Cal Public Employee Pension Fund Reports Stunning One Percent Return

Townhall.com ^ | July 18, 2012 | Mike Shedlock

[Kaslin]

The California Public Employees' Retirement System (CalPERS) manages pension and health benefits for more than 1.6 million California public employees, retirees, and their families. Its pension plan assumes 7.5% annual growth.

For fiscal year ending 2012 CalPERS Reports Preliminary Performance of 1 Percent.

How Underfunded is CalPERS?

Bear in mind that CalPERS was massively underfunded before this report. How underfunded?

Good question. Please consider CalPERS Lies About Equity Returns

CalPERS is both corrupt and incompetent.  If it were a private firm, the lies about return on investments would send executives to jail and billions in lawsuits filed.

“The California Public Employees’ Retirement System (CalPERS) is the biggest public pension in the country. It is also deeply underfunded. Depending on the measure used, they have just 55-75% of money needed for future expenses while 80% is considered the minimum to be safe. Their return is currently less than 99% of big pension funds.

On March 12, CalPERS voted to lower their expected return from 7.75% to 7.5%, ignoring the advice of their own chief actuary that it should be 7.25%. More than a few investment professionals consider a projected rate of 7.75% to be unrealistically high in these times and question whether 7.25% is realistic.”

Now we know that CalPERS is in the lowest 1% of all pension funds—what else would you expect from a California government agency?

"What If" Charts at Various Compounded Rates

Let's pretend that CalPERS is 100% funded. Already that is one hell of a pretend job, but assuming so, what will CalPERS underfunding look like at various compound plan performance rates?

CalPERS currently has $233 billion in assets.
CalPERS assumes 7.5% annual growth.

What if CalPERS only returns 5%? or 2.5%?

In the following charts the left scale is in billions of dollars.

The bottom scale is in years.

Base assumption is CalPERS is currently fully funded (which it clearly is not)

CalPERS Assets Compounded at 7.5%, 5.0%, 2.5%



CalPERS Underfunding at 5.0% and 2.5%



I believe annualized returns for the next 10 years will be between 0% and 5% at most. I highly doubt they will be as good as 5%.

With that in mind, let's take a closer look at projections for the next 10 years.

CalPERS 10-Year Asset Growth Projections



CalPERS 10-Year Projected Underfunding at 5.0% and 2.5%



Once again the above charts assume pension plans are fully funded and they ignore effects of drawdowns if exceptionally low returns happen.

Negative Returns for 10 Years?

I have made the case that Negative Annualized Stock Market Returns for the Next 10 Years or Longer are Far More Likely Than You Think.

For follow-up posts please consider

• Anatomy of Bubbles; Negative Returns for a Decade Revisited; Is Gold in a Bubble?
• Another "Lost Decade" Coming Up; Boomer Retirement Headwinds; P/E Expansion and Contraction Demographic Model
• Misty Water-Colored Memories, Dirt-Cheap Stocks, and Patient Opportunism

Assume the Best

Even if you assume negative or near-zero returns are impossible (ignoring Japan for the last 20 years and the S&P 500 since the 2000 peak) clearly low cumulative annual returns over extended periods are possible.

Given boomer demographics, downsizing, student debt suppressing housing, etc., why shouldn't growth be anemic for quite some time?

Given that pension plans are typically heavily invested in bonds, and the current 10-year treasury rate is 1.48%, it is going to be damn difficult (most likely impossible) for pension plans to come close to the annualized projection of 7.5% made by CalPERS and others.

Furthermore, the more risk pension plans take attempting to meet near-impossible goals, the more likely it is that they will blow sky high in taking that risk.

All things considered, especially with pension plan philosophy to be 100% invested in something 100% of the time, I believe pension plans will not avoid the next huge drawdown, with possibly devastating consequences.

However, let's for the moment assume positive annual growth of 2.5% to 5%. Let's further assume plans are not currently underfunded. Finally, let's assume pension plans avoid the next big drawdown.

Even with those optimistic assumptions (wildly optimistic as pertains to CalPERS being currently fully funded), CalPERS still rates to be deep in the hole 10 years from today.

Lesson in Exponential Math

If that still does not shock you, hopefully the following YouTube video on Exponential Math will.



If you are not familiar with exponential functions such as 7.5% annualized growth assumed perpetually by CalPERS, please play the video above. Perhaps you should play it even if you are.

Those in CalPERS counting on 7.5% annual growth are going to instead see clawbacks, reduced rates, or outright default.

[Lurker]

There are only two things for California to do:

1.)Raise taxes on the rich.
2.)Build a high speed rail line from Bakersfield to Eureka.

[Varsity Flight]

“I have made the case that Negative Annualized Stock Market Returns for the Next 10 Years or Longer are Far More Likely Than You Think”

What do you think the Phony-Care is all about? And these so called health “insurance” companies on the receiving end of the Duress Extortion Mandate.

[proxy_user]

I looked at my own account, my 1-year return is 6.45%. I really don’t see how they could be making so little, unless they had big losses on a lot of things.

[green iguana]

A high speed rail line from Bakersfield to Eureka is just stupid.

They need to build two lines so that trains can go both ways at the same time. Nobody only wants to go in one direction.

[RDasher]

"I really don’t see how they could be making so little, unless they had big losses on a lot of things."

It must of been all their investments in "Green Technology".

[bkepley]

their own chief actuary that it should be 7.25%

Sheesh my 401K is up only a little over 4% after 15 years. Do I need to change my investment portfolio?

[Carry_Okie]

2.)Build a high speed rail line from Bakersfield to Eureka.

High speed rail is an exemplar of why the return was so low in the first place. CalPERS is the largest stockholder in Catellus Development (yes, Richard Blum's plaything). As the former Southern Pacific real estate business, Catellus is the largest player in the real estate market in the Western US.

The way it goes is like this: Friends of politicians like ChiFi's husband issue penny stock in companies they control. They make a few well placed phone calls to inform their partners in crime (such as board members at CalPERS or union big shots) to make very specific stock plays. They then propose publicly, some monstrous public works project from which those companies will benefit. They use CalPERS buying power to run up the stock. The players in the stock market all know who will benefit. Up goes the stock. The big shots then dump their shares and let the suckers depending on CalPERS hold the bag.

It doesn't matter if it's high speed rail or that idiotic 70 mile underground water tunnel under a peat bog to divert water south (more on that in a minute). It doesn't matter if the project ever gets built. But I promise you: everything from listing the delta smelt to put farmers out of business, to the routing of high speed rail is all about making money off the power to control people's attention.

This is why the LATimes/Mirror Corp. is the second largest real estate player in California. They got the taxpayers to buy flood control in the Pomona-San Bernadino corridor, they got outsized freeways put in, they pumped the real estate, and when the people fell for it the whole thing collapsed.

By now I'm sure you know the Central Valley was the same game, started FIFTY years ago by Jerry Brown's daddy Governor Pat. The farmers financed the water project, held it under a Williamson Act tax shelter, and when the big shots wanted it, they put them out of business. Oh but they need more water. Hence the tunnel.

etc. CalPERS is nothing more than a scam to use pension money to make money while the taxpayer holds the bag.

[proxy_user]

Could be. My own portfolio is big on oil, electric utilities, and cigarettes. You won’t go wrong investing in those.

[Robert357]

CAL-PERS has a very significant problem, because at some point the state will need to inject a cash payment from the State General fund to make up the difference between the assumed high interest rate of earnings for the funds and the actual rates, which are probably not going to be much better this next year.

The Cal State budget isn't going to allow for this kind of make up payment unless they stop funding crazy things like high speed rail. Ultimately, pension benefits are going to need to be cut by CA for public employees. It should not come as a surprise to anyone.