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Bear market bites CalPERS and CalSTRS pension funds

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California’s two big pension funds for public workers lost money on their investment portfolios in the fiscal year ended June 30, the funds reported today.

The red ink at the California Public Employees’ Retirement System and the California State Teachers’ Retirement System wasn’t a surprise, given the stock market’s dive over the last year. (Despite the funds’ diversification, stocks still make up more than half of their holdings.)

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But too many years like this one would be bad news all around -- because, dear fellow California taxpayer, guess who risks getting stuck with the bill if the pension funds can’t earn enough to pay the benefits already promised to public-sector workers?

CalPERS said it lost 2.4% in the June 30 fiscal year on its $239-billion fund. CalSTRS’ $162-billion fund had a loss of 3.7%.

The numbers are preliminary, and the final losses probably will be worse because both funds measure their holdings in real estate and private-equity investments only through March 31 when calculating the total portfolio returns. (It takes a while to collect final quarterly data for that stuff.)

The numbers also are before investment fees. In CalPERS’ case, fees reduced the gross return by 0.3 percentage point in the previous fiscal year.

CalPERS’ portfolio performed better than CalSTRS’ in part because CalPERS last year moved a small portion of the fund into commodities -- just in time to catch the latest big rally in raw materials, including crude oil. The ‘inflation-linked’ portion of the fund’s portfolio, which includes commodities, soared 22.9% in the period measured.

By contrast, CalPERS lost an estimated 12% on its U.S. stock portfolio in the 12 months. CalSTRS’ U.S. stock portfolio lost 13.4%. The broad Russell 3,000 stock index fell 12.6% in the period.

How the funds fared with other assets:

--The teachers’ fund did better with its foreign stock holdings: It lost 5.8% on those issues compared with a 7.8% drop at CalPERS.

--Returns on bonds and other fixed-income investments came to 7.7% at CalPERS and 6.1% at CalSTRS.

--The funds continued to earn decent money on their real estate holdings, although CalSTRS fared much better in that sector, earning an estimated 11.8% in the period measured, compared with 8.1% for CalPERS.

--Private equity returns, such as from investments in firms taken private in leveraged buyouts, totaled 19.6% for the period measured at CalPERS and 11.6% at CalSTRS.

CalPERS said its overall portfolio loss ‘will have no immediate or significant impact, in and of itself, on California employers’ budgets next year or on the pension fund’s ability to pay benefits.’ That’s because the fund calculates the contributions it needs by smoothing portfolio returns over a 15-year period.

Measured over the last five years, the CalPERS fund’s average annual return was 11.4%, well above the 7.75% it says it needs to earn to finance its promises to public workers. CalSTRS’ five-year annual average return was 11.5%, compared with its target of 8%.

For their own sakes, California taxpayers should hope the good times resume soon.


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