The California Public Employees’ Retirement System (CalPERS) has lost about $68 billion in market value since January, thanks in large part to the coronavirus-fueled dive in global financial markets.
This is leading some to crank up the volume on their calls for a shift from defined benefit plans to 401k plans for the state’s public employees.
CalPERS, the largest U.S. pension plan by assets, had a market value of about $402 billion as of January 21, 2020, according to a news release, and was at $353 billion as of March 12. The most recent value posted on the CalPERS website has the value at $334 billion as of market close on March 20.
CalPERS held its most recent board meeting March 19 via teleconference (due to coronavirus safety concerns), which was short on details of just how badly the state pension plan had been hit by falling stock prices, according to reports.
CalPERS Chief Investment Officer Ben Meng did say the pension system had increased its liquidity position to help mitigate equity declines, according to a March 19 article on Chief Investment Officer.
“We don’t have a crystal ball to tell you how long this pandemic will last. There’s no clear picture of the impact COVID-19 will have on the economy and the global financial markets. It is difficult to gauge or forecast, and we should expect market volatility to continue,” Meng told the board, per the CIO article.
In an opinion piece posted March 20 in the San Bernardino Sun, Steven Greenhut notes that CalPERS was only 70% funded at the height of the market.
Greenhut writes: “Instead of fixing the pension system by scaling back future-going benefits, California officials ramped up state spending, dismissed pension reformers (we’re apparently just anti-union Chicken Littles) and pretended the fat times would go on forever. Ironically, California’s Legislature—the heart and soul of the Trump resistance—banked on the administration’s continued success at juicing the stock market.”
Crisis puts state, cities in bind
He goes on to note that in the private sector, workers generally receive 401k plans.
“When the market soars, employees do well. When it falls, they take a hit. That’s why most of us wisely are not checking our retirement accounts right now,” Greenhut wrote. “In the public sector, employees are guaranteed a pension based on a formula. It can’t be altered even during economic catastrophe. The pension funds invest in the markets and need to hit a predicted rate of return to keep the funds buoyant. CalPERS’ investments clearly were on track for a healthy return this year, but might now head into negative territory.”
Indeed, CalPERS’ fiscal year ends on June 30, and without a significant equity market recovery over the next few months, its returns could be in the low single digits or even in negative territory, CIO notes, instead of hitting the stated goal of a 7% annualized investment return.
While public employees won’t take a hit, cities will have to boost their contributions to the state’s pension fund. That means cutbacks in public services and higher local taxes. California will have to divert more money from the general fund, and Greenhut notes CalPERS may consider leaving the public employee contribution rate steady for the next two years to reduce the current strain, but adds that just kicks the can down the road and will ultimately exacerbate the shortfall.
Greenhut goes on to mention state senator John Moorlach, the state’s top pension expert, has called for a shift from DB plans to 401k plans for public employees, “but the union-controlled Legislature could never countenance such a heretical idea.”
Greenhut concludes that California lawmakers can fix the pension system by shifting public employees to 401k programs or adjusting the so-called “California Rule,” which forbids government from reducing future benefits for current employees.
“Don’t expect them to make those hard choices. Instead you, dear [California] taxpayer, will be forced to pay more to deal with our government’s shortsightedness.”