It may not be top of mind, but Californians should be aware that the California Public Employees’ Retirement System (CalPERS) is a key part of ensuring that the state recovers quickly and completely from the coronavirus pandemic.
Those who think about CalPERS often limit their perspective to the context of pensions for public employees. But the reality is that every single person who wants to be able to get a job in a community with affordable housing, good schools, safe streets, and accessible public services needs CalPERS to be successful. Otherwise, we will all pay a steep price.
Approximately 58 cents of every dollar comes from investment earnings, 29 cents from agency contributions and 13 cents from employee contributions.
Got your attention? Let me explain.
Public agencies across the state negotiate retirement benefits with their employees. That is a sacred obligation. CalPERS helps ensure that the retirement benefits they promised can be delivered. The fund has nearly $415 billion in assets that it invests on behalf of these agencies, and they make approximately $24 billion in annual benefit payments.
It breaks down like this: Approximately 58 cents of every dollar comes from investment earnings, 29 cents from agency contributions and 13 cents from employee contributions.
This is a zero sum game, and we are all playing. As California’s economy reels from efforts to fight the pandemic and local government revenues are being hammered, they are still obligated to meet their pension obligations to employees. If they cannot make their payments and CalPERS is unsuccessful generating investment returns, these agencies will look at every possible option to make pension payments: tax increases, layoffs, service cuts, and for homebuilders, higher developer fees, which leads to higher housing costs. Everything will be on the table soon if it has not already been proposed.
But I am optimistic, and here’s why. CalPERS has strong leadership and is implementing the right plan to achieve its target 7% annual risk adjusted return. I served on the CalPERS Board of Administration for 4 years and understand the organization. It is comprised of talented people who care deeply about their mission. This board has wisely made moves to position CalPERS for long term success.
In 2016, the board made a bold decision to hire CEO Marcie Frost to reimagine the organization. Frost brought strong experience to the position and a determination to jettison politics and do what is right for members and taxpayers. In four short years, she has transformed CalPERS into a pension fund that is laser-focused on disciplined investing, mitigating risks and generating the necessary returns to deliver retirement security.
The results speak for themselves. During the last fiscal year, one where public pension funds across America averaged a 3.2% return on their investments, CalPERS’ strategy delivered 4.7%. That difference is an additional $6.2 billion.
The strategy behind these returns requires the fund to take a significant amount of calculated risk. The plan, which entails increasing investments in private equity and credit, capitalizes on CalPERS advantages, which include a long-term investment horizon and access to private asset classes. Concurrently, under Frost’s leadership, the fund took actions prior to the COVID-19 pandemic that prevented $11 billion in losses and cut the amount of fees it paid to external asset managers, saving an additional $115 million.
Here is why all this matters. Every dollar saved plus every dollar earned provides retirement security and protects local governments and taxpayers.
In recent weeks, CalPERS suffered a significant setback when its chief investment officer, Ben Meng, resigned. Frost moved quickly to make it clear that CalPERS’ strategy would not change. She told Pensions & Investments, “In his 18 months, Ben did extraordinary work with an extraordinary team. But Meng did not work alone. We have not taken a pause in beginning execution of the strategy.” Staying the course is exactly what is needed right now, because the plan is working.
Leadership requires building organizations that are resilient, disciplined and able to overcome challenges, such as what 2020 has posed. That is what CalPERS has done and must continue to do. It will help ensure that California’s economic recovery will be strong and sustained.
Editor’s Note: Dan Dunmoyer is president and CEO of the California Building Industry Association and a former CalPERS Board member.