Stanford Institute Evaluates CalPERS
Two Stanford Institute for Economic Policy Research (SIEPR) studies released in December 2011 and February 2012 paint a sobering picture of the California Public Employees Retirement System (CalPERS). “Actuaries and pension boards make assumptions about future investment returns and pension costs. Unfortunately, they’ve been wrong. They have overestimated investment earnings, underestimated pension costs and retroactively added benefits without proper funding. As a result, pension systems across California have huge unfunded liabilities.”
How significantly CalPERS is underfunded is debated because the future performance of CalPERS investments is unknown. CalPERS provides “defined benefit” pensions * to Piedmont and hundreds of other governments and agencies in California. The extent of CalPERS underfunding depends on the earnings assumption.
The SIEPR study called the 2011 assumption of 7.7% earnings “absurd.” If the historic bond rate return of 4.5% is assumed, then the CalPERS shortfall is $658 billion or $53,000 per California household.
In addition, SIEPR pointed to a separate and additional $118+ billion underfunding of the CalPERS retiree health benefit plans. Piedmont has been enrolled in the CalPERS retiree health benefit plan since January, 1, 1997.
In its December 2007 report to the State and fund participants CalPERS assured, “CalPERS has been a great investor for the taxpayers of California. Over the past 20 years ended June 30, 2007 the CalPERS pension fund earned an averaged 10.2% [annual] rate of return… ” Interestingly, they also bragged, “As a percent of payroll, the State pays less per employee than it did 25 years ago…”
CalPERS assets reached their highest value of $247.7 billion as of June 30, 2007. A 23.4% loss of principle in 2009 reduced the assets to $180.9 billion. As of June 30, 2011 CalPERS assets had recovered to $237.5 billion, still short of its 2007 value. ( If CalPERS investments over the years 2007 –2011 had produced a 7.5% return – the current and lowest return the Board assumed since 2007 — the assets would have increased to $330.77 billion as of June 30, 2011.)
*A defined benefit pension program guarantees a set monthly pension benefit upon retirement. This places all the risk on the public providers of the pensions, leaving them vulnerable to poor investment decisions and the performance of those chosen investments.
