Public employees’ pension fund no stranger to economic fluctuation

As nervous pensioners and government employees watch the portfolio of the California Public Employees’ Retirement System lose  nearly $80 billion in 12 months, questions arise about the fund’s fiscal health.  Officials at CalPERS and specialists in the Capitol say  the outlook for the fund is sound, and note that the massive fund’s investment strategy, called a ‘smoothing’ policy, is based on a long-term, 15-year engagement rather than short-term sell-offs and protects against a turbulent Wall Street.

The roughly $10.8 billion the fund pays out annually in retiree benefits to some 470,000 pensioners, who constitute about a third of the fund’s total membership, is protected by law, and cannot be disturbed by a governor and Legislature seeking to plug deficits in the state budget. That protection may be especially significant now, given that the state is looking at a potential $10 billion hole in the tardy budget that was signed last month. A special session looms in the Legislature to confront the issue.

In  years past, there have been attempts to divert or delay the state’s contribution to the pension fund to help balance the state’s books. But court rulings blocked that process. Currently, the governor and Legislature are required to assure that the state contributes to the pension fund at an actuarial-approved level that protects benefits.

In January, when the governor presents his budget for the new fiscal year, the Department of Finance will include in the budget document an estimate of the fund’s contribution, plus an adjustment based on an estimated increment. In the spring, the department – which writes the governor’s budgets – will get the latest contribution numbers from CalPERS, then plug those numbers into the May Revision, typically the administration’s final budget document that goes to the Legislature for action.

But while those numbers involve state spending, they are handled a bit differently: In effect, they are approved in the form of a continuing appropriation and they avoid the hubbub that accompanies the bitter debates over the state budget. The Finance Department described the state’s pension-fund contribution as a non-budget item.

Last week, the Wall Street Journal reported that CalPERS, the nation’s largest public pension fund with 1.6 million members, was selling off stocks in a declining market in order to make sure it had sufficient cash to meet its obligations.

CalPERS said it had sufficient cash and more. Unlike the many Wall Street investors, CalPERS added, the fund has a stable source of incoming funds to cover benefits, a point echoed by Capitol analysts of the fund.

“We don’t comment on specific investment transactions except to say that in down markets, we manage our cash as appropriate for the situation. However, our retiree payroll doesn’t come from cash from investments – we use our cash generated from employers and members,” said CalPERS spokeswoman Pat Macht.

“We always have capital calls for our investment programs and we always manage our cash as appropriate. Our total cash positions are reported monthly or quarterly to our board so that will be in our public reports when issued.”

The larger political question is whether the state increase its contributions to the fund. That could prove difficult in a climate of budget cuts and retrenching – there already is talk of a $2 billion cut to schools – when political leaders are asked to protect the pensions of state employees while workers in the private sector suffer through  a recession. Despite Wall Street’s upheaval, CalPERS’ investment specialists say the fund’s long-term ‘smoothing’ policies provide stability.

The issue of whether that stability can continue in a severe economic downturn is still untested.

“One thing is known,” Kurato Shimada, Chair of the Benefits and Program Administration Committee, said last week after the Committee received a report from its Chief Actuary. “When the dust settles, we will apply the impacts of losses or gains over a 15 year period. No large change in investment performance in one year will directly translate into the same level of change in employer rates in a single year.”

On Wednesday, CalPERS’ assets were put at $181.2 billion, down more than 20 percent since the summer and nearly $80 billion less than the fund’s highest mark exactly a year ago, when it stood at $260.4 billion.

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