Carmel, CA CalPERS Faces Another Pension Shortfall

In March, I wrote a story on my blog about the alarming shortfall of funds at the California Public Employees' Retirement System (CalPERS), which announced it had just 63% enough cash to fund future pension liabilities after losing $69 billion in the 2008 downturn, about a quarter of its funds.  At the time, the Wall Street Journal wrote a story entitled "CalPERS Lowers Target Rate" which implied the fund had realized it was coming up way short on its investment strategy and needed to make a turn in another direction.  But upon reading the story, I found that they had lowered their expected rate of return from 7.75% to 7.5% and commented that I didn't think that this was nearly enough.  The fund has earned an average rate of return of 5.1% over the past ten years, although it did make a 7.5% return over 20 years, which included the dot-com bubble.  By lowering its rate of return, the state of California, schools and county agencies would have to kick in a bit more to cover an expected shortfall, however, I thought expecting a return of 7.5% might be too aggressive.  I was right.  The Wall Street Journal reported this week that CalPERS was hit hard in investments it made in Europe and subpar performance by outside fund managers.  This caused it to earn a rate of return of just 1% for its fiscal year ending June 30.  Over the same period, the Dow Jones Industrial Average rose 3.8%.  The State of California and cities will need to contribute $233 billion to the retirement system to make up for the shortfall in the investment strategy.  This sub-par performance will cause more financial distress at the state and municipal levels and illustrates just how risky it is to put retirement funds into the stock market.