki Majeed, told the committee that investment income, averaging about $5 billion in previous years, was down last year because of a drop in real estate revenue but is expected to bounce back this year.

The investment policy that the CalPERS board is adjusting has not been a top performer.

The CalPERS investment portfolio loss of 27 percent last year ranked near the bottom third, according to a comparison with other public pension systems with more than $10 billion in assets done by a board consultant, Wilshire.

“Real estate and fixed income were two of the big contributors to the underperformance for the year,” Andrew Junkin of Wilshire told the committee.

The CalPERS portfolio ranking is better over a longer period. Wilshire said a loss of 2.32 percent during the last three years ranked in the top third. A gain of 3.22 percent during the last five years ranked in the top 28 percent.

The market storm has driven some CalPERS investments off course from their targets.

Stocks were intended to be 56 percent of the portfolio, but were only about 40 percent by the end of last December. Fixed income such as bonds, expected to be 19 percent, was 23 percent. Cash, allotted zero, was 8.8 percent.

“There are some pretty big differences obviously between you and the average plan,” Michael Schlachter of Wilshire told the committee.

For example, he said, CalPERS has a larger allocation for real estate and private equity and has done away with the “hometown bias” that earmarks part of the portfolio for U.S. stocks, going instead with global equity.

Schlachter touched off a clash with the CalPERS chief actuary, Ron Seeling, when he showed a chart illustrating that most state pension systems have investment plans unlikely to achieve their average goal of an 8 percent annual investment return.

Wilshire told the CalPERS board in December, Schlachter said, that most state and local governments were spending more than their tax revenue. He said increased pension contributions would add to their problems.

“This chart would indicate that apparently the average state plan isn’t exactly going to earn their way back out of this hole because their asset allocation is actually targeting a return south of that 8 percent actuarial growth rate,” he said.

Schlachter said he thinks there is likely to be pressure on pension systems to make riskier investments, with the goal of getting greater returns, or to cut benefits if state and local governments cannot afford to increase pension contributions.

Seeling said CalPERS has recently been criticized for projecting annual earnings of 7.75 percent in the future, while earning only 3.32 percent during the decade ending in December. (See Calpensions post March 9: “Pension funds: A double whammy?”)

“So I’m quite nervous that this graph, this slide could cause further potential misunderstanding,” Seeling said of Schlachter’s chart.

If you look at the 10-year period ending last June 30, instead of the 10-year period ending Dec. 31, the average annual return is 9 percent instead of 3.32 percent, Seeling said.

In addition, he said, Wilshire assumes that the 8 percent annual earnings target is made up of the real return plus 1.5 percent inflation, about half of the average inflation rate during the last decade.

Seeling said if you assume that inflation will average 3 percent, then the real return only has to be 5 percent to reach the target of 8 percent assumed by many pension plans.

“Inflation drives the liabilities — the pay raises, the cost-of-living adjustments for retirees,” Seeling said in an interview. “So all of those things drive multiple moving parts within the system.”

In the same way that President Obama reportedly values advisers with conflicting views, the CalPERS board hires consultants such as Wilshire and Allan Emkin’s Pension Consulting Alliance to give them second and third opinions.

The investment committee chairman, George Diehr, said the CalPERS board plans to meet with the consultants, without CalPERS staff present, on April 20, one of four such meetings held during the year.

The new CalPERS chief investment officer, Joseph Dear, summed up five issues raised during the committee meeting this week for consideration during the next meeting in May:

A specific allocation for cash, allocation target ranges, opportunistic investments during the current market turmoil, high-yield bonds advocated by Wilshire, and the status of hedge fund investments.

During public comment, a retired state worker, Robert Thacker, told the committee that CalPERS risk models missed the high-tech bubble a decade ago and the recent real estate bubble.

“How much more wrong can we afford to be?” said Thacker. “I’m really scared what’s going to happen when your sponsors, the employers, are presented with the increases that they may have to come up with. They are having shortfalls, too.”

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at Posted 20 Mar 09

10 Responses to “CalPERS’ lost decade: From boom to bust”

  1. James McRitchie, Says:


    Please keep up the good reporting. While nothing like the bonuses coming under criticism at AIG and elsewhere, the bonus structure CalPERS uses for internal fund managers could use improvement because it encourages excessive risk. Like the “pay for performance” of many CEOs, bonus pay for portfolio managers is awarded on the basis of points awarded for beating benchmarks but no negative points are awarded for missing the mark. Additionally, bonuses awarded to unrealized gains which turn into losses after they are marked to market are not clawed back, although the results are reduced because of a formula emphasizing long-term gains.

    I testified to the Performance and Compensation Committee on March 16, 2009. Download a slightly revised pdf version, based on additional information obtained in Committee at Staff and Committee members appear receptive to the recommendations.

  2. W.C. Varones Says:


    Good story. But CalPERS is even worse than you imagine. Their huge private equity and real estate portfolios are marked to fantasy.

    As I wrote in July, CalPERS claimed that its private equity and and real estate portfolios were still going up even as everything else was going down.

    When we find out what those horrible real estate and private equity investments are really worth, it’s going to be a disaster.

  3. W.C. Varones Says:


    Good story. But CalPERS is even worse than you imagine. Their huge private equity and real estate portfolios are marked to fantasy.

    As I wrote in July, CalPERS claimed that its private equity and and real estate portfolios were still going up even as everything else was going down.

    When we find out what those horrible real estate and private equity investments are really worth, it’s going to be a disaster.

  4. upthecreek Says:

    Thanks for the update.. california pension systems will kill this sate.. there is No Way the taxpayers can keep these pensions liquid.. I think the time has come to move out of this OVER Taxed State…
    Or we can fire 50% of the state, city, and county Employees.

    Recall them All

  5. Dingo Says:

    Calpers international investments is what did them in with their incessant greed to make profits and putting profits before people. Even though the pensions for retirement are protected by law, Calpers won’t be able to make payments someday. I wish I never worked for The State of California.

  6. nenebird Says:

    What mystifies me is why the State elected to go into Social Security for many agencies in the 1970. Most local and public agencies arent’ in Social Security. The State’s own Corrections dept isn’t in SS. So you have the State paying the additional payroll tax on duplicate system…That 6% payroll cost could come in handy when financially things get dicey like they are now. If Calpers needs higher contributions, I say drop SS and put that money into Pers..No extra cost to taxpayers.

    In times when things aren’t dicey, the State would be saving the payroll tax. I have done some quick calcs and its substantial $690 million a year based on the calcs used for the furlough savings? Not chump change.

    It never made any sense for the taxpayer to foot the bill for two retirement systems, even though SS really was never meant to be a retirement system.

  7. Bob Taylor Says:

    Easy Ed

    Mucho tnx again for tracking this extremely important segment of govt for us retired former public slugs. Finally read all of your posts since you decided to cover this usually ignored area. You are leaving no stones unturned, buddy, and your thorough reporting shines through again. Keep pushing this envelope. Best

    Bob Taylor

  8. Charles Sainte Claire Says:


    The State of California’s employees were forced into SS if hired after the spring of 1961. I wish I had all the money “invested” in SS/

  9. Don't Hate Me Because Working At the DMV Is Beautiful - Hit & Run : Reason Magazine Says:

    […] we get a fund that, like CalPERS (the largest public employee DB fund in the nation), managed to lose between one-quarter and one-half of its portfolio in the year after "Bang" was written. CalPERS' pursuit of big, dumb risks led to […]

  10. FACT check Says:

    The sky is falling, but wait the Calpers value is back at $218.9 billion. Yes ,30 bilion is a still a large gap, but Calpers has made back around 50 billion from the low point in 18 months.

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