ECONOMY: CalPERS loses $24.9 billion but stays strong, analysts say

Pension fund's global, well-diversified portfolio credited for resilience.

By ZACH FOX - Staff Writer | Tuesday, September 30, 2008 5:44 PM PDT ∞

Don't feel bad if you've lost a fortune in the stock market during the recent Wall Street turmoil ---- so has one of the nation's largest, most sophisticated investment funds.

The California Public Employees' Retirement System, the pension fund used to pay the retirements of millions of government employees, has lost $24.9 billion over the last three months. The 10.4 percent loss is less than the Standard & Poor's 500, which dropped 13.6 percent in that time.

If the losses continue, California taxpayers could be faced with demands to make up shortfalls in funding the giant pension system.

On Monday alone, a dive in the stock markets wiped out $7.8 billion of the pension fund's investments.

The losses have come mostly from multimillion-dollar investments in financial institutions that have wobbled or fallen to the wayside. But analysts said they expect the company's global, diversified investments to carry the fund through a possible recession.

The pension fund's holdings were valued at $214.3 billion as of Monday, according to the fund's Web site. Recent losses from volatility in the financial sector follow a down year for the pension fund over the last fiscal year ending June 30. Its investments lost 2.6 percent in that time, compared to a 15.8 decline in the S&P 500 over the same time period.

In order to pay for workers' retirements, the fund needs to earn 7.75 percent each year, said Clark McKinley, a spokesman for the system.

That means if losses continue to mount, the fund might need to increase the contributions cities make into the pension fund.

A looming recession already has tightened the budgets of local cities as sales tax revenues have slipped and property taxes grew at a slower-than-normal rate after a severe real estate recession wiped out billions of dollars of home values across North County.

If the retirement fund were to increase the city contribution rate, it would be another strain on some cities' tight budgets.

How cities would pay the increased rate "depends on how much they change the rate," said Jennifer Smith, finance director for Encinitas. "We have put aside a rainy-day fund, but those (funds) were only 2 percent of operating revenues, so if we experience a bigger hit than that, we would have to go back to the City Council and see how we could address those losses," Smith said.

However, CalPERS might not need to demand more money from North County's fiscally tight cities. The pension fund employed a "smoothing" process a few years ago that spreads losses or gains over a 15-year period, McKinley said.

And during the housing bubble, the investment fund earned much more than its 7.75 percent benchmark, appreciating as much as 19 percent in one year, he said. Over the last five years, it has averaged 10.95 percent. But over 10 years, it averaged 6.7 percent, according to the fund's documents.

That means municipal contribution rates have increased gradually over the last several years, up to 16.5 percent of the base salary for most employees, said Andrea McCullough, spokeswoman for Vista.

Still, CalPERS might need to up its contribution requirements from cities if market conditions deteriorate further.

Whether the pension fund makes that move is contingent upon actuarial analysis of the volatile market. But overall, the fund is on solid ground, McKinley said. "There's one key term, and that's long term," he said. "The market goes up and down and we've got a worldly, highly diversified portfolio."

An independent analyst, Jason Dickerson with the state legislative analyst office, agreed. He said the pension fund is sufficiently diversified to withstand the rocky market and get back to profitable returns in the near future.

"I, frankly, wouldn't second-guess CalPERS' board," Dickerson said.

But CalPERS' losses should provide some individual investors some comfort in knowing that one of the most successful investment firms also can make bad bets.

At one point, the fund owned $1.8 billion worth of stock in American International Group, Lehman Brothers, Fannie Mae and Freddie Mac. All four institutions have since failed. As of mid-September, the fund still held stock in all its financial sector investments, said Brad Pacheco, another spokesman for the fund.

"As a long-term investor, we would have held these stocks through the rough times, so there has been some loss but it's just been a paper loss at this time," he said, meaning the fund will not realize any losses until it sells the investments.

The fund's position remained strong Friday, with Fitch Ratings, a company that evaluates the fiscal strength of a company, reporting CalPERS' top rating of "AAA" as stable.

CalPERS' strength offers another point of reference for individual investors, Dickerson said.

"It's important to not look too much at what happens each day or month or quarter, but to look at the long term," he said.

Contact staff writer Zach Fox at (760) 740-5412 or zfox@nctimes.com. Read his blog, "On the Realside," at nctimes.com/blogs/minding_your_business

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