CalPERS: Conservative When Gambling With Their Own Money

Many people have questioned the 7.75% annual return on investment assumed by CalPERS. Though it sounds like a policy-wonk concern with little relevance to average Californians, this assumption actually affects us all profoundly. If you're worried about what municipal and/or state bankruptcy might mean for your taxes and job prospects, then you need to wonder whether this huge public-worker pension fund is solvent or not. Which is where the 7.75% comes in; when figuring out whether or not it can pay all the benefits that retirees in the state have been promised, it has to make an assumption about what its assets will be worth in future years. In the past ten years, of course, CalPERS has only gotten a return of about 4.5%, and private pensions are required to assume a more conservative 5%-6% rate of return. So is CalPERS just so awesome at making investments that it can safely assume above-market returns into the future? Well, no; CalPERS is so big that it can't really beat the market. In the view of skeptics like us, CalPERS assumes better than-average returns because more realistic accounting would make it appear badly underfunded, requiring far higher taxpayer contributions and swallowing funding for public services. Which is why this report from Steven Greenhut at Cal Watchdog should upset you.

Greenhut breaks down an uber-wonky blog post from Ed Mendel at CalPensions, which describes last week's decision to raise the cost of terminating a plan with CalPERS. If a municipal government chooses to close such a plan, it's required to pay CalPERS an up-front fee to offset future obligations to the total pool of CalPERS retirees, since the law prevents CalPERS from getting any more money out of the municipality. Naturally, the pension giant is worried about what would happen if a large plan chose to leave. So, instead of making that optimistic assumption about future obligations, it's chosen to assume a below market rate of return, just 3.8%, when figuring out what it's owed by governments ending their involvement.

Put another way, when it's gambling with your money, CalPERS is willing to let it ride, and assume that a lot of risky investments will pan out. When it's worried about its own money, then it needs huge taxpayer contributions to ensure that benefits can be paid.