As Henry Jones became the new CalPERS president last week, he received a reminder of the risky road ahead. Pension investments lost money last year, and the projected funds needed to pay future pension costs fell.
Chief Executive Officer Marcie Frost told the board investment returns were negative 3.9 percent last year but over the last 10 years averaged 7.9 percent, still above the current earnings target of 7 percent.
The new chief investment officer, Ben Meng, who began work this month, told the board the projected funding level was “around 65 to 66 percent,” down from the previous reported level of around 70 percent.
A decade after losing about $100 billion during the financial crisis and stock crash in 2008, CalPERS funding has not recovered, even though stock indexes tripled during a bull market of record length before dipping last year.
Before the crash, CalPERS had a $260 billion investment fund and was 100 percent funded. Last week the investment fund was at $348 billion. The new funding level of 65 to 66 percent is little better than the low of around 60 percent a decade ago.
Now large economic forces are expected to make investment earnings harder to get. Wilshire consultants estimated two years ago the CalPERS investment portfolio would earn 6.2 percent during the next decade, below the 7 percent earnings target.
CalPERS rates paid by local governments are at an all-time high and growing, pushed up by investment losses, lowering the earnings forecast to 7 percent, longer life spans, and generous pension increases encouraged by a union-dominated CalPERS board.
“The greatest risk to the system continues to be the ability of employers to make their required contributions,” a CalPERS funding and risks report said last November. The report said some employers are “under significant strain.”
Jones, perhaps more than most board members, has mentioned how failing to rebuild the funding level has left CalPERS more vulnerable to a market drop. Experts say falling below 50 percent funded is a red line, making recovery difficult if not impossible.
Henry Jones
In brief remarks after his election by unanimous vote, Jones said “lower future investment returns may weaken our funding status and funding costs to local government” as he listed several CalPERS challenges.
“While these challenges exist, I do not believe they are insurmountable,” Jones said. “The goals outlined in our five-year strategic plan are aimed at addressing these challenges.”
Meng returned to CalPERS after three years as deputy CIO of a large Chinese government agency, the State Administration of Foreign Exchange. Before seven years at CalPERS, he worked for Barclays, Lehman Brothers, and Morgan Stanley.
“Success for CalPERS is really defined by achieving a high rate of return,” Meng told the CalPERS board last week. He listed some of the reasons achieving high returns in the future may be more difficult than in the past.
Meng said there are likely to be growing pains, criticism and setbacks as changes are made. He asked the board to “empower the CEO to enable the CIO” to stay focused on investments and to help persuade stakeholders to stay the course.
“One of you asked me in the CIO selection process how much time I would need to effect all these changes and my answer was five years, and it’s still five years,” Meng said.
Ben Meng
Outcomes are not guaranteed, Meng said, but he believes CalPERS can increase its chance of success.
The election of Jones as president may mean public employee unions are losing some of their grip on the 13-member board of the California Public Employees Retirement System.
Six members are elected by active and retired CalPERS members. The governor has four members (two administration officials and two appointees). The Legislature appoints one member. The state Treasurer and Controller are members by law.
A rare ouster of incumbent board members in two recent elections seems to have shifted the balance of power, at least for board elections. New members Margaret Brown and Jason Perez were opposed by unions but backed by retiree groups.
Two years ago Jones was part of a drive for term limits on top pension board posts that would have prevented Rob Feckner, the president since 2005, from seeking re-election. Though the drive failed, Feckner apparently chose not to run again.
Last year Jones ran for president and was defeated by Priya Mathur, who became the first female CalPERS president. She had the backing of union supporters and won on a 7-to-6 vote.
Jones had his vote and the vote of Brown, who had just unseated incumbent Michael Bilbrey, as well as all four votes from former Gov. Jerry Brown’s administration officials and appointees.
Mathur was unseated last fall by Perez, a Corona police sergeant with support from law enforcement groups and the retirees. The election of Perez may have given Jones the vote he needed to tip the balance and be unanimously elected president by voice vote.
Voter turnout for CalPERS board elections is notoriously low. Only about 4 percent of eligible voters, 16,364 out of about 400,000, gave Perez his victory over Mathur, 57 percent to 43 percent. The Retired Public Employees Association has an experienced campaign organization.
Jones, a retiree and the first African-American CalPERS board president, is up for re-election this year in a seat that represents retirees. A former board member, J.J. Jelincic, a supporter of Brown and Perez, is considering running for the seat.
Whether the rise of the retirees is only factional infighting or may influence CalPERS policy remains to be seen. The CalPERS board faces a decision about launching a new private equity program after two years of research and planning.
Private equity, particularly leveraged buyouts, has been the highest-yielding CalPERS investment. Retiree groups have questioned the cost and public scrutiny of two “private companies” that would be created under the new plan.
Gov. Newsom could make CalPERS board appointments that alter the balance of power. Similar to former Gov. Brown’s extra $6 billion to pay down state worker pension debt, Newsom proposed an extra $5.9 billion to pay down CalPERS and CalSTRS debt.
Unlike Brown, Newsom reportedly told a firefighter group during his campaign last year that he supports the “California Rule,” a series of state court decisions defended by unions that prevents cuts in pensions current workers earn in the future.
The East Bay Times reported that Newsom said this month he is evaluating his legal position on the issue. After oral arguments last month, the state Supreme Court is working on a ruling in a case that could modify the California Rule.
Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at Calpensions.com. Posted 28 Jan 2019
Calpensions 