Pension Panic
California’s Pensions Expected to Miss Target Returns

More bad news for California’s pensioners and taxpayers: CalPERS’ new portfolio allocation is now expected to deliver returns well below the assumed 7 percent rate. Reuters has the story:

The reduced expectation, disclosed late Monday in documents from the largest U.S. public pension fund, is based on a lower-risk, lower-return asset allocation adopted by CalPERS in September and announced in December.

CalPERS’ caution mirrors outlooks from public pension funds across the United States as they try to grapple with investment forecasts of slow market growth over the next decade.

The new CalPERS allocation reduces the portfolio’s more volatile stock and private equity sectors and increases allocations of more stable investments such as real estate and infrastructure. The board expects to review the allocation again in 2018.

In December, CalPERS staff said the fund’s 10-year expected return was 6.2 percent. They expected annual returns to jump to 7.83 percent in the decades to follow. As a result, the fund’s long-term average would more closely align with CalPERS’s new discount rate, which the board voted in December to lower from 7.5 percent to 7 percent by 2020.

For a state talking about “Calexit” and boasting about the vibrance of its economy and its non-Trumpian politics, the pensions crisis is a highly inconvenient reality. The state’s finances aren’t in as good shape as they appear on paper, its governance isn’t sustainable (you can’t keep giving public sector workers benefits raises ad infinitum), and its leaders don’t seem serious enough to even acknowledge the magnitude of the problem.

California has vibrant industries and a large tax base, but people and companies can move to less costly states. Increasingly, many of them are doing just that—take out immigrants, and California has experienced a net exodus in recent years. The aging population exacerbates the pensions crisis. Fewer working people as a percentage of the population will hurt the tax base and make it even harder to fund pensions.

It’s not impossible to imagine gung-ho California turning around and realizing it needs some assistance from the feds to shore up its finances. Talk of a Calexit would take on a rather different tone against that backdrop.

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