Guest Post: California’s $100 Billion Whooping

Submitted by Leo Kolivakis, publisher of Pension Pulse.

As if California didn’t have enough to deal with its budget crisis, now the FT reports that the two largest pension funds in the US have recorded steep losses following the turmoil in stock markets, with the value of their combined portfolios shrinking by almost $100bn:

The California Public Employees’ Retirement System (Calpers) and the California State Teachers’ Retirement System (Calstrs) were hit by the real estate slowdown and the slump in global equities. Calpers said the fall in the value of its assets was the most severe in its history.

“This result is not a surprise; it is about what we expected, given the collapse of markets across the globe,” said Joe Dear, investment chief at Calpers.

The value of Calpers assets fell 23.4 per cent for the year to June 30, raising concerns that state employees and local governments might have to increase their ontributions to cover the shortfall.

But Calpers presented a bullish view. “The system has more than enough cash through contributions and income from investments to meet our present liabilities, so we are in a good position to ride out the current downturn and come out stronger,” said Mr Dear.

The market value of Calpers assets was $180.9bn (£110bn) on June 30, down from $237.1bn on the same date the previous year. The value of the portfolio had fallen to $160bn in March of this year but rebounded by $20bn by the end of June thanks to a partial recovery in equity markets.

Both organisations shifted a portion of their portfolios out of equities and into fixed income and real estate during the year to take advantage of lower prices.

Calpers also said it was “realigning relationships with hedge funds and private equity partners”. This would lead to “reduced fees, better alignment of interests, and more mutually beneficial long-term relationships”.

The value of Calpers real estate and private equity investments fell by 35.8 per cent and 31.4 per cent respectively in the year to June 30.

Calstrs was hit by the same macro-economic factors, with the value of its assets falling from $162.2bn to $118.8bn in the 12 months to June 30.

The organisation wrote down the value of its property holdings rather than spread the writedown over several years, which saw the value of its real estate portfolio shrink by 43 per cent.

“We’re now in a position to turn round our real estate returns,” said Christopher Ailman, Calstrs chief investment officer, adding the organisation planned to acquire “high-quality assets from distressed sellers at attractive deep discounts”.

The steep annual decline could exacerbate Calstrs long-term funding gap of $22.5bn. “Our members’ benefits are secure, yet the current economic picture clearly illustrates investments alone cannot meet pension obligations in the long term,” said Jack Ehnes, Calstrs chief executive.

He added: “We are not in a crisis to resolve the contribution gap, but the sooner a solution is found, the lower the cost.”

The only way California is going to solve the funding gap is by increasing contribution rates, cutting benefits, increasing the retirement age and by increasing taxes. It’s a bitter pill to swallow but given the magnitude of these losses, they don’t really have a choice.

I also heard another large Canadian pension fund, PSP Investments, deposited their FY2009 report to the Treasury Board. Parliament will discussing it today for approval. It will be interesting to see their losses in public and private markets.
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  1. RPB

    The IOUs are going to blow up in California's face. I do not think anyone has addressed the real issue. That of business arbitrage to pay their taxes.

    If I am an individual I would have very dubious faith in the IOUs. So dubious, in fact, I would be willing to trade these things for greenbacks at a value less than they are worth. Especially, if I travel outside of the state often. Or, if I want to buy things available outside of the state of California, etc.

    If I am business I will take advantage of the individual to pay my taxes in IOUs. Let's say I can pay people anything less than 100 cents on the dollar for their Cali IOUs with USD and then pay my business taxes with the IOUs (trading less than 1 dollar in USD for 1 dollar in tax credit through IOUs). I've effectively arbed my taxes using California gov's fiat currency. I can imagine this may begin to occur and that some businesses will be unwilling to honor the IOUs, especially given California's ambiguous financial future.

    Thus, there is no guarantee to their worth as they are "free floating" and California has set itself up for an inflationary spiral of their fiat currency. If this begins to occur I can imagine a complete breakdown in faith (and price) in that currency and the move to dollar.

    While this scenario is not destined to happen, the question should arise: who can break the California buck first? (Soros?)

  2. Brick

    The one thing California and other states will avoid at all costs is increasing contribution rates, cutting benefits, and increasing the retirement age. This is not a vote winning scenario and I expect them to get into more difficulty as they cut more and more jobs which can be blamed on central government. The claim that they are now in a position to turn round their real estate returns concerns me particularly and shows something drastic will have to happen before attitudes change.

  3. fresno dan

    CA, as many other state and local pension funds, has assumed rates of return of about 8%.

    The question is: is the downturn and recession typical, and return to growth around the corner, or are demographics and the death of leverage presaging a much more wrenching change. I think I am a typical Naked Capitalism commenter – I think rates of return of % won't come back for decades. And that means even more tax increases to make pension payments.

  4. Anonymous

    Who are you going to tax? The Gen-Xers? There is not enough of them. Oh I know, the up and coming Milleniums, aren't they going to be equal in size to the boomers? Well I got three Millenium children and I can tell ya they won't be able to afford the coming expense.

    This generation, while competing against illegal imigrants and third world wages with "flexible" benefits, will be expected to pay the retirement of boomers along with funding a decrepit infrastructure, which should have been the boomers responsibilty to maintain. Add to that the interest cost on the national debt and the Milleniums just might decide that their participation in the productive economy isn't netting themselves any reward and resign themselves to live in their parents basements forever.

  5. Anonymous

    CALPERS recipients are feather-bedding, mooching leeches off the taxpayers, with their double dipping, bloated pensions….may they swallow many more bitter pills, not a drop more out of taxpayers for these deadbeat parasites

  6. tom a taxpayer

    All the leaves are brown
    And the sky is grey.
    Got an I.O.U. instead of my pension check,
    Seems like a cold winters day.
    My mortgage is due
    But State says "I.O.U."
    California dreamin
    California dreamin
    On such a winters day.

    Stopped into a bank
    I passed along the way
    Well, I got down on my knees
    And I intend to pay
    I intend to pay my mortgage with an I.O.U.
    But you know the banker likes cold hard cash.
    He takes my home away.
    California dreamin
    California dreamin
    On such a winters day.

    Mama and the Papas – Mama Cass rocks out.

  7. Lloyd G.

    “We’re now in a position to turn round our real estate returns,” said Christopher Ailman, Calstrs chief investment officer, adding the organisation planned to acquire “high-quality assets from distressed sellers at attractive deep discounts”.

    They're getting even deeper into real estate? I wonder if this might backfire.

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