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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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  • Dale Fayda

    Calexit – wonderful idea! As a CA resident, I’d vote for it. Of course, I won’t be living here long afterward.

    • CaliforniaStark

      EastCalexit will take place at the same time. Northeastern California and much of the Central Valley will break away and become a new state. Since the new state will likely encompass much of California’s agriculture land and water resources, am sure it will run a nice trade surplus with the crazy coastal leftist state, with its dependent, non-income generating masses — including about 1/3 of the present U.S. welfare recipients.

      • Dale Fayda

        Hard to predict how the geographic distribution would shake out at the end, but I’m certainly willing to chance it!

  • seattleoutcast

    Hmmm, well below 7%. Everybody knew that 7% was impossible, except for the gullible, greedy union members. The union leaders could have been honest with its members about the reality of such largess, but they weren’t and its members pretended it was true too, as those close to retirement knew they could scam the younger millennials. Everybody benefited from fantasy accounting.

    Of course, the scapegoat will be those evil corporations.

    • f1b0nacc1

      Actually the scapegoats will be the conservative republicans who (despite having no role of any significance at any level of CA’s government) will have managed to sabotage all the wonderful plans of the Left…

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