The State Worker

Bloomberg.com has this story that contends many public pensions are overstating expected returns and understating their future costs. The story includes references to CalPERS:

The nation's largest public pension fund, California Public Employees' Retirement System, has been reporting an expected rate of return of 7.75 percent for the past eight years, and 8 percent before that, according to spokesman Clark McKinley.

Its annual return during the decade from Dec. 31, 1998, to Dec. 31, 2008, has been 3.32 percent, and last year, when markets tanked, it lost 27 percent.

"It's pitiful, isn't it?" says Frederick "Shad" Rowe, a member of the Texas Pension Review Board, which monitors state and local government pension funds. "My experience has been that pension funds misfire from every direction. They overstate expected returns and understate future costs. The combination is debilitating over time."

Rowe, 62, is chairman of Greenbrier Partners, a private investment firm he founded in Dallas 24 years ago.

... Calpers's McKinley declined to comment on Rowe's views.

We asked CalPERS' spokeswoman Pat Macht to respond. Here's her e-mail:

Beware of the anti-pension ideologues who come out of the woodwork during market downturns. Like vultures, they prey on the highly charged and negative investment environment, looking for ways to convince you a temporary performance downturn will be typical for all time!

They know -- but don't tell you so -- that we set our rates based on a fiscal year investment return. They don't tell you that our assumed rate of return is made based on advice from a range of experts within CalPERS and within the industry and that it is regularly evaluated every two to three years in public session. They don't tell you what you would learn from a textbook on pension management: that some years investment returns are as expected; other years, they will be more than expected and yes, some years they will be less than expected.

They don't tell you that over the last 24 years, we have exceed our assumed rate of return 17 times, and eight of those years were more than double the 7 3/4 percent assumed rate of return.

(And here's an interesting fact: For five years after the Great Depression, there were multiple double digit return years.)

We will withstand the market swings, with our goal in mind: to achieve our assumed rate of return averaged over many, many decades. That's what we are designed to do. That's the math that matters.

Patricia K. Macht
Assistant Executive Officer
Office of Public Affairs