State ponders money shift to CalPERS to guard pensions

The state, already strapped by unprecedented deficit and a weakened economy, may be on the hook next year to bail out California’s largest public pension fund – a possibility that once appeared remote.

The California Public Employees’ Retirement System, which provides benefits for 1.6 million workers, retirees and their families, lost more than 26.6 percent of its value from last July through January. The fund, which in October 2007 totaled $260.4 billion, now stands at $166.3  billion, as of Monday.

CalPERS’ stock portfolio alone lost nearly 40 percent of its value, and the stocks represent about 38 percent of CalPERS’ assets.
The dramatic decline in Cal-PERS’ value has had no impact on members’ benefits which, fund officials emphasize, are protected by law. CalPERS provides about $11 billion annually in pension benefits, a figure that doesn’t include health care.

But the state of California and hundreds of local governments are obligated to protect those pensions, and if CalPERS cannot do it because of its dwindling assets, then the state and other governments are obligated to step in. CalPERS estimates that about 2,600 local government entities, including cities, counties, special districts and other operations, are affected.

Possible scenarios for that action were presented this week to the board by CalPERS’ staff,  said spokesman Clark McKinley.
That intervention could not come at a worse time for the state, which struggled for months to cover a $41 billion budget shortage only to find a new $8 billion hole. The local governments aren’t any better off, and municipal belt-tightening including cuts in service and layoffs are the norm in scores of California cities.

In addition, California voters will decide on May 19 to approve a half-dozen ballot measures aimed at raising $5.8 billion for the state through taxes, cuts, selling off pieces of the state lottery and tapping money for pre-schoolers and the mentally ill. If the proposals fail, the state’s ability to meet the pension obligation will be that much harder.

In the background looms the federal stimulus money bound for California. But there already is confusion over how much money is coming and who will control how it is doled out. Thus far, there is no indication that any of the federal money could be used to meet public employee pension benefits.

CalPERS said last fall that if it lost 20 percent or more in value during 2008, then the likelihood was that CalPERS — and scores of local governments — could be required to boost their payments to retirement benefits by up to 4 percent for the 2010 fiscal year. Fiscal experts in the Capitol believe the increase could range from 2 percent over 5 percent.

If the state is indeed required to contribute to CalPERS to offset the fund’s 26.6 percent losses in 2008, that contribution will begin flowing to the state on July 1, 2010, McKinley said, based on numbers generated through the 2008 fiscal year. A similar shift may be required of local governments the following year.

The numbers affecting the state’s 2009 figures are “pretty much flat,” he added. “The actuaries crunched all these numbers and what goes out in June has pretty much been decided,” he said.

The fickle financial markets are likely to change in the near future, which means the level of the state’s support to CalPERS will change, over time – for the better or worse.  

“For this fiscal year, we still have the rest of March, April, May, June – more than 3 ½ months left. Nobody knows what the market is going to do. So we could back some of what we lost,” McKinley noted.

The larger question, however, is the longer-term outlook.

Although government employers may be required to help fund the pensions in 2010, there have been many years since the 1990s when the pension fund’s financial success kept the employers’ contributions stable. In fact, CalPERS’ investments grew dramatically and provided enough – more than enough – to meet the pensioners’ needs.

A 20.1 percent increase was reported for 1996-97, a hair below the 19.5 percent boost reported for 1997-98. There were double-digit increases for most of the decade.

Through the fiscal year that ended last June, CalPERS’ performance was down 4.9 percent.

CalPERS has a 15-year investment process called a “smoothing strategy” that is designed to protect the fund against unexpected fluctuations – whether up or down – in investments’ returns.  But the smoothing strategy was not intended to cover the dramatic volatility shown on Wall Street since late last year.

CalPERS is the nation’s second-largest public pension fund, after the Federal Thrift Savings Plan, which serves about 4 million members and has assets of $197.3 billion as of Jan. 31. The FTSP is a defined-contribution system and its assets are allocated differently than CalPERS, making an apples-to-apples comparison between the two difficult.

CalPERS’ assets are divided between publicly traded stocks (56 percent), private companies and real estate (10 percent), fixed-income products such as bonds and treasury bills (19 percent), and inflation-linked products such as commodities, inflation-linked bonds and forest lands (5 percent).