Calif. pension funds grow more than 20 percent

July 18, 2011 - 2:29 PM

SACRAMENTO, Calif. (AP) — The nation's largest public pension fund has posted its highest investment returns since before the recession, reporting returns of 20.7 percent for the fiscal year ended June 30, the fund's investment team announced Monday.

That preliminary figure is the best after-fees return in 14 years for the California Public Employees' Retirement System, which oversees benefits for 1.6 million current and retired state and local government employees and their families.

It's also the second consecutive year CalPERS has topped the 7.75 percent investment return target assumed in its long-range financial model.

Critics say the assumption is too optimistic and retirement benefits are too high, leaving taxpayers on the hook for costs the system will not be able to cover.

"While we can't assume that we'll sustain this high level of earnings, we have averaged a net return on investments of 8.4 percent for 20 years," said Joseph Dear, the fund's chief investment officer.

The gain for 2010-2011 was due largely to a 30.2 percent annual return on the fund's stock portfolio, but other investments also saw increases. Private equity stakes returned 25.3 percent and real estate returned 10.2 percent through March 31, the most recent data available. In all, the gains helped boost the fund's value to $237.5 billion, up from $200.5 billion a year ago.

Assets fell as low as $165 billion in 2009, after a 2008 drop in the stock market and global credit freeze cut the fund's portfolio value by tens of billions of dollars.

The state's second-largest pension fund, which covers teachers and school administrators, announced even larger gains Monday. The California State Teachers' Retirement System posted a 23.1 percent return for the fiscal year, its highest in a quarter-century.

That's nearly twice the 12.2 percent gain the previous year, but CalSTRS, too, is clawing back from a 25 percent loss in 2008-2009. Fund officials say the system eventually will need more money, and it's unrealistic to expect such booming returns to continue.

The Legislature will have to address the long-term funding problem because, unlike CalPERS, the teachers retirement system can't unilaterally increase the amount of money the state pays to cover retirement benefits.

"Without legislative approval for increased contributions, even given this past year's impressive performance, CalSTRS would need a more than 20 percent investment return each year for the next four years to achieve full funding in 30 years, an impractical expectation," said chief executive Jack Ehnes.

Long-term projections at CalSTRS suggest the system will fall $56 billion short of the money it needs to meet all its benefit obligations over the next 30 years, and the longer the state waits to make changes, the higher that number is likely to go.

"Solid performance in the past two fiscal years puts some wind in our sails, but it doesn't make up for a lost decade of returns" stemming from the recessions that hit at each end of the past decade, said CalSTRS chief investment officer Christopher Ailman.