CalPERS Loses $69B In Biggest Market Losses Since Great Recession

Sacramento Bee (CA)

Mar. 22--The pot of invested money used to pay for hundreds of thousands of California public employee pensions has shrunk by $69 billion as coronavirus has squeezed global markets.

The California Public Employees' Retirement System's fund balance stood about $335 billion Thursday, down from a record high of $404 billion one month ago, according to CalPERS officials.

The California State Teachers' Retirement System likely experienced similar losses, but the system doesn't publicly report its value as often as CalPERS does. Its value stood about $243 billion at the end of February.

Absent a major market swing upward, the losses will impact local governments, schools, taxpayers and some state and local public workers.

Cities, counties and schools will have to pay CalPERS more in the years to come to help make up for the losses, putting pressure on them to raise taxes or reduce public services. And many public workers hired since 2013 -- when a pension reform law shaped by the last recession took effect -- could have to contribute a larger slice of their paychecks to their retirement plans.

An 11-year period of unprecedented growth in international financial markets came to an end March 11, and the markets continue to flounder. The extent of the losses at CalPERS won't be known until probably July. Higher payments won't go into effect until July 2021, when they will begin to be phased in over five years.

The extent of the pain from the losses will be determined by CalPERS' return on its investments for the present fiscal year, measured as a percentage.

A return rate of less than 7.25 percent will trigger higher payments for the local governments and school districts with pensions administered by CalPERS. For state agencies, the rate is 7 percent.

Local governments already are straining to make their scheduled payments, which are eating up a growing share of their budgets, said Dane Hutchings, a lobbyist with Renne Public Policy Group.

"A one-year downturn in the market is going to have significant effects for a decade," Hutchings said Friday. "They're still reeling from the Great Recession."

In 2009, following the Great Recession's hit to the system, CalPERS reported a negative 24 percent return.

CalPERS CEO Marcie Frost said Friday that the fund is better positioned to weather a downturn than it was 10 years ago.

"It's not that we didn't expect it, although it does seem a little unprecedented in the market," Frost said of the recent drop. "We were planning for a market downturn or correction in the market for the last couple years."

In the last fiscal year, CalPERS earned 6.7 percent. The system was about 70 percent funded in July, meaning it had about 70 percent of the assets it would need to pay all its current and future liabilities.

During the Great Recession, the system dropped from 101 percent funded to 61 percent funded.

Back then, the system's target for annual returns was higher. In the last three years, CalPERS reduced the target rate and tightened its schedule for paying off debt. The changes mean short-term losses will have a less significant impact on the funded status.

Additionally, CalPERS has more liquid assets now, which allows it to make its $24 billion in annual pension payments to about 700,000 people without selling off assets like it had to do in the Great Recession, Frost said. And the liquidity allows the fund to reinvest while stock prices are low, which will help it bounce back later, she said.

If the system earns nothing on its investments for the fiscal year that ends in three months, it would drop to 68 percent funded, Frost said, citing projections.

She said she didn't have estimates for negative returns.

Impacts of a poor return

CalPERS administers pensions for about 1,500 local governments around the state, as well as California state employees. Their required payments to CalPERS depend on the size of their workforce, workers' pay and other factors. Drops in CalPERS' investment returns can mean big increases in their spending.

As an example, a larger-than-average local government with 471 employees would owe $11.9 million this year if CalPERS earns 7 percent, according to projections from GovInvest, a local government consultant that models pension costs.

Under that normal scenario, the agency's pension costs would increase to $14.45 million by 2026. If CalPERS' return rate drops to negative 25 percent, similar to the Great Recession, the agency would owe about $22 million in 2026, according to the projection.

In extreme cases, rising pension costs can contribute to pushing local governments into bankruptcy, which happened most famously in Stockton in 2012.

The CalPERS Board of Administration lacks authority to change public workers' benefits, and California's constitution protects the benefits. A set of legal precedents known as the California Rule prevents reductions to public pensions without offsetting benefits.

"The strength of CalPERS is that we're a long term horizon investor," Frost said. "And hopefully that will serve us well ... we'll take conservative and appropriate options if we find opportunities in the market. Staying with our long-term investment plan is really the most important part of the equation right now."

CalSTRS

CalSTRS, which administers pensions for California teachers, was about 64 percent funded as of May.

CalSTRS is structured differently than CalPERS. School districts' contributions are determined each year under, and the CalSTRS board can only increase them by 1 percent each year, up to a maximum of 20.25 percent of what the districts pay teachers.

"The CalSTRS investment portfolio is broadly diversified to withstand periods of turbulence," CalSTRS spokeswoman Vanessa Garcia said in an emailed statement. "We have a risk mitigating strategies asset class that provides diversification to the portfolio and protection against equity market downturns."

Garcia said the system plans to assess the impact of the downturn in fall 2020.

"What's happening with the investment markets is obviously very important to us," said Derick Lennox, a lobbyist with the Association of California School Administrators. "But it's a long-term issue we're thinking about. Our short term objectives are continuing to provide a high quality education and feeding students."

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