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September 12, 2014



Dan Borenstein of the SacBee (as reprinted in the Merc) has this painful update for us:

On Monday, Chief Investment Officer Ted Eliopoulos will release CalPERS' investment earnings for the fiscal year that ended June 30. We know roughly what he will say because he foreshadowed it last month.

"We're likely to be flat, which is a nice way of saying zero, more or less," he warned the CalPERS board. Goose eggs. Zilch. No return on investment.

That's bad news for a pension system predicated on assumed long-term average annual returns of 7.5 percent. That's especially bad for taxpayers who must make up the shortfall.

The pension system last reported its shortfall in 2014 at $93 billion, more than four times what it was a decade earlier. Since then there have been two consecutive fiscal years of poor earnings. The debt is more now.

The problem is exacerbated because CalPERS' board is dominated by labor representatives and labor-backed politicians susceptible to worker pressure to keep the investment return forecast high.

The resulting lower up-front contribution leaves more money available for workers' raises. But it adds to the pension system debt.

Yet the political gamesmanship continues at CalPERS, as the board overrides recommendations of its professional staff. In 2011, the board kept its assumed return rate at 7.75 percent, ignoring its actuary's recommendation to lower it. In 2012, the board lowered the rate to 7.5 percent; the actuary had recommended 7.25 percent.

The board is scheduled to next reset the investment return rate assumption in 2018.


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