Some Good News, and Some Big Challenges, for State Pension Funds

The good news from the California Public Employees' Retirement System, the pension system that serves about 1.7 million public sector workers, retirees and their dependents: 2013 was a very good year for the fund's investments. CalPERS reported Monday that its portfolio grew by 16.2 percent last year, boosted by last year's runup in stock prices, and is now worth $282 billion.

As the Los Angeles Times reports, the gains are the latest turn for CalPERS' up-and-down fortunes:

The results for 2013 capped a wild ride for the agency over the last 11 years. The fund was especially hard hit during the Great Recession of 2007-09. In 2008, amid the depths of the worst global economic slowdown in half a century, the fund lost 27.8 percent of its value.

Since then, it has climbed back. In 2011, the fund's increase in value was a mere 1.1 percent. For 2012, the rate of investment growth was up to 13.3 percent. By early 2013, the total value of the fund officially surpassed its pre-recession high.

CalPERS' overall rate of return for 2013 was more than twice the 7.5 percent minimum that the fund's board has said it needs to meet current and future obligations to retirees.

CalPERS performance actually was well below the major stock indexes for 2013, which saw the Dow Jones Industrial Average reach a record high and the Standard & Poor's 500-stock index rise about 30 percent for the year. CalPERS saw more modest gains because it is required to balance its portfolio with other assets, like bonds, commodities and real estate, which didn't perform as well as stocks last year.

Beyond the CalPERS report, though, looms the reality that the state's public sector retirement funds are still facing hundreds of billions of dollars in future retirement obligations that it hasn't yet figured out a way to pay for. CalPERS reportedly accounts for about $100 billion of the shortfall. The state's other major retirement fund, the California State Teachers' Retirement System, or CalSTRS, faces another $80 billion in unfunded liabilities.

The Associated Press notes in a story today that despite Gov. Jerry Brown's promise to start tackling the state's biggest fiscal challenges, he's not yet proposing any specific action on CalSTRS. (The system is vital to California teachers because they don't pay into Social Security and thus don't get it when they retire.)

The AP's Don Thompson notes the CalSTRS liability is "a gap so large that the fund is projected to deplete all its assets in about 30 years. ... The deficit for the nation's largest educator-only pension fund is so huge it would cost teachers, local school districts, community colleges and the state budget a combined $4.5 billion a year to bridge. The California State Teachers' Retirement System says it grows by $22 million each day nothing is done."

Thompson also spells out some of the obstacles that must be surmounted to get CalSTRS back on track:

And unlike the California Public Employees' Retirement System, which covers a wide range of state and municipal employees, CalSTRS cannot unilaterally increase the amount it collects from state and local governments. CalSTRS contributions can be increased only if the Legislature votes to do so.

While CalPERS plans to boost contribution levels again next month for the third time in the last two years, the 8 percent that teachers pay into the pension fund from their salaries has not changed since 1972. The 8.25 percent that school districts pay has not been altered since 1990.

While the state's share can vary slightly, it has hovered at 5.5 percent, including an annual cost-of-living adjustment — about $1.4 billion a year. The state's general fund contribution to CalPERS is projected to top $1.8 billion next fiscal year.

The bulk of the pension funds' revenue comes not from contributions but from investment income. And that also is the cause of CalSTRS' problems.

The dot.com boom led to the fund being fully funded by 1998, but the windfall prompted state lawmakers to increase benefits and decrease the state's contribution. CalSTRS Chief Executive Officer Jack Ehnes said the fund has been seeking an increase ever since the tech market balloon deflated more than a decade ago, but the bottom really dropped out during the Great Recession.

The Brown administration says the state cannot afford to absorb the full $4.5 billion annual increase because it would overwhelm other budget priorities. Paying $4.5 billion on top of the current $1.4 billion would eclipse state spending for the University of California and California State University systems combined, according to the legislative analyst. It calls the unfunded teacher pensions perhaps the state's most difficult fiscal challenge.

Local districts "should anticipate absorbing much of any new CalSTRS funding requirement," advises Brown's budget, while "the state's long-term role as a direct contributor to the plan should be evaluated."