PD Editorial: CalPERS is still in a deep hole

Just as a recently completed oversight report underscored challenges facing Sonoma County’s retirement system, the latest financials for the state’s largest public-employee pension fund tell a dismal story.

CalPERS, the California Public Employee Retirement System, just concluded its worst year since 2009 - the height of the financial crisis.

Moreover, with a return on investments of 0.6 percent, the fiscal year ending June 30 was the second lackluster year in a row for CalPERS. And it’s likely that 2016-17 won’t be any better.

Indeed, the chief investment officer warned that this could be the beginning of a protracted period of anemic returns for CalPERS, which oversees retirement benefits for 1.7 million state and local government employees.

“We have some challenges to confront,” the investment officer, Ted Eliopoulos, said during a conference call this week. “We’re moving into a much more challenging, low-return environment.”

CalPERS now is about $100 billion short of meeting its obligations, and its problems can’t be blithely dismissed by saying a one-year snapshot isn’t relevant to the long-term health of the $295 billion pension fund.

By CalPERS’ own accounting, the average return on investments is less than 6 percent over the past 10 and 15 years, and it is 7.08 percent over the past 20 years. That’s less than the 7.5 percent discount rate, the average long-term return assumed by CalPERS in setting mandatory contributions for its member agencies, including all nine cities in Sonoma County.

“That’s a significant policy issue for us,” Eliopoulos said.

CalPERS already has raised rates substantially to cover huge losses after stock markets collapsed eight years ago. Some member agencies pay as much as 50 cents for every payroll dollar to cover retirement costs, leaving few dollars in the budget for public services such as road repairs and expediting applications to build affordable housing.

Weak investment returns could very well mean even higher pension costs for public employers.

As they say on late-night TV, there’s more.

CalPERS is a maturing fund, meaning it is approaching a tipping point when more people will be drawing benefits than are paying into the system. So it would be prudent to reassess its investment strategies to reduce risk, just as individuals are encouraged to take fewer chances as they approach retirement age.

However, less risk is likely to mean smaller returns. Some public pension funds already have reduced their discount rates below 7.5 percent, and some experts expect CalPERS to follow suit, though the issue isn’t scheduled for review until 2018. A lower discount rate would almost certainly mean yet another rate increase for Santa Rosa, Petaluma and other public employers.

Under a pension law enacted four years ago, employers and employees hired since 2012 are supposed to share equally in the projected cost of pension benefits. But employers alone are responsible for any shortfalls, whether they’re the result of poor actuarial calculations or investment losses.

CalPERS was fully funded in 2007. Two years later, after the crash, funding had fallen to about 60 percent of obligations. It’s now about 68 percent, with a shortfall of $2,500 for every man, woman and child in the state. What will happen if there’s another crisis? Then again, it looks like the last one is still with us.