CalPERS’ "Risky” Investment Move

Still reeling from its biggest market loss since the Great Recession of 2008, the California Public Employees’ Retirement System (CalPERS) now plans to borrow up to $80 billion to help achieve its goal of a 7% return.

The new plan, described by CalPERS’ Chief Investment Officer Ben Meng in a Wall Street Journal op-ed, has been called risky and irresponsible by some observers.

CalMatters’ Dan Walters’ writes the following:

The new scheme is an implicit admission that CalPERS can’t meet its 7% mark without increasing its exposure to the vagaries of the market. “There are only a few asset classes with a long-term expected return clearing the 7% hurdle,” Meng wrote.

Perhaps, then, the real problem is the 7% goal, much higher than those of private industry pension plans.

CalPERS and other public systems use higher earnings projections because they need them to pay for the expensive pensions that politicians have awarded. Inferentially, if they fall short of the mark, they can tap employers — i.e. taxpayers — to close the gap. However, that option is pretty much maxed out, which may explain why the very risky borrow-and-invest approach is being adopted.

This is serious stuff, so risky that the Legislature should dump its informal hands-off policy toward CalPERS and order up a comprehensive and independent examination of the system’s assets, liabilities and long-term prospects of meeting its pension obligations.

Read more about the borrowing scheme at Barron’s and Forbes.