California’s massive public pension fund has been severely underfunded and mismanaged for decades, but its accountants have managed to conceal the extent of the problem by assuming that the state-run asset manager would secure white-hot seven to eight percent returns over the long run. Independent analysts have estimated that at a more realistic rate of return of five percent, the fund would be over a trillion dollars in the hole. But the latest returns make even that figure sound like a pipe dream. Pensions & Investments reports:
CalPERS on Monday announced a preliminary net return of 0.61% for the fiscal year ended June 30.The latest fiscal-year return, coming on top of 2.4% in the prior year, means CalPERS has not met its expected 7.5% rate of return for the last 20 years, Ted Eliopoulos, chief investment officer, disclosed Monday at a press briefing on the returns.
It is not exactly reassuring that in the face of this acute solvency crisis, CalPERS executives seem to be prioritizing political activism—like demanding that companies they invest in signal their concern about climate change—over what should be their overriding responsibility: maximizing returns for pensioners.
This news highlights once again the critical need for state and local governments to take action to reform their pension systems before it’s too late, and for the federal government to make contingency plans in case the next recession sets off a wave of bankruptcies. It is also a reminder of the fact that ultra low interest rates may be staving off recession today, but only at the cost of making the pension time bomb even more explosive down the line.