Calpers, the California Public Employees’ Retirement System, is in deep trouble. Calpers got in trouble by not understanding risk. It still does not understand risk and thinks risk is the solution.



Please consider the New York Times article California Pension Fund Hopes Riskier Bets Will Restore Its Health.



Calpers, lost nearly $60 billion in the financial markets last year. Though it has more than enough money to make its payments to retirees for many years, it has a serious long-term shortfall.



Those problems now rest largely on the slim shoulders of Joseph A. Dear, the fund’s new head of investments. He is not an investment seer by training, but he thinks he has the cure for what ails Calpers, or the California Public Employees’ Retirement System, the largest in the nation with $180 billion in assets.



Mr. Dear wants to embrace some potentially high-risk investments in hopes of higher returns. He aims to pour billions more into beaten-down private equity and hedge funds. Junk bonds and California real estate also ride high on his list. And then there are timber, commodities and infrastructure.



That’s right, he wants to load up on many of the very assets that have been responsible for the fund’s recent plunge. Calpers’s real estate portfolio has tumbled 35 percent, and its private equity holdings are down 31 percent. What is more, under Mr. Dear’s predecessor, Calpers had to sell stocks in a falling market last year to fulfill calls for cash from its private equity and real estate partnerships. That led to bigger losses in its stock portfolio.



Gov. Arnold Schwarzenegger, who is on the Calpers board, has called the fund “unsustainable.” He has specifically criticized a decision by Calpers last month to give California municipalities a break on their required contributions. Rather than stepping up contribution rates to 5 percent to cover investment losses, Calpers set a maximum increase of 1.1 percent — saving municipalities hundreds of millions of dollars.



Mr. Schwarzenegger called it a “pass the buck to our kids idea.” Calpers says municipalities, which pay 15 percent of their payroll — or about $11 billion a year — into the fund, needed the help.



In the end, Mr. Dear, who will get $408,000 to $612,000 in salary and can qualify for a performance bonus of up to 75 percent of that salary, will be judged by portfolio returns.

Calpers Follows Roll The Dice Model



Hoping To Recover From Bad Year

$TNX 10-Year Treasury Yield

Calpers Assumes Rate of Return at 7.75%

CalPERS and partner buy shopping centers

Tormented by sagging investments over the past year, CalPERS is fighting back by going bargain hunting. The big pension fund and a partner are paying more than $1 billion for a collection of shopping centers that they sold just four years ago for a much higher price.



"This is a great example of the many positive opportunities there will be in the marketplace for CalPERS coming out of the distress in the market," said Ted Eliopoulos, senior real estate investment officer for the California Public Employees' Retirement System.

Question For CalPERS



Neighborhood centers that cater to necessities, not luxuries, are "a recession-hardy part of the real estate market," said Jim Hurley, CalPERS real estate portfolio manager.

Bumpy Road For Calpers

This week, the board of the California Public Employee Retirement System (CalPERS), the largest pension fund in the country, will be asked to approve a “smoothing” proposal designed to provide short- term cash flow relief to local and state governments by deferring pension contributions. If that sounds to you like a free lunch, you’re right. Such an offer is tempting to governments facing harsh budget troubles, but CalPERS should reject the proposal as at best imprudent and at worst dangerous to future generations.



Unfortunately we have been here before. In 1999, CalPERS told California governments at that time that they could not only defer contributions but also even boost pension promises retroactively by tens of billions of dollars because future investment earnings would cover the cost. As things turned out, not only did CalPERS not earn what was projected, but proposed contributions from governments today are nearly 5 times greater than what CalPERS projected would be the case. As a result, general funds in California today are facing an unanticipated $3 billion of contributions for past promises underfunded on faulty assumptions.



Worse, even those higher contributions understate the amounts required to put CalPERS on financially sound footing and to protect future general funds. This is because CalPERS continues to employ a high-yield earnings assumption ungrounded in reality (particularly for such a large fund), lulling employers into complacency about the real size of contributions needed to meet pension promises. To put this matter in perspective, to meet its earnings assumptions CalPERS needs the Dow Jones Industrial Average to grow even faster in the 21st century than it grew in the 20th century and to yield more than the legendary investor Warren Buffett assumes his defined benefit plan assets will earn.



The difference between a reasonable and unreasonable assumption means life or death for government programs. Because of the long-term nature of these liabilities, a tiny difference in earnings assumption can mean billions of dollars of shortfall and, as a result, understaffed and undercompensated police, parks, fire, education and other departments for decades to come.

Calpers Gives Municipalities "A Break"

Rather than stepping up contribution rates to 5 percent to cover investment losses, Calpers set a maximum increase of 1.1 percent — saving municipalities hundreds of millions of dollars.

Who Is On The Hook?