How does California fall further and further into debt? Today’s news in the Sacramento Bee about CalPERS’ projection that it will earn almost 8% on its investments is typical.
CalPERS, which is exploring a cut in its official forecast of investment returns, received some encouraging news Monday from its chief outside consultant.
Wilshire Associates said the big pension fund can expect to earn an average annual return of 7.84 percent over the next decade. That’s slightly higher than the 7.75 percent forecast CalPERS uses now.
Even though CalPERS has lost tens of millions of dollars over the last year, its optimism is apparently boundless. The rosy forecast may depend significantly on the performance of the CalPERS investment in private equity funds, a riskier type of investment that can earn big returns in good years but dive in bad years. CalPERS’ chief investment officer explained to the Senate Finance Committee a couple years why it was a good idea to put pension funds in riskier, high-return investment vehicles:
Private equity returns may be up while public equity and other asset class returns are down, or vice versa. In addition, sophisticated investors typically further reduce risk in their private equity portfolios by diversifying into different market segments (e.g., venture capital, buyouts, mezzanine debt, etc) and geographies (e.g., US, Europe, Asia, etc.).
Is that really a confidence builder that the public employee pension funds will be prepared to pay future obligations? Wouldn’t it be safer for the state’s budget and its employees to plan on a much lower investment return, say 5 or 6 percent, and then be pleasantly surprised if the 7.84% projection turns out to be right?
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