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California Pension Takes Nosedive

The largest pension fund in the U.S., the California Public Employees Retirement System, also known as Calpers, returned a measly 1 percent on its investments last year. This marks the third time in five years that the pension fund has failed to reach the benchmark 7.5 percent it needs to fulfill pension obligations. The statement by Calpers’s CIO to Bloomberg is a masterpiece of understatement:

“Inevitably, a 1 percent return will be noted by some as significantly below our target return of 7.5 percent and questions will be raised as to whether that 7.5 percent is realistic,” the fund’s chief investment officer, Joseph Dear, said in remarks to reporters. “One percent is below where we would like it to be but it is well within the range of returns for the kind of portfolio we have.”

To be fair, Calpers earned 21 percent in 2011, and 12 percent in 2010. (Then again, it also lost 23 percent in 2009.) But the real problem here is not the returns; the global economy has been at best crab walking since the onset of the financial crisis, and investors the world over are seeing slim or negative returns this year. Rather, the problem is the fact that public funds have banked on unrealistic expectations for return on investment for years. Until it was lowered in March, Calpers’ assumed rate of return was 7.75 percent. This rate is used to calculate how much money the fund will need to cover the benefits and how much employers have to contribute.

When Calpers underperforms, the state of California and local municipalities must find the money from somewhere to make up the difference to pensioners. This means that next year, when California will once again be drowning in red ink, it will see its pension costs rise. It’s a grim reminder that the blue model approach to public finances is built on denial and thus deeply, dangerously unsustainable.

What is also true is that reliance on a high rate of return drives the pension funds toward high risk investments — investments that perhaps not coincidentally result in huge fees for Wall Street. Shoveling the retirement savings of middle class state employes to ethically challenged investment gurus on Wall Street does not strike Via Meadia as appropriate or wise — but then we’re just a simple blog without a lot of fancy financial training.

Worse, the fund’s actuary recommended a lower target, but the fund rejected it — not because the current number is accurate, but because using a more accurate rate of return would place too great a burden on struggling governments! Instead, they will close their eyes, clap their hands, and wait for Tinkerbelle to balance the books.

Perhaps it’s time to occupy the state pensions.

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  • Mogden

    Pension funds should use the risk free rate of return on long dated Treasury bonds, for example. Because we don’t want there to be risk to the taxpayer, right?

  • Alex Scipio

    … and because these managers are lying to themselves. (most likely) and to the public (most definitely), they are forcing additional un-voted, un-representative (by definition) taxes on future generations, they are not in jail because…? …and are not forced to use GAAP because… ?

  • Kenny

    Excellent point by Alex.

    By their self-serving actions, the managers of California’s state pension funds are essentially forcing taxes on us in the future.

  • Eurydice

    Well, to be “fair”, nobody cares about Wall Street ethics when the returns are high.

  • thibaud

    Perhaps it’s time to stop cherry-picking the data to fit a preconceived thesis. Especially silly when you start talking about investment returns.

    Mr Mead’s screeds would have us believe that municipal bonds are the worst possible investment one could make – and yet the Barclays Capital Muni Bond Index outperformed equities over the last ten years.

    As long as we’re discussing short-term results, one could point out that munis were also the best-performing asset class in 2011, but one would never guess that from Mead’s Drudge-like breathless reports of impending calamities for anything related to big gum’mint.

    In truth, though, investment returns for any particular year are next to meaningless. No proper analysis of the efficacy of a fund manager or his/her investment prowess would go out less than 10 years.

    A pity that Via Meadia’s author doesn’t stick to subjects which he actually knows something about.

  • thibaud

    To be clear, the point about the performance of the municipal bond asset class is just one example to illustrate the larger point, that CalPERS’ investment performance, like that of any investment manager, cannot be judged on the basis of one year.

    I know that Via Meadia specializes in “quick takes,” but that doesn’t justify drive-by shootings like this one.

  • Jeffersonian

    So because WRM’s investment acumen isn’t what it ought to be, Calpers is going just swimmingly? No new revenues needed? No benefit cuts foreseen?

    Face it, Calpers’ managers are whistling past the graveyard and no amount of nit-picking of WRM’s posts will change that.

  • John Rogers

    So escalating pension costs aren’t an issue for state and municipal governments in your world, thibaud?

  • Jim.


    So let me get this straight — municipal governments are handing their investors higher returns than equities, even while they’re facing bankruptcy in the medium, and even near-term?

    So why aren’t you out there trumpeting this injustice to the skies? Those greedy investors, those “banksters”, charging helpless governments so much money for their heroic support of the (insupportable) Blue Model!

  • MarkJ

    Question: In the year 2020, what will be the rate of return for Calpers investments?

    Answer: The question is irrelevant: in 2020 there will be no Calpers because everyone will have fled the state by then.

  • masstexodus

    For a sober look at possible returns over the next 7 years check out the (free) 7 year asset class forecasts at

    Everything is mediocre. A blended portfolio is unlikely to to 7.75% as bonds and cash will be a real performance anchor.

  • thibaud

    Of course they’re an issue, a big issue, as everyone involved in invesment management has known for many years now.

    US pension fund managers pay far too much in fees. They don’t usually outperform the relevant indices. Sometimes they’re run by hacks and cronies.

    As I’ve said here, and others have pointed out, we need far better governance than we have now.

    The point is that this is a GOVERNANCE issue, not one of “socialism” vs “capitalism.” Other nations that have far higher degrees of government intervention than we do also have far better governance, and pension management, than we do.

    Mead has it backwards: in this area, we should be learning from the interventionist Canadians, the Dutch and the Swedes, not v-v.


    If I understand the figures correctly, the outcome of the four annual rates of return can be represented as 1.00 * 0.77 * 1.12 * 1.21 * 1.01 = 1.0539. Annualizing that four-year return, one gets an annualized rate of return of 1.32% for a four-year period.

  • jdm

    I’d like to know more about this “Barclays Capital Muni Bond Index” thing. Symbol? ETF? Or mutual fund? I can’t find that the index itself, MUB?, has existed more than 5 years. And if it’s an index, there’s very little work for a “fund manager or his/her investment prowess” other than making sure the components of the index are matched.

  • RocketRik

    The reality, however, is 1% is probably too high. The hedge fund investments of CALPERS are not regulated and use questionable valuation methods to establish Net Asset Value. CALPERS really doesn’t want to know that their hedge fund investments lost money last year, not made 10%. It’s a little like the comment from the fellow who jumped off the Empire State building who said as he passed the 80th floor… so far so good !

  • Mastro

    “wait for Tinkerbelle to balance the books.”

    Hmm- could that be Obama if he wins reelection? No doubt portrayed as a “stimulus”?

  • drhockey13, your math is correct — except for the fact that these mumbers probably don’t include the fees that CalPERS has to pay those who manage the money. Take those off and you probably get down to a gain of near 0% for four years, even while the folks running the fund are still fantasizing about returns that don’t exist. BTW: returns of the kind that CalPERS had projected would have returned $1.3479, sted $1.0539.

  • J. Knight

    I’ve seen the Calpers head on CNBC many times lately pontificating on Wal-Mart, which is probably one of the few investments that has paid off for Calpers this past year. Calpers has been turned into a political organization, constantly punishing organizations not progressive enough to suit them, and filing stupid lawsuits. My hope is that they lose..lose..lose enough money to regain their senses. Oh, hell, I know that’s not possible. They would rather go backrupt.

  • gringojay

    Annually Cal. contributes >$3.9 Billion from the state’s “general fund” to CalPERS. The Cal. deficit is $9.2 Billion. Mr.Meade isn’t doing a drive by smear when said: “a more accurate rate of return would place too great a burden on struggling governments.”

    CalPERS board meeting is planned for some potential vote today, 18 July. Yesterday CalPERS committee discussed dropping fund forecast forecast to 7.5% (from 7.75%). If this is done Cal. state general fund needs to contribute to CalPERS another $167 million a year (with more millions from state’s “general fund”).

    It seems that committee completely shelved the actuarial formula proposal that would best match market realities, wherein CalPERS would use a basis of 7.25% return.
    That 7.25% cipher would have made Cal. state’s general fund pay an additional $425 million a year (with still another $347 million going to CalPers from state “special funds).

  • jeanneb

    I love how they insist all these pension promises are inviolate and can’t be broken.

    What about the promises to taxpayers? Pay your taxes and you’ll get this level of policing, these libraries, well-maintained roads, etc.? Well, I say if you can renege on taxpayers, we can renege on pensions.

  • George

    CALPERS is (was?) used to be pretty aggressive in using its size to influence the behavior of firms it invested in. It would be interesting to try and figure out how much its “socially aware” investment decisions cost it.

  • RHD

    LOL: “Instead, they will close their eyes, clap their hands, and wait for Tinkerbelle to balance the books.”

    Great line, and ridicule is clearly the only way to approach this. Financial accounting for governmental entities in the US — federal, state and municipal — has been a scandal for a long time. Same with CBO ‘scoring’ — the politicos won’t tolerate the use of sensible assumptions about future developments.

    One of the great gifts from the Tea Party movemnent is that many more people now understand the scam. But, evidently, still not enough to force reform. One of these government-rum pension funds will go belly-up soon enough. Perhaps that, along with the growing list of municipal bankrupties, will finally be enough. But don’t count on it — many politicos and bureaucrats have a huge personal investment in keeping the scam going.

  • thibaud

    Jim – as they say, past performance in one period is no guarantee of future performance. Maybe munis will tank this year; I’ve no idea.

    But it’s an enormous asset class – about $3 trillion, if memory serves – and the deterioration of a a dmall portion of that class does not necessarily, by itself, betoken the collapse of the entire asset class. Obviously, there are many other issues here, including funds flows, relative attractiveness vs other “dirty shirts in the laundry pile” per Bill Gross, etc.

    So for Mead to leap in and talk about the sky falling when he doesn’t really understand all the key drivers at work here is, well, not very helpful.

    jdm – Ask and ye shall receive. Every major investment management firm has some kind of report comparing asset class returns over an appropriate horizon.

    To take one example – you can google others (Blackrock, Fidelity, Franklin etc) here’s Invesco’s comparison of performance of eight fixed income classes and one equity class since 2002, nicely laid out in a visually interesting, color-coded grid format:

  • thibaud

    As with most things financial, it gets complicated in a hurry when the would-be analyst takes his finger off the trigger and actually starts do some real analysis.

    One of the big drags on performance for investment funds in recent decades has been the payout structure for private equity and hedge funds. To simplify, the PE and hedge fund managers charge their pension fund clients a portion of profits when they do well, but in many cases do not let the investor in the PE/hedge fund take back (“claw back”) money when the PE/hedge fund manager does poorly.

    This is one of the ways by which the PE/hedge fund managers end up, over time, grabbing the vast majority of the investment returns for themselves – instead of returning them to CalPERS et al. IIUC, the ratio is something like 70% of the total returns over the long haul go to the PE/hedgefunders and only 30% of the returns are left for their pension fund and other big institutional investors.

    So it would appear that one of many ways that our public pension fund system is failing is that it basically funnels huge amounts of money into the pockets of private equity and hedgefund managers, regardless of their OVERALL performance. Heads they win; tails, CalPERS et al lose.

    All the more reason that we need to replace the s0ciALi$$$t! in Chief with a private equity operator who really understands the art of financial engineering.

  • thibaud

    Of course we should criticize piggish public sector unions, political hacks, cronies, less-than-competent fund managers.

    But there are additional culprits here – a big one is the industry that helped the GOP’s Caymans Blocker presidential candidate to angle so many millions into his pockets without actually building much in the way of sustainable economic value for anyone else.

    Perhaps Romney generated fabulous returns for his institutional investors, but the overall record for his industry suggests that this is unlikely. Given the veil of secrecy that he and everyone else in his business drape over their returns, it’s hard to tell.

    Interestingly, a former investment banker from JPM calculates that since 1998 a full 84% of the hedgefund/PE returns were pocketed by their managers.

    “2 and 20”? More like 84 (hedgefunders) and 16 (us/investors).

    ” ‘The Hedge Fund Mirage’ attacks the Wall Street worshippers’ blind adulation. Simon Lack, who spent 23 years at JPMorgan, an investment bank, selecting hedge funds to invest in, grew tired of the free hand that investors all too often gave managers. He has written a provocative book questioning a central tenet of the hedge-fund industry: its performance is always worth paying for.

    “The promise of superior performance is wrong, he says.

    “Of course some investors make a killing, but on average hedge funds have underperformed even risk-free Treasury bills.

    “This is because the bulk of investors’ capital has flooded in over the past ten years, whereas hedge funds performed best when the industry was smaller than it is now. What is more, it is hard to know how hedge funds actually fare, since indices that track industry performance tend to overstate the returns. Funds that do badly or implode are not usually included in the indices at all.

    “Why would any client continue to pay for such mediocre returns? One reason is that hedge-fund managers are incredibly good salesmen. In addition, industry insiders who are all too aware of hedge funds’ shortcomings choose not to expose them, Mr Lack argues.

    “Moreover, the common fee structure, in which hedge-fund managers keep 2% of assets as a “management” fee to cover expenses and 20% of profits generated by performance, has made many managers rich, but not their clients. Mr Lack calculates that hedge-fund managers have kept around 84% of profits generated, with investors only getting 16% since 1998.

    ” ‘Where are the customers’ yachts?’ is the title of one chapter. What is worse, the disastrous dive of equity markets in 2008 may have wiped out all the profits that hedge funds have ever generated for investors….”

  • thibaud

    The 84/16 scam perpetrated by Romney and his confreres is yet one more sword hanging over the Cayman Islands candidate.

    Heads they win, tails we lose.

    Just imagine how much fun Team Obama’s going to have creating TV ads connecting the dots for the swing voters.

  • RS

    Hey, how about investing in mortgages that are about to be unilaterally seized by California cities.

    Got to be a real winner!

  • Jim.


    It seems to me that a life’s work of taking bankrupt companies and shutting down the ineffective, inefficient, and downright broken parts until you only have an effective core remaining is exactly the sort of qualification we need in a president today. With the ever-increasing TEA Party presence in the GOP to keep him honest on deficits, we’re likely to see governance in the US improve markedly, starting at the end of January.

  • Dan Tracy

    “Rather, the problem is the fact that public funds have banked on unrealistic expectations for return on investment for years”

    They justify the 7+% return rate because that is the so-called average return rate for the stock market over the past 20 years.

    Hello? Over the past 20 years I recall their being a dot com and then a housing bubble, so it the 7+% realistic?

    “I love how they insist all these pension promises are inviolate and can’t be broken.”

    And they are burdening future generations with this viewpoint.

  • SamC

    Fact is Calpers is not making its absurd projected returns and consequently will have to hit up the taxpayers or better yet tell the retirees they are getting a hair cut.

    Everything else is “look at this shinny object over here.”

  • An

    CALPERS holdings and returns are public information, which can analyzed. CALPERS problems have nothing little to do with the pension management fees.

    The underlying promises and actuarial calculations are fundamentally wrong. For years “55 and 30” was the rallying cry of the most unionized workers. Through collective bargaining, crafty political contributions, the teachers and state workers of CA received just what they ask for. After age 55 and 30 years of service, teachers in CA received 90% of their last years salary. (Which gave them a pension benefit greater than their salary in the early years). Contributions by employees were on average 7% of their current year salary. The generous benefits has been modified for newer teachers but they still are unsustainable. The crushing pension costs have taken a larger chunk of each years budge for most states and cities.

    Underfunded liabilities for CALPERS is $500 billion. Whether they hit their targeted investments goals of 7% or even 9%, the system is still bankrupt.

    Pensions are legal promises made to the public unions. These were supported and enacted by mainly Democratic politicians, who ostensibly, were suppose to be on the side of the taxpayer at the negotiation table.

  • Rich K

    So after all the TALK I think thibaud is simply trying to tell Mr Mead to,if Im correct: STFU? Bad manners thibaud.

  • boqueronman

    From my occasional visits to this site, one “thibaud” spends an enormous amount of time telling us what an idiot WRM is. Perhaps he’s right, although, having read many of WRM’s books and read thibaud’s comments, I doubt it. It appears what is needed here is for this troll to start his own blog, or, if he has one, to provide us ignorant buffoons with the link.

  • thibaud

    Boque – As I and several others have observed, when Mead speaks on subjects within his sphere of competence – international relations outside of Europe, mainly – he writes knowingly and judiciously. When he prattles about his BSModel, another Mead emerges, one that shoots from the hip without doing even the most basic research.

    Our national debate would be greatly helped by the former tendency. We’ve got far too much of the latter already.

  • thibaud

    Jim. – “It seems to me that a life’s work of taking bankrupt companies and shutting down the ineffective, inefficient, and downright broken parts until you only have an effective core remaining is exactly the sort of qualification we need in a president today.”

    Don’t get suckered by the B-school mythology, Jim. Most of Romney’s returns came from levering up and then paying himself dividends made possible by not improved ROI and profits but that same leverage.

    In other words, Romney’s success is mainly due to his ability to game the tax code and its favorable treatment of debt.

    The Roman Empire fell, it is argued, because of the gap between its rhetoric (self-image) and the political-economic-social reality.

    We have a rhetoric about free enterprise, the heroic entrepreneur, the “agent for capital” and shareholder ROI etc.

    In reality, most of our buccaneers are just gaming the system. Romney is Exhibit A for this tendency. He would be a disaster as president – worse than Hoover.

    Thank goodness he’s so stubbornly, cluelessly incompetent as to make himself almost unelectable, even with every possible headwind at his back.

  • Former FOFer

    As a former analyst at a +20bn fund of hedge funds that invested on behalf of large US institutions like CalPERS, I can tell you with absolute certainty that these pensions, life insurance companies, etc. are getting fleeced. FoFs charge exorbitant fees and never make more than 3%. These institutions would have been better off in T-bills and a NYSE tracking ETF.

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