Pen­sion fund is fall­ing short of goals

Taxpayers may have to make up dif­fer­ence if CalPERS earns less than ex­pected.

Los Angeles Times - - BUSINESS - By Dean Stark­man

The na­tion’s big­gest public pen­sion fund is fall­ing far short of its an­nual in­vest­ment goals, a set­back for a sys­tem al­ready strain­ing to keep up with loom­ing obli­ga­tions.

The Cal­i­for­nia Public Em­ploy­ees’ Re­tire­ment Sys­tem earned only 3% in the 10 months that ended April 30 and is likely to fall short of its 7.5% an­nual tar­get when the fis­cal year ends Tues­day, the pen­sion gi­ant’s in­vest­ment chief said.

Ab­sent a “re­mark­able rally in the global stock mar­ket,” said Ted Eliopou­los, CalPERS’ chief in­vest­ment of­fi­cer, the ground to make up in two months is too great to avoid a likely short­fall.

“We don’t like to get too ex­cited about any one- year re­turn,” he said. “As the board is well aware, we would like to look at longer time pe­ri­ods as they are much more mean­ing­ful in mea­sur­ing our per­for­mance.”

Eliopou­los’ re­marks came in a state­ment to the CalPERS board last week. A video of the meet­ing was posted on YouTube, but not yet on CalPERS’ web­site. CalPERS posted monthly fi­nan­cial data Thurs­day.

The per­for­mance of CalPERS, with in­vest­ments to­tal­ing $ 304.9 bil­lion at the end of April, is closely watched in the f inan­cial world and has broad im­pli­ca­tions for state taxpayers.

Charged with pay­ing ben­e­fits to 1.7 mil­lion cur­rent and fu­ture re­tirees, CalPERS has the power to com­pel gov­ern­ment em­ploy­ers to make up any short­fall in its fund. The pen­sion plan was 77% funded at the end of last June.

An 80% fund­ing level had

long been con­sid­ered ad­e­quate, but a grow­ing sen­ti­ment is call­ing on public pen­sions to be fully funded. The Amer­i­can Academy of Ac­tu­ar­ies said pen­sions should set long- term goals of 100% fund­ing or greater.

A 10- month f inan­cial re­port posted on the CalPERS web­site Thurs­day showed that the fund’s 3% re­turn was nearly half a per­cent­age point be­low the bench­mark for other large pen­sion funds.

The fund’s global stock port­fo­lio, which rep­re­sents about 54% of the fund, re­turned 3.1% in the pe­riod, slightly be­low a bench­mark that grew 3.4%, ac­cord­ing to the re­port.

The bond port­fo­lio, the other big piece ac­count­ing for nearly 19% of the fund, turned in a strong per­for­mance in a volatile year, re­turn­ing 4.3%, or nearly nine­tenths of a per­cent­age point bet­ter than the bench­mark.

The big un­der­per­form­ing cat­e­gory so far this year has been real as­sets, which ac­count for 10% of the fund, ac­cord­ing to the re­port. The cat­e­gory, dom­i­nated by com­mer­cial real es­tate, gained 3.7%, which was 4.7 per­cent­age points be­low its bench­mark.

Real es­tate re­turned 3.3% in the pe­riod, a time when prop­erty val­ues gen­er­ally were mak­ing strong gains in con­tin­u­ing to re­cover from the 2008 fi­nan­cial cri­sis, and missed the bench­mark by more than 5.6 per­cent­age points.

“I’m dumb­founded to un­der­stand re­turns of 3.3%,” said Craig Le­upold, pres­i­dent of Green Street Ad­vi­sors, a New­port Beach real es­tate re­search firm. “This is in the con­text of a com­mer­cial real es­tate back­ground that has been quite healthy.”

Le­upold said rents and build­ing oc­cu­pancy rates have been ris­ing across prop­erty types, in­clud­ing shop­ping malls, of­fices, apart­ment build­ings and ware­houses. Green Street’s com­mer­cial prop­erty price in­dex is up 12% in the 12 months that ended May 30 and gained 3% in May alone.

Joe DeAnda, a CalPERS spokesman, said re­turn val­u­a­tions of the fund’s pri­vate as­set classes, in­clud­ing real es­tate and pri­vate eq­uity, typ­i­cally lag be­hind other as­sets since they re­quire an­nual ap­praisal by in­vest­ment ad­vi­sors.

The re­turns for both as- set classes are ex­pected to come in much higher, he said, when the full- year num­bers are re­ported in July and re­vised when the sys­tem’s an­nual re­port is pub­lished late this year.

For­est land, a small part of real as­sets, re­turned 3.1%, miss­ing the bench­mark by more than 5 per­cent­age points.

In his re­marks, Eliopou­los noted that the fund’s re­turn last year was 18.4% and that it has been 10.8% an­nu­al­ized over three years, 9.5% over f ive years, 6.7% over 10 years and 8% over 20 years.

Michael Rosen, a prin­ci­pal at An­ge­les In­vest­ment Ad­vi­sors, which coun­sels in­sti­tu­tional in­vestors, said the year- to- date per­for­mance was “not out­side the bounds of what might be rea­son­able.”

But oth­ers said CalPERS’ loom­ing miss adds to con­cerns about whether its re­turn tar­get is re­al­is­tic and whether achiev­ing it would be enough to fore­stall the need for ever- greater con­tri­bu­tions from state and lo­cal gov­ern­ments to meet the sys­tem’s obli­ga­tions.

The sys­tem’s tar­get is a dif­fi­cult one, said Sam Sto­vall, U. S. eq­uity strate­gist for S& P Cap­i­tal IQ. He noted that since 1918, the price of pub­licly traded stocks, which pro­vide higher re­turns his­tor­i­cally than bonds, has risen only 6.5% an­nu­ally by one mea­sure.

Though div­i­dends add to the to­tal re­turn for stocks, he said, “even if you put 100% into stocks, it might be a chal­lenge to meet that 7.5% tar­get.”

David Crane, an ad­vi­sor to for­mer Gov. Arnold Sch­warzeneg­ger and critic of the pen­sion sys­tem, said the fact that the fund re­turned nearly half a per­cent­age point be­low the bench­mark was a “pretty sig­nif­i­cant” miss.

Crane said public pen­sion ac­count­ing rules al­low the sys­tem to dra­mat­i­cally un­der­state li­a­bil­i­ties and mask the size of the re­turns needed from its in­vest­ments. He said that even sig­nif­i­cantly higher re­turns would not be enough for CalPERS to meet its obli­ga­tions with­out fur­ther con­tri­bu­tions from taxpayers.

“Once you fall be­hind, you can never catch up,” he said.

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