California's $100 Billion Whooping

As if California didn't have enough to deal with its budget crisis, now the FT reports that the two largest pension funds in the US have recorded steep losses following the turmoil in stock markets, with the value of their combined portfolios shrinking by almost $100bn:

The California Public Employees’ Retirement System (Calpers) and the California State Teachers’ Retirement System (Calstrs) were hit by the real estate slowdown and the slump in global equities. Calpers said the fall in the value of its assets was the most severe in its history.

“This result is not a surprise; it is about what we expected, given the collapse of markets across the globe,” said Joe Dear, investment chief at Calpers.

The value of Calpers assets fell 23.4 per cent for the year to June 30, raising concerns that state employees and local governments might have to increase their ontributions to cover the shortfall.

But Calpers presented a bullish view. “The system has more than enough cash through contributions and income from investments to meet our present liabilities, so we are in a good position to ride out the current downturn and come out stronger,” said Mr Dear.

The market value of Calpers assets was $180.9bn (£110bn) on June 30, down from $237.1bn on the same date the previous year. The value of the portfolio had fallen to $160bn in March of this year but rebounded by $20bn by the end of June thanks to a partial recovery in equity markets.

Both organisations shifted a portion of their portfolios out of equities and into fixed income and real estate during the year to take advantage of lower prices.

Calpers also said it was “realigning relationships with hedge funds and private equity partners”. This would lead to “reduced fees, better alignment of interests, and more mutually beneficial long-term relationships”.

The value of Calpers real estate and private equity investments fell by 35.8 per cent and 31.4 per cent respectively in the year to June 30.

Calstrs was hit by the same macro-economic factors, with the value of its assets falling from $162.2bn to $118.8bn in the 12 months to June 30.

The organisation wrote down the value of its property holdings rather than spread the writedown over several years, which saw the value of its real estate portfolio shrink by 43 per cent.

“We’re now in a position to turn round our real estate returns,” said Christopher Ailman, Calstrs chief investment officer, adding the organisation planned to acquire “high-quality assets from distressed sellers at attractive deep discounts”.

The steep annual decline could exacerbate Calstrs long-term funding gap of $22.5bn. “Our members’ benefits are secure, yet the current economic picture clearly illustrates investments alone cannot meet pension obligations in the long term,” said Jack Ehnes, Calstrs chief executive.

He added: “We are not in a crisis to resolve the contribution gap, but the sooner a solution is found, the lower the cost.”

The only way California is going to solve the funding gap is by increasing contribution rates, cutting benefits, increasing the retirement age and by increasing taxes. It's a bitter pill to swallow but given the magnitude of these losses, they don't really have a choice.

I also heard another large Canadian pension fund, PSP Investments, deposited their FY2009 report to the Treasury Board. Parliament will discussing it today for approval. It will be interesting to see their losses in public and private markets.