Pensions: Update on CalPERS Returns and Approaches Taken By Cities

Pensions & Investments writes that CalPERS had a 6.7% net return for their fiscal year ending June 30th. This was below the target of 7.1%. Though this return is below expectations, it is an improvement above what Pension & Investments reported back in January when it said that CalPERS earned -3.9% for 2018. That return was driven by the market drop in December 2018.

This is what they write for the fiscal year ending June 30th:

The $372.8 billion California Public Employees Retirement System, Sacramento, earned an annualized net return of 5.8% over five years, a 9.1% return for the 10-year period and 5.8% for the 20 years ended June 30. Over the past 30 years, the CalPERS fund has returned an average of 8.1% annually.



This is a nice pickup from calendar year 2018:

CalPERS earned -3.9% in the year, 6.3% for the three years and 5.1% for the five years ended Dec. 31, CEO Marcie Frost told the board for the $348.7 billion pension fund at its meeting Tuesday. The 10-year return ending Dec. 31 was 7.9%. 

Still, recent 5 year history is coming in at 5.8% versus the target of 7.1%.

For those who are watching the pension problem in California know that CalPERS is making demands on cities to increase their pension payments. There's a couple stories up on this topic.

The Daily Bulletin writes this about the city of Ontario:

Meanwhile, the city’s pension payments through CalPERS are going up, from $30.7 million this past year to $33.2 million in 2019-20. Keeping up with growing demands will be increasingly difficult for the city, Ochoa warned. “The City’s annual General Fund CalPERS pension expense will increase an average of almost 10% over the next three years, while the projected General Fund revenue growth is pegged at approximately 4%,” he wrote . . . According to Stanford’s PensionTracker.org website, each Ontario household is responsible for $20,144 of that debt. According to the site, the average California household is responsible for $78,334 in unfunded pension debt. 

The article mentions that Ontario is expecting general fund expenditures of $275.4 million versus revenues of 273.2 million. Nothing in the article indicates that Ontario is doing anything in their budget to address their future pension increases so they're just kicking the can down the road. The article does state that Ontario household responsibility is $20K while the average California is $78K. I suspect this isn't an apples to apples comparison. I believe that the $78K includes state workers and the allocation of those costs to California households.

Based on Pensiontracker.Org, Ontario ranks 91st in the state when it comes to pension obligations. That ranking doesn't seem that bad, but then Simi Valley which ranks 270th ($11K) is considering some drastic action to deal with their pension problems. This might indicate that Ontario should start being more concerned about their debt sooner rather than later.

Ventura County Star writes the following about Simi Valley and the risky move they're hoping to take:

The Simi Valley City Council is considering issuing risky pension obligation bonds to refinance much of the $147 million it owes the California Public Employees' Retirement System pension fund . . . They note that the money the bonds let cities borrow is typically invested in the stock, bond or real estate markets, which have their ups and downs. If the market falls short, taxpayers are on the hook for the difference . . . "The research I've seen indicated that about two-thirds of the time that an agency issues these pension obligation bonds, they actually lose money," Nation, who is also project director at the Stanford Institute for Economic Policy Research, said. "  . . . [Deputy City Manager Samantha Argabrite] said she would not recommend that the council issue a bond for the entire $147 million unfunded accrued liability. "Typically, you're going to more likely fund in the 80% to 90% realm," she said. 

The article goes on to indicate that these bonds don't need to be approved by voters. So basically the city is taking a risky bet that turns negative two-thirds of the time without consideration by voters. It would seem that this might be the wrong time to take such a bet. We've been in a decade long bull market. What are the chances that the next bear market is just around the corner? I do find it amusing that the Deputy City Manager states that she wouldn't recommending funding the entire unfunded amount via this bond . . . just 80% to 90%. At those percentages, why not just go to 100%.

(Pensiontracker.Org has the following debts for California's larger cities: San Francisco at $65K, Los Angeles at $30K and San Diego at $17K.)