California's State Finances May Be Squeezed Further By Pension Plan

Local governments in California, and their taxpayers, may face even greater financial trouble, following a move by the $195 billion state pension plan, CalPERS. The board of the plan is considering lowering its expected return, that is, how much it expects to earn on the investment portfolio, leaving some slack that would have to be picked up either by greater contributions from local governments (who in turn would tap their taxpayers) or higher contributions from employees.

Last week I wrote about a report from the Pew Center for the States which covered the funding shortfalls in many state pension plans -- many haven't been making their required contributions, and of course all were badly dented by the financial markets in 2008. California is a special case, not only because the state economy and thus its pension funds are so big, but the CalPERS plan has for years been an investment innovator, and many plans follow their examples. In the Pew report, California was rated "needs improvement."

This topic came to my attention from The Wall Street Journal. CalPERS has assumed its fund would earn an average annual rate of 7.75 percent, but looking at the financial markets it faces, is thinking about reducing that rate. (The last change was a reduction from 8.25 percent during the dark days of 2003.)

To keep up benefit payments, 75 percent of which is paid for by investment earnings. The extra would have to come from somewhere -- higher employee or local government contributions are the likely candidates.

It's not certain that CalPERS will change the assumed earnings rate, but they've been thinking about it for a while.

The Journal reports:

Pressure to lower the target has been building for months. "You'll be lucky to get 6% on your portfolios, maybe 5%," BlackRock Inc. Chairman and Chief Executive Laurence Fink told Calpers board members last July.