CalPERS Staff Nudges Board To Consider Lower Return Rates: New at Reason

California hasn’t come close to resolving its pension crisis yet, but it’s becoming increasingly difficult to ignore.

Steven Greenhut writes:

There’s bad news coming down the pike for California municipalities following several days of board meetings for the nation’s largest state-based pension fund. Although no action has been taken, it’s clear the California Public Employees’ Retirement System, or CalPERS, might again lower its expected rate of returns on investments. That means cities and other member agencies would have to pay more to make up the shortfall.

A key moment, buried amid nearly 13 hours of recorded meetings, came when CalPERS’ Chief Investment Officer Ted Eliopoulos played a short interview video with Wall Street experts, including famed investor Warren Buffett, opining on the expected investment returns in coming years. One investment guru thought a 4 percent or 5 percent rate of return would be the objective. Buffett pointed to very slow growth in the economy.

Eliopoulos used a diagram showing a 30-year decline in interest rates, even as discount rates used by pension funds remained steady. CalPERS currently calculates its pension liabilities based on an expected return rate of 7.5 percent. Based on the data provided by CalPERS staff, it’s clear the agency would need to ramp up its risk taking to have any chance to continually meet such goals. In the past year, CalPERS’ return rate was 0.6 percent.

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