CalPERS takes unnecessary risks that could cost taxpayers

The Unfunded Liabilities of CalPERS

The California Public Employees’ Retirement System (CalPERS) is one of the largest pension funds in the United States. With over $180 billion in unfunded liabilities, CalPERS is facing significant financial challenges. The unfunded liabilities represent the difference between the assets available to pay future benefits and the liabilities owed to retirees.

The Current State of CalPERS

Assets: $3 trillion

Liabilities: $180 billion

Funding ratio: 5%

Investment strategy: CalPERS invests in a diversified portfolio of assets, including stocks, bonds, and real estate. ### The Plan to Increase Investments in Private Equity and Private Credit

The Plan to Increase Investments in Private Equity and Private Credit

CalPERS plans to increase its investments in private equity and private credit by 20%. This move is aimed at generating higher returns on investment and reducing the unfunded liabilities.

CalPERS lags behind the S&P 500 in investment performance.

The Performance of CalPERS and the S&P 500

The California Public Employees’ Retirement System (CalPERS) is a public pension fund that manages the retirement savings of over 2.1 million public employees in California. In recent years, CalPERS has faced criticism for its investment performance, with some arguing that it has failed to keep pace with the broader market.

The CalPERS Funding Crisis

The California Public Employees’ Retirement System (CalPERS) is facing a severe funding crisis, with its 23-year average return significantly lower than its assumed rate of return. This disparity has serious implications for the state and local governments that are ultimately responsible for CalPERS’ financial health.

The Assumed Rate of Return

CalPERS’ assumed rate of return is set at 7.6%, which is significantly higher than its actual 23-year average return of 5.6%. This difference has resulted in a significant shortfall in the system’s assets, leaving it with a funding gap of over $1 trillion. The assumed rate of return is based on historical data and is intended to provide a benchmark for investment performance. However, the actual return on investment has been lower than expected, leading to a significant shortfall in the system’s assets. This shortfall has resulted in a funding gap of over $1 trillion, which is a significant burden on the state and local governments that are responsible for CalPERS’ financial health.

The Impact on State and Local Governments

The funding crisis facing CalPERS has significant implications for the state and local governments that are ultimately responsible for the system’s financial health. These governments are required to contribute to CalPERS through payroll taxes, and they are also responsible for paying the system’s administrative costs.

Rising pension costs threaten California’s public services, economy, and competitiveness.

The Impact on Public Services

The increased debt burden on CalPERS has significant implications for the state’s public services. Cities, counties, and school districts are facing a perfect storm of rising costs, reduced funding, and decreased revenue. This can lead to:

Reduced funding for education, resulting in smaller class sizes, outdated textbooks, and decreased resources for teachers and students. Decreased infrastructure investment, leading to crumbling roads, bridges, and public buildings. Reduced public safety services, including police and fire departments, leaving communities vulnerable to crime and emergencies. ## The Consequences for California’s Economy*

The Consequences for California’s Economy

The financial strain on CalPERS is not limited to public services. The state’s economy is also feeling the effects of the rising pension costs. This can lead to:

Increased taxes, as cities and counties seek to make up for the shortfall in funding. Reduced economic growth, as businesses and individuals are deterred by the high cost of living and doing business in California. Decreased competitiveness, as the state’s high pension costs make it harder for businesses to attract and retain talent. ## The Need for Reform*

The Need for Reform

The situation is dire, and immediate action is needed to address the rising pension costs. This can be achieved through:

Increasing the retirement age for public employees, allowing them to work longer and reduce the burden on CalPERS. Implementing cost-of-living adjustments (COLAs) to keep pace with inflation and ensure that pension benefits keep up with the cost of living.
One employee managed the $1.4 billion fund for CalPERS, one managed $4.2 billion in Nevada PERS assets, and the remaining employee managed $4.5 billion in CalPERS assets. With such high returns, these two systems are considered among the best performing pension funds in the world. The success of these two pension funds can be attributed to several factors. Firstly, their investment strategies are highly diversified, with assets spread across multiple asset classes, sectors, and geographic regions. For instance, CalPERS has invested in stocks, bonds, real estate, and private equity, while Nevada PERS has invested in real estate, bonds, and private equity. This diversification helps to minimize risk and maximize returns. Secondly, these pension funds have implemented effective risk management strategies. CalPERS, for example, has a strong risk management framework that includes regular portfolio rebalancing, hedging, and diversification. Nevada PERS has a similar framework in place, which enables the fund to navigate market volatility and make informed investment decisions. Thirdly, these pension funds have been able to attract and retain top talent in the investment management industry. Both CalPERS and Nevada PERS have hired experienced investment managers who have a proven track record of delivering strong returns. These managers have been able to identify and capitalize on investment opportunities that have contributed to the funds’ success. Fourthly, these pension funds have implemented effective governance structures.

Mariana Trujillo is a policy analyst at Reason Foundation, where she is working on the Government Financial Transparency Project examining the debt of state and local governments.