Oct 18 2015

Piedmont Pensions Costs Will Be Higher If CalPERS Lowers Assumed Investment Returns

Contributions to CalPERS by Piedmont and other communities would have to increase if assumed return on investments is lowered.

Unexpected increases in costs to Piedmont for CalPERS pensions are not new. In 2013 Piedmont’s Budget Advisory & Financial Planning Committee (BAFPC) recommended that the City exit from the CalPERS Side Fund of the City’s pension obligations by refinancing it. The refinancing of the obligation was approved.

The 2004 Piedmont City Council ballot argument for Municipal Tax Measure S stated, “More than half of Piedmont’s increased pension costs are caused by past investment losses by the State pension fund.  Piedmont’s annual pension contribution will increase by $600,000 even without any pension plan changes.”

CalPERS Board Meeting this week

The California Public Employees’ Retirement System (CalPERS) Board will be meeting October 19-21. In May the staff proposed to the Board that its investment return goal be lowered from 7.5 percent annually to as low as 6.5 percent by increments of 0.05 percent to 0.25 over years or decades.  In 2011 the goal was lowered from 7.75 percent annually to the present rate of 7.5 percent. CalPERS tried to lower its risk of big investment downturns last year by pulling out its entire $4 billion investment in 24 hedge funds and a half-dozen hedge funds of funds. With more than $302 billion, CalPERS is the largest pension fund in the United States despite its CalPERS loss of about 25% of assets in 2008- 2009.

According to CalPERS’ Chief Financial Officer Cheryl Eason:

“… lowering the rate of return would also enable officials to build a portfolio less vulnerable to market swings. The current 7.5% rate of return has a 12% volatility rate. Reducing the rate to 7%, as one scenario does, would translate to a 10% volatility rate. A 6.5% rate of return would equate to a volatility level of 8.5%, she said.”

(read the article from Pensions & Investments here)

The proposal is an acknowledgement that 8 percent returns are unlikely, given low inflation and interest rates. CalPERS reported returns of 2.4% for the fiscal year ended June 30.

“It’s also a reflection of the reality of investing in conventional investments,” Amy Resnick, editor of the trade publication Pensions & Investments said. “Assumptions of higher returns are just not realistic nowadays.”

Jeffrey MacLean, CEO of investment consulting firm Verus, Seattle, said CalPERS’ time frame for the portfolio volatility reductions is so long that significant investment losses could mute its effectiveness.

As target investment returns decrease, contributions from employees and their employers will be required to fund CalPERS pensions.

Previous PCA articles on CalPERS:

Stanford Institute on CalPERS

Problems for CalPERS leaders

Piedmont Pension Costs Rising

Piedmont 2004 Municipal Tax Ballot Measure S


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