Misunderstandings Over Pensions Create 'Unnecessary Alarm'

A report from the Center on Budget and Policy Priorities has concluded that misunderstandings regarding state debt, pensions, and retiree health costs are exaggerated.

(January 21, 2011) — The Center on Budget and Policy Priorities (CBPP) has offered a report concluding that misunderstandings regarding state debt, pensions, and retiree health costs has caused “unnecessary alarm.”

The report stated that predictions of an “imminent fiscal meltdown” among US states and municipalities are exaggerated, with misperceptions also diverting attention from needed structural reforms.

While US states will reportedly confront deficits totaling $140 billion in the next fiscal year, the Center has concluded that the operating deficits most states are forecasting for fiscal 2012 are largely the result of the weak post-recessionary economy. “Overheated claims about state and local budget problems not only are inaccurate, but also could lead policymakers to take unwise steps such as allowing states to declare bankruptcy or forcing them to change the way they report their pension liabilities as a condition for issuing tax-exempt bonds,” Iris J. Lav, senior adviser at the research group, stated in a news release.

Industry observers claim that states and localities have $3 trillion in unfunded pension liabilities and that pension obligations are unmanageable, which may cause localities to declare bankruptcy, the report explained. Yet, “such claims overstate the fiscal problem,” the report said, adding that the warnings fail to acknowledge that severe problems are concentrated in a small number of states, and often promote extreme actions rather than more appropriate solutions.

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The CBPP said that instead of bankruptcy, state and local governments should instead divert their attention to overhauling their budget and revenue systems, proactively addressing structural deficits that have built up. The group added that the pension liability problem also may not be as large as some have predicted.

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742

Both the $226.6 billion California Public Employees' Retirement System (CalPERS) and the $146.4 billion California State Teachers' Retirement System (CalSTRS) have achieved returns of more than 12% in 2010.

(January 21, 2011) — While still below the high-water marks set before the financial crisis, the nation’s two largest public pension systems have reported positive returns in 2010, with both funds achieving a return of more than 12%.

The 12.46% return on investments by CalPERS was just below its policy benchmark of 13.2%, buoyed by gains in alternative investments. In contrast to its 6% drop in return in 2009, private equity was the system’s best-performing asset class for the year with a 21.5% internal rate of return. Following private equity, global equity at 14.6% and global fixed income, 11.6%, achieved the best performance. Despite the good news for CalPERS, real estate, its worst performer, continued to slip another 5% after its 47% drop in 2009.

“During 2010, we reduced portfolio leverage and ended relationships with several real estate partners who didn’t meet our expectations,” said Joseph Dear, chief investment officer of the pension fund, in a statement. “The strong returns we saw in 2010 prove that our top-to-bottom evaluation of all our investments is paying off for our beneficiaries and our employers.”

As of January 18, CalPERS’ total investment portfolio was valued at $228.5 billion — 12% below its historic high of $260 billion in October 2007 yet significantly better than its low of $160 billion during the recession in March 2009.

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At the same time, the 12.7% return by CalSTRS has pushed the fund back to its October 2008 level at $146.4 billion. Its top-performing asset class was US equity at 17.2%, followed by private equity at 16.9%; non-U.S. equity, 12.8%; fixed income, 8%; and real estate at 0.01%. The pension fund’s governing board has been involved in a process of discussing the implementation of a radical new asset allocation that will divvy up the scheme’s assets based on their characteristics – like sensitivity to inflation, stable return, or growth – rather than equity or debt.

“This means that while the positive investment returns are a good short-term indicator for CalSTRS, we still confront a long-term funding shortfall that can only be resolved by working with our stakeholders for a solution that the Legislature and Governor must develop and that CalSTRS can implement,” CalSTRS spokesperson Ricardo Duran told aiCIO.

Meanwhile, in a reflection of the broader attempt of public funds to become more transparent following the financial crisis, CalPERS has been spearheading the push for heightened transparency, after worries about lack of disclosure in the pension fund community exploded in 2009 when a pension-fund scandal in New York exposed the role of placement agents in bribery and corruption charges. “Gathering information is not enough,” said Anne Stausboll, CalPERS chief executive officer, to the LA Times early last year. “We remain firmly committed to pursuing a full and fair examination that the special review will provide, and to backing legislation that would remove contingent fee arrangements and require placement agents to comply with the same rules as lobbyists.”

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742