Calpers, the nation's largest pension fund, is another victim of the aggressive use of "alternative assets" by pension funds (I recently posted on the problems in Pennsylvania).As in the case of university endowments, the "state of the art" invesmtment strategy moved from a "boring : portfolio including large holdings of investment grade bonds along with marketable equities has been replaced by one including generous helpings of "non traditional asset classes" which were promised to increase returns without increasing risk.
The WSJ reports on the conseqeunces for CALPERS, (my bolds) and I am afraid we the taxpayers of Califormia will be called upon to maker up for any shortfalls. Unlike PA which reported large losses due to hedge fund investments, this article reports on the ill fated real estate investments at CALPERS, although I strongly suspect they took hits in the hedge fund arena as well.
Risky, Ill-Timed Land Deals Hit Calpers
By MICHAEL CORKERY, CRAIG KARMIN, RHONDA L. RUNDLE and JOANN S. LUBLIN
At the height of the property bubble, California's giant pension fund, Calpers, made a fateful decision: It aggressively poured money into real estate. As a result, today it's one of the biggest owners of undeveloped residential land in America.
Bad Bets
Partly because of these investments, California Public Employees' Retirement System is struggling to avoid one of its worst annual declines since its 1932 inception. Calpers has lost almost a quarter of its assets since July 1, the start of the current fiscal year.
The problems come at a time of uncertainty for the nation's largest public pension fund, which has been without its top two executives for nearly half a year. Calpers is poised to appoint a new chief executive as early as this week, people familiar with the matter said.
Calpers is now warning California's cities, towns and schools that they may have to cough up more money to cover the retirement and other benefits the fund provides for 1.6 million state workers. Some towns are already cutting municipal services, and at least one is partly blaming the Calpers fees.
Calpers in recent weeks said it expects to report paper losses of 103% on its housing investments in the fiscal year ended June 30. That's because Calpers invested not only its own money, but billions of dollars of borrowed money that must be repaid even if the investment fails. In some deals, as much as 80% of the money invested by Calpers was borrowed.....
With $239 billion in assets as of June, Calpers's portfolio was bigger than the government-run funds of Russia, South Korea, Dubai and Chile combined. In recent years, Calpers became much more aggressive than other pension funds in making nontraditional investments -- real estate, foreign stocks, even forestland....
Alicia Munnell of the Center for Retirement Research, Boston College, says the economic slump will likely force other pension funds besides Calpers to pass on the financial pain. "Even under the best-case scenario...taxpayers are still going to have to put more money into pension funds."...
Just one particularly bad year for investments can have serious consequences for California governments in the retirement system. Calpers recently estimated that if its declines for the current fiscal year are greater than 20%, it would trigger an increase of 2% to 5% of an employer's payroll.
Currently, the average employer-contribution rate for public agencies, including cities and counties, is 13% of payroll, Calpers said, which is already on the high side for state pension funds, according to industry analysts. A 5% increase in California's rate would be the largest increase to hit public employers since the dot-com bust....
Real-estate losses aren't the primary reason Calpers is taking a hit. Its biggest declines have been in the stock market: Its stock portfolio is down 41% so far this fiscal year.
But Calpers has targeted less money in bonds, and about double the allocation to private-equity investments and real-estate deals, than the average public pension fund, according to Calpers documents and an industry survey.
Calpers got more aggressive in real estate amid the tech-stock selloff of 2000-02. Its board decided to increase its investments in real estate and private equity, shifting some money out of safer, but lower-yielding, holdings like bonds.
Robert Carlson, a former Calpers board member who left the board earlier this year, said publicly at that time, "We believe taking no risk is the biggest risk you can take."
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