SACRAMENTO, Calif. - The nation's largest public pension fund collected a dismal 1 percent annual return on its investments, a figure far short of projections that will likely bring pressure on California's state and local governments to contribute more money, officials said Monday.
The return reported by the California Public Employees' Retirement System was well below its projected return of 7.5 percent for the fiscal year that ended June 30 and is prompting administrators to consider changes to investment strategies.
The investment returns are critical because taxpayers are on the hook for the difference if the pension funds fail to meet their performance targets.
"The last 12 months were a challenging period for all investors," chief investment officer Joe Dear said about the stock market's performance amid the ongoing European debt crisis and slow global economic growth.
The fund was most impacted by a minus-7 percent return on global equities. Half the pension's assets are in equities, Dear said.
The fund, known as CalPERS, runs a $234 billion pension system for more than 1.6 million state employees, school employees and local government workers.
The preliminary returns reported Monday were even lower than the state's pension fund for teachers, which earned just 1.8 percent from investments over the past year.
Dave Hitchcock, director of state and local government ratings at Standard & Poor's in New York, said the fund's low returns were symptomatic of the entire financial industry.
"We're in an age of lower global returns than what we saw 10 years ago," Hitchcock said.
Local government officials expressed disappointment with the return. They said it should underscore the need for pension reform.
Dwight Stenbakken, deputy executive director of the League of California Cities, said the current system relies too heavily on earnings. When stocks, bonds, real estate and other pension investments don't reach targets, the difference has to be made up by taxpayers.
"We are going to be experiencing this problem for a long time to come," Stenbakken said.
Dear said the CalPERS returns would result in increased contributions from the state, school districts and municipalities, most of which are already financially stressed. It wasn't immediately clear how much contributions would increase.
He said the fund's long-term 7.5 percent target remains realistic but noted that recent returns have been the lowest in a generation. For the past five years, CalPERS earned just 0.1 percent. Over 20 years, it collected 7.73 percent.
"It does imply that we're going to have to employ new strategies in terms of where we invest and how we manage risk if we were to retain that 7.5 return target," Dear said.
California taxpayers are already on the hook for billions of dollars in pension and health care benefits promised to public workers when they retire. The current unfunded liability for CalPERS is around $85 billion and the California State Teachers' Retirement System is short by about $64.5 billion.
State spending on pensions has been on the rise. The latest budget includes $3.5 billion in pension contributions, nearly the amount the state spends to run its court system, from trial courts to the state Supreme Court.