The California Public Employee Retirement System (CalPERS) is about to report the world’s largest public employee pension suffered an actuarial investment loss of $30.8 billion last year.
CalPERS manages the defined pension plan investments and record keeping for 3,007 California state and local government entities. The pension plan is also responsible for paying the pension benefits to 611,078 retirees and will eventually be responsible for paying retirement benefits to another 868,713 active and 335,908 inactive government workers.
Despite Governor Jerry Brown last summer demanding CalPERS immediately “lower its investment risk and volatility of returns” by reducing its “assumed” annual investment return from 7.5 percent to 6.5 percent, the CalPERS board voted 7- 3 on November 15, 2015 only to slowly reduce the investment return expectation over the next decade.
A frustrated Brown issued an angry warning:
“I am deeply disappointed that the CalPERS Board reversed course and adopted an irresponsible plan that will only keep the system dependent on unrealistic investment returns. This approach will expose the fund to an unacceptable level of risk in the coming years.”
CalPERS has notoriously minimized the annual pension contribution for its 3,007 government entities by fantasizing that its superior investments expertise will allow its investments to compound every year without loss for the next three decades at an annual rate of 7.5 percent.
To understand just how inflated CalPERS’ assumed investment return really is, the U.S. Pension Benefit Guarantee Corporation estimate for private sector defined-benefit investment returns is only 4 percent.
Had CalPERS’ Board adopted Brown’s proposal to cut their public pension plan investment return assumption to 6.5 percent, the California Legislature have been required to increase the state’s annual pension contribution by 43 percent, from $4.7 billion to $6.7 billion.
For the 12 months ended on June 30, 2016, CalPERS investments lost 2.7 percent, or $8.2 billion. Combining the cash loss with the pension plan’s failure to earn any of the 7.5 percent “assumed” investment return of $22.6 billion, the CalPERS total “actuarial investment loss” was a stunning $30.8 billion.
CalPERS’ disastrous investment performance this year follows a dismal investment return of just 2.4 percent for the prior year ending June 30, 2015. As a result, CalPERS suffered a $15.4 billion actuarial investment loss for the prior year.
Adding the two years’ actuarial loss together, CalPERS’ $293.7 billion fund has suffered a $46.2 billion actuarial investment loss.
Since CalPERS cannot be held liable for its investment performance, the State of California and thousands of counties, cities and government agencies are responsible for making up the 15.7 percent actuarial loss.
Put in everyday terms, California government entities have just lost one out of every six dollars they planned to use to make pension payments.