CalPERS acts to cut earnings forecast, raise rates

A key committee yesterday approved a drop in the often-criticized CalPERS investment earnings forecast, gradually raising record rates already being paid by state and local governments, if approved as expected by the full board today.

The earnings forecast would drop from 7.5 percent to 7 percent, giving the nation’s largest public pension fund one of the most conservative forecasts, possibly setting a nationwide trend in the view of some.

But the painful and costly drop in the forecast used to “discount” or offset future pension obligations is still well above the 6.2 percent earnings forecast expected by CalPERS consultants during the next decade, which drove the action to drop the forecast.

Acting this month, rather than in February as some expected, seemed to reflect a general agreement and sense of urgency among employers and employees. As of last June, the CalPERS funding level fell to 68 percent of the projected assets needed to pay future pensions.

“It’s a little bit of pain for everyone,” said CalPERS President Rob Feckner, noting that five groups had come together on the action: labor, employers, the Brown administration, CalPERS staff, and the CalPERS board.

The committee approved a plan that would lower the earnings forecast or discount rate over three years, beginning with the state next year. Schools were split from the state and would begin in 2018 along with local governments.

The rate increase from a lower discount rate is phased in over five years. Some employee rates will go up, particularly for those hired after a pension reform in 2013 requiring them to pay half the “normal” cost, excluding debt from previous years.

When fully phased in the lower discount rate will cost the state an additional $2 billion, Eric Stern of Brown’s Finance department told the committee, half from the general fund that contributes $5.4 billion to CalPERS this year and the other half from special funds.

The rate increase comes in the middle of the usual four-year cycle for setting a discount rate. Wilshire and other consultants think that for several reasons global economic conditions have deteriorated since the current discount rate was reaffirmed at 7.5 percent two years ago.

Another sign of how seriously CalPERS regards the market change was the announcement Monday that, in a closed September session, the asset allocation of the $303 billion portfolio had been changed to reduce growth investments and the risk of losses.

Global equity investments were reduced from 51 percent to 46 percent of the portfolio, private equity dropped from 10 percent to 8 percent. Inflation assets increased from 6 to 9 percent, cash from 1 percent to 4 percent, and real estate from 12 to 13 percent.

Ted Eliopoulos, CalPERS chief investment officer, said the announcement was delayed to allow time for CalPERS to make some of the fund transfers. CalPERS investment changes often are not announced until later to avoid moving the markets.

At the Finance committee yesterday, board member J.J. Jelincic said the new asset allocation dropped the earnings forecast to 6.25 percent. His motion to drop the discount rate to 6.25 percent died without a second.

Staff told the committee that Jelincic’s assumption that the new allocation is expected to yield 6.25 percent is correct for the next decade. But the 7 percent discount rate is supported by the long-term yield over three decades.

At the Investment committee on Monday, Jelincic said CalPERS members need to know what’s being done with their money. His request for the public release of part of the transcript of the closed session, along with the agenda item, was referred to legal counsel.


Part of the urgency for action is that the underfunded California Public Employees Retirement System is unusually vulnerable to a major investment loss, unlike 2007 when it went into the deep recession and stock market crash with a funding level of 101 percent.

Two years ago, when the current 7.5 percent discount rate was reaffirmed, the funding level was estimated to be 77 percent, up from a low of 61 percent in 2009 after the CalPERS investment fund dropped from about $260 billion to $160 billion.

But since 2014, the economic outlook has declined and CalPERS investment earnings were well below the 7.5 percent target (0.6 percent last fiscal year and 2.4 percent the previous year), dropping the funding level to 68 percent as of June 30 this year.

“In all the data that (staff and consultants) have presented to us and that I’ve read, you drop to a level of 50 percent and it’s a point of no return as we know a pension system today,” board member Henry Jones said. “You may return, but it won’t be the same.”

Some think raising rates and the discount rate high enough to project 100 percent funding would become impractical. CalPERS is a mature system with the number of retirees soon expected to outnumber active workers.

Investment funds must be sold to pay pensions now, about $5 billion this year to add to $14 billion from employer-employee contributions to pay $19 billion for the pensions of the retirees. Reducing this growing “negative cash flow” is one of the reasons for raising rates.

Critics contend that an overly optimistic discount rate hides massive national state and local government pension debt. They argue that a risk-free discount rate should be used to aid “intergenerational equity” and reduce debt passed to future generations.

But the cost of using a risk-free rate to discount risk-free pension debt, following a basic finance principle, also would be massive. The yield on a 20-year Treasury bond early this month was about 3 percent.

Since the recession, CalPERS employer rates have increased roughly 50 percent. The discount rate was dropped from 7.75 to 7.5 percent in 2012. An actuarial method that no longer annually refinances debt was adopted in 2013.

The rate increase from a longer average life expectancy for retirees adopted in 2014 is still being phased in over a five-year period.

Some board members, perhaps referring to advance coverage of their meeting in the national media, said that a widely watched lowering of the discount rate by CalPERS would set a good example for other public pension funds.

“The recommendation before us gives us a chance to be a leader in the nation in responsible pension funding, and I think from a reputational perspective that is something it’s time for this system to take the lead on,” said board member Richard Gilliahan, Brown’s Human Resources director.

Board members also expect criticism that the discount rate was not dropped far enough. But state Controller Betty Yee and other board members said they will continue to work on the issue during the process leading to the scheduled rate review in 2018.

“This is all about the long-term sustainability of the fund,” said Richard Costigan, the Finance committee chair. “We are going to continue to have a robust discussion. This is just the start.”

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 21 Dec 16

14 Responses to “CalPERS acts to cut earnings forecast, raise rates”

  1. Tough Love Says:

    Lowering the pension liability discount rate STILL avoids addressing the ROOT CAUSE of the PUBLIC Sector pension mess in CA (and just about everywhere else) ….. grossly excessive pension (AND benefit) “generosity”.

    The often cited “lack of full annual funding” as the CAUSE of this mess misses the mark, ignoring that the annual contribution necessary to achieve and maintain full funding moved in lock step with the “generosity” of the Plan, and a VERY generous Plan will be VERY costly, and hence VERY difficult to fully fund.

    The “lack of full funding” is not the CAUSE of the problem, but a CONSEQUENCE of the true root cause …. grossly excessive pension (AND benefit) generosity.

  2. john moore Says:

    If CaLPERS had done a decent job, annual costs for Agency’s would be about 15% and there would be no pension debt. To describe it as having even a teeny bit of credibility, is biased. It has destroyed democracy in Ca.

  3. rockyrambone Says:

    No matter how they reallocate their investments, you know it will dramatically underperform a simple low-cost total stock market index fund. Why don’t they fire all these expensive investment advisors and go with an index fund?

  4. CalPERSon Says:

    Got to keep raising employee contribution rates. As the rates go up it encourages the older pre-PEPRA workers to retire earlier (if you’re contributing 15%, there’s no point working past the 85% benefit level as you are effectively working for free). As these older workers retire they can be replaced with younger workers who will be under PEPRA. They will contribute longer, work longer and have a lower benefit (but still a very good one).

    CalPERS is laying the groundwork to be sustainable many years from now. It’s a question of whether they can weather the storms between now and then.

  5. Tough Love Says:

    Quoting CalPERSon ……

    “Got to keep raising employee contribution rates.”

    Yes, but a GREAT deal more than you think.

    Because with near equal Public/PRIVATE Sector “cash pay”, there is ZERO (yes ZERO) justification for ANY greater Taxpayer contribution toward Public Sector pensions than what Taxpayers typically that get from their employers (rarely more than 3% of pay into a 401K Plan), Public Sector employee contributions should be raise to cover the ENTIRE COST of their pensions (using reasonably conservative assumptions, not the VERY rosy ones currently used by gov’t entities) less the share of such pension promises that can be bought with 3% of pay.

    And with CURRENT Public Sector pensions now so grossly excessive, most non-safety workers would need to contribute 25% to 35% of pay, and most Safety workers from 40% to 50% of pay.

  6. S Moderation Douglas Says:

    The very same person you continually quote saying state workers in California have a twenty three percent compensation advantage, in the very same study, says that California state workers (as well as average state workers nationwide) earn twelve percent less “cash pay” than equivalent private sector workers.

    Twelve percent less (thirty seven percent less at the professional level) is not “near equal Public/PRIVATE Sector “cash pay”. Not even close.

  7. Tough Love Says:

    SMD …Oh my, how did I …almost .. let you get away with trying to mislead/hoodwink the readers AGAIN ?

    Above, where I pointed out the 23%-of-pay Public Sector Total Compensation ADVANTAGE, you responded by pointing out that the same study points to a 12% Public “cash pay” DISADVANTAGE ….clearly being put forth in a way that suggests that the latter offsets the former.

    Hogwash ….. and you VERY CLEARLY know it ….. because with Total Compensation = “cash pay” + pensions + benefits, the 23% Public Sector Total Compensation advantage ALREADY factors into that 23% the impact of the 12% lower Public Sector “cash pay”.

    And lets not forget that the 23% Public Sector Total Compensation ADVANTAGE was calculated excluding all Public Sector Safety workers (Police, Fire, Corrections, etc.) and with they having the highest pay and (BY FAR) the most egregious pension & benefits, had they been INCLUDED, that 23%-of-pay advantage would have been materially greater.

    Oh, and as the author of that study (Andrew Biggs) concludes …. if we properly factor in the financial value of the FAR GREATER Public Sector job security, we need to add an ADDITIONAL 10% of pay Public Sector advantage.

  8. spension Says:

    I actually agree with Tough Love’s first post… California Pensions got way too high… the States of Washington, Wisconsin, South Dakota, and North Carolina are doing just fine.

    Tough Love keeps his head in the sand as to how the private sector decimated its own pension plans, largely because executives siphoned off the pension funds due lots of clever accounting tricks, as documented by a Pulitzer Prize winning Wall Street Journal Reporter, .

    And Tough Love also keeps his head in the sand on all the instances in the private sector where public tax dollars are siphoned off for pensions that exceed public pensions by factors of 100 to 1000… heath care and defense are two prominent places.

    Let’s have a simple rule: if any business takes any contract involving public money, or a single tax deduction or credit, no pensionable pay above the Social Security Wage Base ($118,500) allowed in that company. If a company wants higher pension base, they don’t have to take a dime in public funds or one nickel in tax deductions or credits. They always are free to do that.

  9. Tough Love Says:

    Quoting spension …….

    “Tough Love keeps his head in the sand as to how the private sector decimated its own pension plans, largely because executives siphoned off the pension funds due lots of clever accounting tricks…”

    Still with the same tired/old irrelevant attempt to dismiss the gross misdeeds/collusion of the PUBLIC Sector Unions/workers/Politicians. Your mother should have taught you that 2 wrongs do not make 1 right and that a 2-nd-identified wrong does NOT dismiss/offset the 1-st one.

    I have been LONG-convinced that you or a family member are now (or will be) benefiting from a PUBLIC Sector pension. Your attempts to divert attention away from the need to immediately address (i.e., REDUCE) the grossly excessive Public Sector pensions (digging the financial hole we are in deeper EVERY DAY) is so obvious.

  10. Tough Love Says:


    I thought you dropped off the radar in shame after your 10/24 comment with outright lies.

    Lest you think that I have forgotten ………

    “Quoting spension in a comment to Tough Love and time-stamped October 31, 2016 at 9:02 in this link …..

    “As you’ve said many times, the executives deserve to lift every dollar of their worker’s pension funds if they want, because, well capitalism.”

    I repeat …….. SHOW the readers exactly where I stated that.

    You are a liar …. and quite a desperate one at that.”

    FYI … I will not post this again AFTER you very clearly acknowledge that the above statement was false AND that you “lied” by making it.

  11. S Moderation Douglas Says:

    Excusez-moi, Monsieur ou Madame,

    You stated, again, that Public/PRIVATE Sector “cash pay” is near equal.

    I point out, again, that Biggs says California state workers earn twelve percent less cash wages.
    Tough Love:
    “Above, where I pointed out the 23%-of-pay Public Sector Total Compensation ADVANTAGE…”


    That’s not just reading comprehension problems, Love. That’s overactive imagination. You said no such thing “above”.

    “….near equal Public/PRIVATE Sector “cash pay”, …” Is untrue, no matter how many times you repeat it. Twelve percent less in California (as well as average state workers nationwide) thirty seven percent less at the professional level)

    Happy New Year

    In Moderation

  12. Tough Love Says:


    Interestingly, after I submitted that comment, I too noticed that the comments in THIS particular blog-article didn’t mention the 23%-of-pay Public Sector “Total Compensation” ADVANTAGE that Public Sector workers have in both CA and NJ. That statement has been included in so many of our back and forth commentary that I took for granted that it was mentioned in earlier comments here as well. I would bet that most calpensions readers are regulars and knew exactly what I was referring to (notwithstanding you attempt to play dumb). But for the benefit of readers that may not be aware of that study result, it can be found in Figure 6 at the following link:

    Click to access -biggs-overpaid-or-underpaid-a-statebystate-ranking-of-public-employee-compensation_112536583046.pdf

    Now back to the heart of my comment that you did NOT respond too … assuredly because my “conclusion” was 100% accurate and you have no response …

    I stated…
    Above, where I pointed out the 23%-of-pay Public Sector Total Compensation ADVANTAGE, you responded by pointing out that the same study points to a 12% Public “cash pay” DISADVANTAGE ….clearly being put forth in a way that suggests that the latter offsets the former.

    Hogwash ….. and you VERY CLEARLY know it ….. because with Total Compensation = “cash pay” + pensions + benefits, the 23% Public Sector Total Compensation advantage ALREADY factors into that 23% the impact of the 12% lower Public Sector “cash pay”.
    You see, the 23% Public Sector “Total Compensation” ADVANTAGE is NET (yes NET) of the reported 12% lower Public Sector “cash pay”

    Go ahead SMD. Try to wriggle you why out of it. Because you know you couldn’t, you reverted to your standard tactic …. divert the reader’s attention …. in this case by reverting back to the “cash pay” comparison.

    Go ahead SMD, we’ll give you another chance to address that 23%-of-pay Public Sector “total Compensation” advantage in both CA and NJ, and noting that ……….

    (a) that 23% advantage rises to 33% in CA and 34% in NJ when the value of the far greater Public Sector job security is included (per Figure 13 in the study linked above),
    (b) had that study included Police/Fire Public Sector Safety workers (with FAR higher pay, pensions, and benefits than other Public Sector workers) the 23% and 33%-34% study-indicated Public Sector advantages would have been notably higher.

  13. S Moderation Douglas Says:

    I have acknowledged both the 12% pay disadvantage and the 23% total compensation advantage for state employees since the paper came out in 2014. In fact, if you will recall, I am the person who brought this study to your attention.

    It is the first sentence in my response. My objection to your post is that you seem to acknowledge the 23% but NOT the 12%.

    Tough Love: “Because with near equal Public/PRIVATE Sector “cash pay”, there is ZERO (yes ZERO) justification….. yadda, yadda, yadda” And you have been doing this continually since 2014.

    Why don’t you ask the moderator to chime in?

    Quoting Tough Love:

    “I’m sure many of your readers don’t know whom to believe ……. you owe it to them to respond, given your expertise and experience.”

    (Burypensions, April 16, 2016 )

    How has that worked out for you?

  14. Tough Love Says:

    Quoting SMD …

    “I have acknowledged both the 12% pay disadvantage and the 23% total compensation advantage for state employees since the paper came out in 2014.”

    Yes you have …. but only when I won’t let you get away with ONLY pointing to the lower Public Sector “cash pay” … as you did above and many many many other times … due to bias ? attempt to mislead ? I think so.

    Sorry ….. we know you are a self-interested Public Sector CA retiree. Your latest gig seems to be supporting a cap on retiree pension payouts (if necessary) as long as that cap is above YOUR pension payout. Oh how nice of you.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: