CalPERS Pension Promises: Myth, Reality, What’s Next?

On July 13, the Fresno Bee reported California’s big pension fund sees flat earnings for a second year.

by Mish

CalPERS still maintains that its long-term track record of 7.5% returns is intact. Is it?

Reader W.C Varones sorts it out in his article CalPERS Deliberately Deceives Public by Cherry-Picking Dates.

Cherry-Picking Dates by W.C Varones

You probably know that CalPERS recently reported yet another year of investment results that fell far short of its absurd promises.

But did you know that CalPERS is actively, deliberately deceiving the public about its investment promises and results?

CalPERS has a section called “Myths vs. Facts” on its website where it tries to debunk critics of its rosy expected returns, which experts nearly universally believe are too high. Here’s what the site showed until mid-July:

This is a recurring theme of CalPERS propaganda: pay no attention to expert opinion, zero percent interest rates, or historically high valuations. CalPERS can always expect high returns because CalPERS earned high returns in the past.

After a second consecutive year of dismal returns, the statements above about 20- and 30-year returns are no longer true. This spreadsheet shows the past 21 years of returns, taken from CalPERS annual reports (we could not find data prior to 1996). CalPERS’ 20-year annualized return is now just 6.57%… and it’s about to go a lot lower because it is rolling off four more consecutive years of double digit returns from the tech/internet bubble.

Last year, CalPERS semi-acknowledged that it needed slightly less crazy assumptions, promising to eventually lower expected return… but only after it has a really good investment year first. That’s like a heroin addict promising to quit after just one more fix.

Given that the CalPERS “Myths vs. facts” statement was no longer true, we were curious to see what CalPERS would do after 2016’s bad results came in. And CalPERS did not disappoint:

Look what they did here. In mid-July 2016, after they had already reported 2016 results, they went back and cherry-picked time periods ending June 30, 2015. If we don’t cherry-pick the data, the truth is that CalPERS has missed its annual return targets for all of these time periods: 1-year, 3-year, 5-year, 10-year, 15-year, and 20-year — and the long-term returns are even worse than the recent years! CalPERS is deliberately misleading the public!

If we can’t trust CalPERS even to be minimally honest with the public about its investment returns, why are we trusting them to manage hundreds of billions of dollars for retirees and taxpayers?

End Varones – Mish Comments

Despite two more bubble years, “CalPERS’ investment portfolio barely eked out a profit during the 2014-15 fiscal year and it performed even more poorly during the 2015-16 cycle that ended June 30, declining by $8 billion (2.6 percent) to $293.7 billion.”

And not only is this one of the biggest stock market bubbles in history, bond yields are at historic lows.

US Treasury Yield Curve

If one assumed a 60-40 mix of stocks and bonds, one would either have to invest heavily into junk, or get returns of 11.88% a year in one of the biggest bubbles ever.

GMO Estimates vs. Pension Plan Assumptions

Even if pension plans get 4% returns for the next seven years they will be in serious trouble.

Mike “Mish” Shedlock

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