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Calpers’s Dangerous Rose-Tinted Investment Glasses


The twin bankruptcies of Stockton and San Bernardino have thrust California and its troubled state pension system back into the national spotlight. Since November, Calpers has been fighting tooth and nail to make sure San Bernardino keeps up its pension payments for fear of setting a precedent that troubled cities can use bankruptcy cut back on pension costs. They have had some success (San Bernardino plans to resume its payments this summer), but the pressures on Calpers and California’s cities are likely to grow even worse before they get better.

Writing in the Wall Street Journal, hedge fund manager Andy Kessler explains why: He notes that for years Calpers has banked on amazingly optimistic projections for the rate of return on its investments:

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 /]

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  • Jim Luebke

    How can any pension fund demand 8% for its money when anyone who needs money can go to banks who have money from the Fed for free?

  • Andrew Allison

    The fact that the CalPERS assumptions regarding returns are ridiculous is less significant than the fact that the plans are underfunded and getting more so. The real cat-fight is going to be between bondholders and their insurers, who are not afraid of antagonizing public employee unions, and the pension plans when it becomes clear that there simply isn’t enough money to satisfy both obligations.

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