* The pension fund holds much more of its money in cash than other comparable state pension funds and more than its allocation policy suggests. State Treasurer Dale Folwell routinely overrides the policy to prevent “rebalancing.” * Folwell emphasizes steeling the pension plan against stock market downturns. That’s led to the plan missing out on the big stock market gains of the last few years. Returns for the state pension fund are far lower than comparable public pension funds. * Folwell repeatedly liquidated stock to shift money to bonds and cash. *He has lowered the pension fund’s assumed rate of return in stages, which means the state and local governments have had to increase their contributions.
Rates reflect all known announced rates as of July 2022. The footnotes at the bottom of the page, which reflect additional explanations, qualifications, and scheduled future developments for certain plans, are a critical component of this data set.
The California Public Employees’ Retirement System reported a negative 6.1% return for the year, which includes a 21.3% positive return on private equity and 24.1% return on real estate as reported through the second quarter of 2022. What will happen if real-estate prices start to fall and some leveraged private-equity buyouts go south amid rising interest rates?
Collective-bargaining agreements limit how much workers must contribute to their pensions, so taxpayers are required to make up for investment losses. Employer retirement contributions—that is, taxpayers—make up 20% of government worker compensation. That amount has soared over the past decade as pension funds tried to make up for losses during the 2008-2009 financial panic.
A recent report by the Equable Institute found that state and local pension plans now are only 77.9% funded on average, which is about the same as in 2008. But some like Chicago’s are less than 40%. Advice to taxpayers in Illinois: Run.
The CalPERS board voted Monday to select a portfolio with a return of 6.8% and an expected volatility rate of 12.1%. This expected rate of return is two-tenths of a percentage point lower than last year’s target of 7%. The vote concluded a review of the pension fund’s assets, which occurs once every four years.
This expected reduction in the rate of return means that some employees will have to contribute more to their pension funds because the fund expects to earn less from its investment portfolio.
For employees hired after the implementation of the Public Employees’ Pension Reform Act (PEPRA) in January 2013, CalPERS estimates they will contribute an average of 1.2% to 1.5% more toward their pensions. These changes will go into effect for school employees, excluding teachers, in July 2022 and will be enacted for most other local government employees in July 2023.
For the last 20 years, state and local pension plans’ assumed rates of return have been far too optimistic. The distributions of average (geometric mean) assumed investment returns and actual returns from 2001 to 2020 demonstrate this. The figure below shows the distribution of the average assumed investment return rate versus actual investment returns for 200 of the largest state and local pension plans in the United States. The median assumed rate of return over the last 20 years was 7.7 percent per year, the median actual rate of investment return for these public pension plans was 5.7 percent.
This two percent difference helps to explain the nearly 30 percent drop in the average pension plan funded ratio over the same period. In recent years, many pension plans lowered their assumed rates of return.
The calculation error that upended the state’s largest pension fund has been traced back to a single month in 2015, according to an investigation from Spotlight PA.
The discovery came to light in a trove of documents obtained by reporters that found a tiny discrepancy that boosted the $64 billion Public School Employees Retirement System (PSERS) by a third of a percentage point in April of that year.
The consultant firm hired to review PSERS’ investment returns between 2011 and 2020, ACA Compliance Group, performed limited checks that skipped over the month in question, according to the report. The company that crunched the actual numbers, Aon, blamed the discrepancy on a data entry error.
No matter the fault, the miscalculation unraveled PSERS’ rate of return, dropping it from just above the mandated 6.36% threshold to prevent a contribution increase down to 6.34%. Now, about 100,000 workers who joined the system in 2011 or later will pay more beginning on July 1.
Main Comments • Stabilization goal is reasonable to consider • However, public sector’s approach to funding with risk assets creates additional issues for this type of debt (unfunded pension liabilities) relative to government bonds • Instability due to market risk isn’t in the model, because the model is deterministic: no distribution of possible outcomes ➢ Higher expected return you target, the greater the distribution of outcomes • Only meaningful scenario is r=d=0% → fiscal adjustment is 14.9% of payroll vs. current 29%. So a 51% increase. ➢ I will provide some reasons I think this might still be too low
Now The Inquirer and Spotlight PA have obtained new internal fund documents that shed light on that consequential mistake. The material traces the error to “data corruption” in just one month — April 2015 — over the near-decade-long period reviewed for the calculation.
The error was small. It falsely boosted the $64 billion PSERS fund’s performance by only about a third of a percentage point over a financial quarter. Even so, it was just enough to wrongly lift the fund’s financial returns over a key state-mandated hurdle used to gauge performance.
The documents reveal that a fund consultant, Aon, blamed the mistake on its clerical staff for inputting bad data. The material also shows that even though the fund hired a consultant, the ACA Compliance Group, to check the calculations, the consultant made only limited checks, and skipped over the month with the critical errors.
Author(s): Joseph N. DiStefano, Craig R. McCoy, Angela Couloumbis
I predict that state and local government balance sheets, already reeling from the pandemic, will be devastated in coming years by the stock and bond markets’ disappointing returns.
That’s because these governments’ pension plans are based on unrealistic assumptions about how those markets will perform in the future, and are therefore woefully underfunded. In fact, even with their optimistic assumptions, those funds are already underfunded. Their “actuarial funded ratio” (the ratio of the actuarial value of their assets to the actuarial value of their liabilities) is just 71.5% currently.
These plans are hoping to make up their actuarial deficits by earning outsized investment returns. I’m willing to bet their earnings instead will fall far short of historical averages, and they will have to make up the shortfall either by raising taxes, cutting services, or declaring bankruptcy.
State pension systems dropped the rate of return they assume for their investment portfolios again, continuing a two-decade long trend that public-finance experts say is necessary, even as it presents some challenges for the entities that participate in such plans.
The search for high returns takes many pension funds far and wide, but the Pennsylvania teachers’ fund went farther than most. It invested in trailer park chains, pistachio farms, pay phone systems for prison inmates — and, in a particularly bizarre twist, loans to Kurds trying to carve out their own homeland in northern Iraq.
Now the F.B.I. is on the case, investigating investment practices at the Pennsylvania Public School Employees’ Retirement System, and new questions are emerging about how the fund’s staff and consultants calculated returns.
The error in calculating returns was a tiny one, just four one-hundredths of a percentage point. But it was enough — just barely — to push the fund’s performance over a critical threshold of 6.36 percent that, by law, determines whether certain teachers have to pay more into the fund. The close call raised questions about whether someone had manipulated the numbers and the error wasn’t really an error at all.
“If you can’t change the benefits, and you can’t change the contributions, the only lever left for these people to pull is investment policy — that’s it,” said Kurt Winkelmann, a senior fellow for pension policy design at the University of Minnesota’s Heller-Hurwicz Economics Institute. “And that exposes younger beneficiaries and taxpayers to a lot of risk.”