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The California Public Employees' Retirement System building in Sacramento, California.
Last year, I wrote about Calpers, the big California pension fund ($235 billion), and its problems with conventional investment strategies:
The investment environment for pension funds isn't actually very good right now. Bonds are yielding historically low rates and the stock market is bucking around like an old Ford pickup truck on a back road in Texas. The Federal Reserve has done everything it can to push investors into riskier assets, like stocks, but so far, the markets haven't been able to maintain any kind of sustained rally.
This means that pension funds are increasingly diversifying into high-risk/high-return stuff, like hedge funds and private-equity. This is an oversimplification, but hedge funds try to make money even when markets are going south, while private equity invests in startup companies and gets involved in the turnarounds of underperforming established ones. The payoffs can be big. But so can the losses.
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California Governor Jerry Brown announces his public employee pension reform plan October 27, 2011 at the State Capitol in Sacramento, California.
Jerry Brown rolled out his pension reform plan yesterday. The Patt Morrison Show did an entire segment on it. The upshot? it's a humdinger. The New York Times sums it up:
Mr. Brown called for raising the retirement age of new employees who do not work in public safety to 67 from 55. He said employees should pay up to 50 percent of their annual pension costs. To reduce the financial exposure of the state, he said future pensions should be a hybrid of the traditional pension model and a 401(k).
To deal with what have been widely seen as abuses of the retirement system, Mr. Brown said the pensions of all new employees should be based solely on their regular salaries, not taking into account any overtime or bonuses. For existing employees, he said the retirement benefits should be based on an average of the last three years’ salary.
He also said that state employees should be barred from double-dipping: retiring, taking pensions and then taking on another state job.
Calpers, the giant California state pension fund currently valued at $219 billion, is in a difficult position. This is from a Bloomberg story about the fund struggling to hit its 7.75 percent expected yearly return for 2010:
“That’s going to be tough this year and maybe for the next few years,” Calpers Chief Investment Officer Joe Dear said in a Bloomberg Television interview today. “This low-return environment is structurally driven, and there’s not a lot of policy to move it.”
In fact, it could be tougher than Dear is letting on. Calpers is only 70 percent funded, according to Bloomberg. That doesn't mean the fund can't pay out benefits. But it does mean that there's a mismatch between how much it has and how many employees are and will be relying on it. Calpers was fully funded in 2007, but the financial crisis has been hard on it.