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Largest public pension fund earns dismal 1%

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POSTED July 16, 2012 8:41 p.m.

 

SACRAMENTO  (AP) — The nation's largest public pension fund collected a dismal 1 percent annual return on its investments, a figure far short of projections that will likely bring pressure on California's state and local governments to contribute more money, officials said Monday.

The return reported by the California Public Employees' Retirement System was well below its projected return of 7.5 percent for the fiscal year that ended June 30.

The investment returns are critical because taxpayers are on the hook for the difference if the pension funds fail to meet their performance targets.

"The last 12 months were a challenging period for all investors as the ongoing European debt crisis and slowing global economic growth increased market volatility and reduced equity returns," said chief investment officer Joe Dear. "It's a clear reminder that we must remain focused on performance, risk and internal controls in today's financial environment."

The fund was most impacted by a minus-7 percent return on global equities. Half the pension's assets are in equities, Dear said.

The fund, known as CalPERS, runs a $234 billion pension system for more than 1.6 million state employees, school employees and local government workers.

The preliminary returns reported Monday were even lower than the state's pension fund for teachers, which earned just 1.8 percent from investments over the past year.

Dear said the CalPERS returns would result in increased contributions from the state, school districts and municipalities, most of which are already financially stressed.

He said the fund's long-term 7.5 percent target remains realistic but noted that recent returns have been the lowest in a generation. For the past five years, CalPERS earned just 0.1 percent. Over 20 years, it collected 7.73 percent.

"It does imply that we're going to have to employ new strategies in terms of where we invest and how we manage risk if we were to retain that 7.5 return target," Dear said.

California taxpayers are already on the hook for billions of dollars in pension and health care benefits promised to public workers when they retire. The state said pension contributions accounted for 2.4 percent of state spending in 2006. It's expected to reach 3.9 percent of this year's $91.3 billion budget.

Local governments have seen pension burdens increase even faster.

The problem been evident in Stockton, which filed for Chapter 9 protection on June 28. The Northern California city of nearly 300,000 people became the largest American city ever to declare bankruptcy.

Its unfunded liability for those benefits is $417 million.

San Bernardino, a city of 210,000 people some 60 miles east of Los Angeles, is also contemplating bankruptcy in the face of a $45 million budget shortfall. While city officials blame weak tax revenues and a loss of redevelopment funds, they also cite escalating pension costs as a contributing factor.

So far, Gov. Jerry Brown and Democratic lawmakers have not been able to strike a deal on statewide pension reform. Talks will continue after lawmakers return from a monthlong recess next month.

Brown, a Democrat, issued a comprehensive proposal last fall that focused on raising the retirement age to match Social Security and moving new workers to a hybrid system in which defined benefits are combined with a 401(k)-style plan widely used in the private sector.

Lawmakers said they want to allow workers to retire before age 67 with reduced benefits. They are refusing the governor's call for a defined contribution plan that places some of the risk on employees.

 

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