CALPERS -- Reassessing the Asumed Rate of Return on Pensions

CALPERS -- Reassessing the Asumed Rate of Return on Pensions

Postby Nick Della Volpe » Fri Dec 23, 2016 9:03 am

The media reports that CALPERS, the nation's largest public pension fund, has determined that 7% is a more realistic rate of annual return for its assumed pension annual earnings target/ performance.

The adjustment, while relatively small (down from around 7 1/2% per annum), will mean millions more in California municipal contributions (and related employee paycheck contributions) are needed to reach appropriate pension funding levels.
(Aside: they already have at least 4 bankrupt cities which can't pay the freight).

CALPERS' action raises the question of whether our 7 3/8% number is likewise unrealistic. If I recall correctly, Alan's last annual report had a chart showing that a 1% drop in actual earnings (i.e., down to 6 1/8%) translates into another $85 M in shortfall. (Currently $211M as of July 1, 2016).

Perhaps the message from California is that you can run, but cannot hide, from reality.
Nick Della Volpe
 
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Re: CALPERS -- Reassessing the Asumed Rate of Return on Pens

Postby Nick Della Volpe » Tue Dec 27, 2016 8:41 am

Payouts-- The current monthly payout is roughly $3.7 M. (That includes $3.57M in monthly Benefits, $130k in Drop payments and $43k in Refunds.
Source-- $2M contributed by City, $394k by employees, plus pension fund earnings. What are those actual earnings, is the focal issue.

Earnings -- to properly calculate, you must first net out trading/fund fees for the investments plus the cost of plan administration(about $3M). As one citizen reminds me:
"Beyond the investment firm fees, the expenses for operation of the plan are deducted from the earnings. Those run .5 - .75%, so you have to earn that before you begin working toward your earnings target. "

We are $211M underfunded (July 1, 2016 figures, per Jim York). As fiscal stewards, may be time to invite our pension gurus, actuaries and accountants to address us.
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Re: CALPERS -- Reassessing the Asumed Rate of Return on Pens

Postby Nick Della Volpe » Mon Jan 02, 2017 1:53 pm

Shrinking assetts-- in case you missed it in the last post, pension fund assets have shrunk (or not grown enough) by $40 Million last fiscal year (I.e., underfunding has grown from $172M on July 1, 2015 to $211M on July 1, 2016).

Short of prayer for stronger market asset growth this year, to grow the current $533M in the fund, the taxpayers will be asked for a further bailout at some point. That's why I keep urging us to re-evasluate where we are in terms of further reform.
I'd rather see scarce dollars spent on infrastructure than repeated fund bailouts.
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Re: CALPERS -- Reassessing the Asumed Rate of Return on Pens

Postby Nick Della Volpe » Mon Jan 02, 2017 10:56 pm

See Audited Financial Statement for Pension, thru 6/30/16

Executive Director Kristi Paczkowski's December 9, 2016 letter to the Pension Board transmitting (and incorporated into) the audited financial return expressly states

"The System's actual investment return of 0.49% for the year ended June 30, 2016 was significantly below the actuarially expected return of 7 3/8%."

_____________
That 2016 Financial Statement goes on to state that the "Investment expenses exceeded investment earnings during the year." (at p. 4) Investment expense is reported as $3.6M.

The net position available to pay benefits declined in each of the last 2 years (at p. 5-6), to:
2014 $554M
2015 $544M
2016 $524M

While the net assets shrink, liabilities Increased to $739M (at p.40).
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Re: CALPERS -- Reassessing the Asumed Rate of Return on Pens

Postby Nick Della Volpe » Tue Jan 03, 2017 8:30 am

Average Return on Investments = 6% according to the pension investment managers, Summit Strategies. See Sept 30, 2016 Letter to Pension Board (included at end of Audited Statement, p 62):

"Over trailing 10-year period, the System returned 6.0% on an annualized basis and ranked in the 34 percentile of its public plan peer universe."

See also p. 63, which to my lay mind shows we are losing ground on growing the asset pie to pay the pension's growing bills:

"The market value of all assets was $325.7 million on June 30, 2016 compared to $544 million on June 30, 2015. The decrease is primarily attributable to required plan withdrawals for benefit payments, as the System's investments returned 0.5% for the fiscal year."
_______________
See page 88 of Audited Statement, which shows benefit payments steadily increasing:
2012 = $39.2 M
2013 = $40.5 M
2014 = $41.5 M
2015 = $42.6 M
2016 = $43-9 M
Nick Della Volpe
 
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Re: CALPERS -- Reassessing the Asumed Rate of Return on Pens

Postby Nick Della Volpe » Tue Jan 03, 2017 9:03 am

TYPO: Unfortunately, this system does not allow corrections:
The page 63 quote has a numerical typo, should read: The market value of all assets was $525.7 million...
Nick Della Volpe
 
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