CalSTRS Returns 2.3% in 2011

A follow-up to my earlier comment on paltry returns for pensions in 2011. Marc Lifsher of the Los Angeles Times reports, California teachers' pension fund posts 2.3% gain in 2011:

Battered by a volatile market, the California State Teachers' Retirement System posted a 2.3% return on its investments last year.

The performance, though extremely modest, was more than twice as large as that reported by CalSTRS' bigger sister agency, the California Public Employees' Retirement System.

CalPERS had a return of just 1.1% on its $229.5-billion portfolio last year.

The $144.8-billion CalSTRS fund had a rough year in 2011. It got a return of 0.9% on its U.S. stocks, 7.2% on bonds, 9.9% on private equity and 15% on real estate. It lost 14.1% on non-U.S. stocks.

CalSTRS did better a year earlier, reporting a 12.7% return that boosted the fund's value to its October 2008 level in the midst of the recession that ended in June of 2009.

The fund's portfolio lost about a quarter of its value during the worst downturn since the 1930s.

"We continue to feel the effects of the most precarious markets in decades," said CalSTRS Chief Executive Jack Ehnes.

The lingering financial crisis has had a strong effect on CalSTRS' ability to meet medium- and long-term obligations to its membership, 856,000 public school educators and their families.

It currently faces a $56-billion shortfall. As of June 30, 2010, it had only 71% of the funds it estimates are needed to pay future benefits.

CalSTRS' funding differs in one significant way from CalPERS'. The CalPERS board has the independent authority to ask participating governmental agencies to increase their annual employer contributions.

But CalSTRS' board lacks that power and needs the approval of lawmakers and the governor to raise contributions.

"The funding shortfall can be managed," Ehnes said, "but the governor and the Legislature must develop a specific funding plan, as only they have the authority to do so."

Despite doing twice as well as CalPERS, the truth is these are modest gains for two of the largest public pension funds in North America. Just like CaPERS, private equity and real estate delivered strong results (CalPERS did better in private equity while CalSTRS fared better in real estate). CalSTRS does not allocate to hedge funds but they did recently announce the selection of Lyxor Asset Management as its advisor in the development of a new global macro hedge fund strategy.

One thing that struck me is the 14% loss in non-U.S. stocks. Obviously they were exposed to European stocks which got hammered but were they overly exposed to financials? Do they hedge currency risk? I do not know but those are steep losses for non U.S. stocks which also include emerging markets which got clobbered in 2011.

As for the funding, Ehnes is right, it is manageable but the state has to come up with a funding plan. The last thing California wants is to go the way of Texas where two Republican state senators have proposed overhauling the state pension system by taking such steps as ending pensions for new state employees and instead offering them a 401(k) plan. That is a step in the wrong direction.

In New Jersey, public pension funds may have gotten a much-needed boost from Gov. Chris Christie’s landmark overhaul last year, but reports released today show the funds continue to be hampered by the state’s failure to make full payments into the plans.

And its not just Republicans looking to reform pensions. New York Mayor Michael Bloomberg told state lawmakers he backs Governor Andrew Cuomo’s proposals to increase payments for Medicaid, reduce pension-benefit costs for future workers and impose evaluation standards on teachers.

The squeeze on pensions is on. Paltry returns, exploding liabilities are increasing pension costs, pressuring politicians from all sides of the political spectrum to tackle pension reform. Below, Governor Cuomo speaks to reporters on why he thinks "pension reform is essential".