In June of 2012, Calpers lowered the expected rate of return on its portfolio to 7.5% from 7.75%. Mr. Milligan suggested 7.25%. Calpers had last dropped the rate in 2004, from 8.25%. But even the 7.5% return is fiction. Wall Street would laugh if the matter weren’t so serious.
Consistent with the decision to lower the expected rate of return for its investments, Calpers is reportedly considering making a move to an all “passive” portfolio, which would mean lower risk but also lower returns (and fewer fees for Wall Street). All told, this would be good news. Public pension funds haven’t had a good track record with exotic Wall Street investments over the years.But it would also mean that the cities and state agencies paying into Calpers would have to increase their payments to keep the pension system funded at a reasonable level. As the spate of municipal bankruptcies shows, cities are already hard pressed to make payments at their current levels. That pain is going to increase.As unfortunate as that is, it’s better than praying for the Pension Fairy to come along and use her magic wand to make all the red ink disappear.[Aaron Kohr / Shutterstock.com]