Calpers Confronts Cuts to (assumed) Return Rate (from 7.75% to 6%)

Wall Street Journal ^ | March 1, 2010 | Gina Chon

[reaganaut1]

Calpers is considering whether to reduce the projected rate of return used by the giant pension fund to make investment decisions. A cut could force cash-strapped governments in California to pay millions more each year to cover their employee pension obligations.

Since 2003, the California Public Employees' Retirement System has assumed that the value of its stocks, bonds and other holdings would increase by 7.75% a year. But the likelihood of an extended period of modest economic growth world-wide is fueling doubts inside Calpers that the pension fund can continue aiming so high.

No specific alternate targets have been discussed by Calpers officials, but the board has been encouraged to shrink its projected rate of return to as low as 6%.

"It's bruising...but it has to be done," said David Crane, a pension adviser to California Gov. Arnold Schwarzenegger. Facing a projected budget deficit of nearly $20 billion, the Republican favors a lower target at Calpers, according to Mr. Crane. Calpers manages about $200 billion, making it the U.S.'s largest public pension fund.

...

The most common projected rate of return among public pensions in the U.S. is 8%, according to Pew Center on the States, a research unit of Pew Charitable Trusts. But that figure looks daunting following double-digit percentage losses at many pension funds amid the financial crisis.

Even though many pension funds topped their assumed returns over the long term, "whether or not that should be the rate going forward is another question," says Kil Huh, Pew research director.

William Atwood, executive director of the Illinois State Board of Investment, says he is comfortable with the pension fund's assumed 8.5%-a-year return, noting that Illinois has earned about 8.6% a year since 1970.

[reaganaut1]

Related thread: States Sink in ($1 trillion) Benefits Hole . I wonder if even that $1 trillion shortfall number made optimistic return assumptions and is thus understated.

Although the state employee unions will scream, I think there may be a need for a bankruptcy procedure for states where municipal bond holders and pensioners both have their claims reduced. A basic question is whether current voters have the right to impose any level of obligations on future taxpayers. Morally, they do not, even if legally they can. At the Federal level, there will need to be benefit cuts in Social Security and Medicare.

[Neidermeyer]

Calpers should be absorbed by the state to pay their current expenses ,, after all it’s mostly payroll for the gov’t workers funding Calpers.

[dennisw]

I agree. Wall Street/banksters have made trillion floating muni bonds. Sane culprits have made trillions enabling profligate counties, cities and states to borrow for asinine capital projects such as building new schools instead of repairing an old one. Ripping up and re-doing roads that were OK

[bjc]

This is scary, scary news. I assume that many other defined benefit plans may be operating in the same cloud cuckoo land? Between these insane assumptions about rates of return and the continuing above-market rates of pay show on earth will the pension obligations be met?

Caps on pension benefits are essential as are extensions of the period of service and changes to pension formulas. These will only be achieved through some heavy duty renegotiations of agreements coupled with some dramatic shrinkage in the public sector.

What happened in Japan when it went through a similar period of stagnation and low returns? Do they have defined benefit retirement plans or the equivalent?

[cyallen]

Keep in mind that many public employees in California (from state, county, city, and local agencies) contribute 7% to 8% of their salary to CalPERS in lieu of Social Security.

[Neidermeyer]

Too bad for them I’m paying into SS and I’ll never see a penny from it ,, why should they benefit from my bailout dollars? Cali is dead broke because there are too many of them and they’re too greedy... if they want to keep it the gov’t union employees need to back reforms ,, including firing half the gov’t workers, drastic reductions in pensions, cuts in all kinds of taxes and disallowing all benefits to illegals.