Calpers Looks to Shore Up Assets

The nation's largest public pension fund said it intends to tap California public employers for more money if its heavy investment losses don't reverse, a sign that more financial pain could be in store for state and local governments.

The California Public Employees' Retirement System, known as Calpers, said its assets have declined by more than 20%, or at least $48 billion, from the end of June through Oct. 10.

Unless returns improve, Calpers is poised to impose an estimated increase in employer contributions of 2% to 4% of payroll starting in July 2010 for about two-thirds of its state-employer members, and in July 2011 for the remaining third. Any decision will be made after Calpers knows its returns for the fiscal year.

The average employer contribution rate for public agencies including cities and counties is 13% of payroll in the current fiscal year, Calpers said.

A Calpers rate increase would add to a fiscal mess in California, where falling sales-tax and income-tax revenue and a tanking real-estate market have affected government agencies across the state. With budget cuts for state and local governments projected in coming years, an increase from Calpers would be one more burden.

The news "bodes very badly for us," said Lori Ordway-Peck, assistant superintendent of business services for Burbank Unified School District, which serves about 15,000 students near Los Angeles. "Something would have to give to find that money.

Joe DeAnda, a spokesman for California Treasurer Bill Lockyer, said "the most obvious impact is going to be on taxpayers, who will have to fund any additional increases" to Calpers contributions, though he added that the treasurer is maintaining hope that a market recovery will minimize, if not eliminate, any additional burden. H.D. Palmer, a spokesman for the California Department of Finance, declined to comment, as Calpers hasn't yet decided whether to enact the increase.

With most economists forecasting a recession in the U.S., and at least a slowdown abroad, analysts see a tough road ahead for corporate earnings, and expectations for the stock market are low.

For the fiscal year ended in June, Calpers lost 2.4%; Merrill Lynch recently estimated the average public pension fund's return as negative 5.1% for that period. Regardless of whether Calpers beats its peers, losses make it more difficult for the fund to fulfill its job of delivering pension payments to 1.6 million beneficiaries -- retirees and others.

Between Oct. 31, 2007, when Calpers assets peaked at $260.4 billion, and Oct. 20 of this year, when assets stood at $192.7 billion, the fund lost about $67.7 billion. The giant fund has tried to steer through the recent market turmoil while searching for new leadership, as its chief executive officer and chief investment officer both stepped down midyear.

While Calpers may end up among the first public pension funds to pass on the costs of investment losses to employer members, it may not be the last. Almost every public pension fund is grappling with losses in stock markets, where funds hold on average 58% of their assets, said Keith Brainard, research director at the National Association of State Retirement Administrators. "Sooner or later the money coming in has to equal the money going out," he said.

The increase in contributions to Calpers could be greater than 4% if the fund's assets decline further by the end of the fiscal year in June 2009. The increases would be smaller, or potentially not occur, if the fund reverses those losses.

A Calpers spokeswoman said that because of strong returns over the four years through June 2007, the fund has put aside 14% of its assets to serve as a cushion during bad times. As a result, the potential increases in employer contributions would be less than increases imposed during previous downturns.

The declines could take a toll on Calpers's funding status, which is the fund's assets divided by its liabilities. That status would be 68% by the end of June 2009, based on the market value of its assets and if the current 20% decline holds.

The ratio for healthy pension funds should be at least 80%, according to Mr. Brainard. At the end of the 2008 fiscal year, Calpers was 92% funded. It was 102% funded at the end of June 2007.

While Calpers has the ability to increase employer contributions, most public funds can't impose any contribution increase unless it is approved by the state legislature. And given economic woes, other state legislatures may be loath to impose more burdens.

Mr. Brainard said that while pension funds could allow their unfunded liabilities to grow in the short term, they will eventually have to dig themselves out of a hole to meet their obligations to beneficiaries.

Roger Mialocq, a partner with Harvey M. Rose Associates who serves as audit manager for Santa Clara County, says the county is struggling financially, and balanced its budget this year "only by using very large amounts of reserves." Santa Clara County includes much of Silicon Valley.

Mr. Mialocq said finance officials at Santa Clara and other counties have been bristling at Calpers rates since 2005, when the fund increased its contribution requirements to make up for losses from the dot-com bust. For Santa Clara, Mr. Mialocq said, the rate the county was paying for most employees jumped to about 13 cents for each dollar of salary from about eight cents.

Mr. Mialocq says that for the current fiscal year, the county is paying $176 million to Calpers for its 15,000 employees, and is projecting a $320 million shortfall for the next budget year. The kind of increase Calpers is projecting, which wouldn't start until 2011 for Santa Clara, could mean a bump of $20 million or more for the county, he estimates.

A Calpers spokeswoman said the formula for calculating the raise for an employer member relies on many factors, including the size of the payroll and the rate of retirement. "The true picture will only emerge as we get closer to the date," the spokeswoman said.

Rep. George Miller

Meanwhile, on Wednesday, the U.S. House of Representatives' Education and Labor Committee, headed by Rep. George Miller, a California Democrat, said the U.S. Pension Benefit Guaranty Corp. lost $3.1 billion in stock investments in the 11 months through August. The PBGC is a government agency that insures private pension plans, takes over failed pension plans, and pays benefits to workers in those plans.

On Sept. 30, 2007, the value of PBGC's total investments was about $63 billion, according to the agency's Web site. Jeffrey Speicher, a spokesman for the PBGC, said the agency now has $68 billion in assets and has "sufficient funds to cover our obligations for years and years into the future."