My inept pension fund

CalPERS has done a terrible job the last two years managing the retirement savings of 1.6 members and retirees. In 2008-2009, the nation’s largest pension fund lost $56 billion (24.4%) of its principal, its worse one-year loss ever. K-12 teachers have a separate fund (CalSTRS) which has done equally badly.

As with any other retirement fund, the earnings from investments are supposed to pay for retirement benefits, in this case a defined benefit plan for most state, municipal and California State University employees. Bad investments means higher taxpayer (or employee) contributions for retirement plans or (less likely) lower benefits.

While the fund may be avoid repeating stupid mistakes in high-risk undeveloped land (like its $970 million loss on Newhall Ranch, near Magic Mountain in north LA County), apparently it thinks the way to fix this is to increase its mix of risky alternative investments. As the NYT reported:

Those problems now rest largely on the slim shoulders of Joseph A. Dear, the fund’s new head of investments. He is not an investment seer by training, but he thinks he has the cure for what ails Calpers, or the California Public Employees’ Retirement System, the largest in the nation with $180 billion in assets.

Mr. Dear wants to embrace some potentially high-risk investments in hopes of higher returns. He aims to pour billions more into beaten-down private equity and hedge funds. Junk bonds and California real estate also ride high on his list. And then there are timber, commodities and infrastructure.

That’s right, he wants to load up on many of the very assets that have been responsible for the fund’s recent plunge. Calpers’s real estate portfolio has tumbled 35 percent, and its private equity holdings are down 31 percent. What is more, under Mr. Dear’s predecessor, Calpers had to sell stocks in a falling market last year to fulfill calls for cash from its private equity and real estate partnerships. That led to bigger losses in its stock portfolio.
…
A somewhat unorthodox choice for the job, Mr. Dear sounds a little like Captain Kirk surveying the Starship Enterprise when he explains why he leaped at the opportunity earlier this year: “Calpers is the flagship command of the public pension fund world.”

He was hired in large part for his management skills and political savvy — honed in Washington, where headed the Occupational Safety and Health Administration in the Clinton years. He does not have an M.B.A. or any other advanced degree in finance. Harvard, Yale or Wharton is not on his résumé. Instead, his lone degree, in political economy, is from Evergreen State College in Olympia, Wash.

Most recently, Mr. Dear headed the Washington State public pension fund, which gained a reputation as a daring investor under his oversight. It risked more of its portfolio — 25 percent — on private equity than any other public fund. The bet pushed the Washington State Investment Board, which now has $67 billion in assets, into the top 1 percent of its peer group in performance during the boom years, according to Wilshire Associates. But in the fiscal year that ended last month, the fund lost 27 percent of its value, or $18 billion.

If that criticism is too subtle, how about Joe Wiesenthal of Silicon Alley Insider:

This is not a new phenomenon. Defined-benefit pension funds, wracked with losses after 2008, know that they only way they'll have enough money to pay out retirees is if they make some big, risky bets that hit.

And so it is with the grand dame, California's CALPERS, which lost $60 billion this past year.
…
Wow, a guy with little investment training thinks the cure is hedge funds, private equity, California real estate and timber. What could go wrong all of that? If there's anything redeeming, it's that at least there's an acknowledgment that these risks are in fact big risks, whereas two years ago, pension funds, like CALPERS, had deluded themselves into thinking that weren't highly exposed to risk, but that their various alternative-investment holdings constituted "diversification."

And it's great news for those hedge and PE funds, which otherwise might have a hard time raising money, were it not for all the pension funds that just have to get their numbers up -- or else. (Well, or else they'd have to get bailed out by the taxpayers).

His colleague Moe Tkacik is not so kind:

It is not hard to see why public pension funds like CALPERS -- and CALPERS has traditionally been one of the worst offenders -- are fertile ground for kickbacks and corruption: they put incomprehensibly vast sums under the management of political appointees who earn a yearly salary that would barely cover the dermatologist bills of the Wall Street advisers they have to talk to all day.

In the past, strict investment guidelines limited the potential for graft in this business, but at some point in the nineties "alternative" investments came into vogue, benchmarks and regulations and disclosure gave way, and by the turn of the millennium millions of teachers, firefighters, bus drivers and cops had earned the dubious achievement of playing the "greatest fool" in every major American asset bubble.

That the lifestyles of political hacks and the profit margins of funds-of-funds-of-funds and investment banks would be subsidized by the retirement savings of what remains of the nation's middle class came to be such an accepted reality that a Bear Stearns managing director openly bragged in 2007 about how public pension funds had become go-to dumping grounds for the unrated "equity tranches" of their crappiest synthetic subprime CDO-squareds.

I like to tell job applicants for SJSU faculty positions: “we have high teaching loads and high cost of living, but we make up for it with a low salary.” (I really do say that — it’s better to diffuse the issue up front and scare off those who are trying to find top dollar.)

The two bright spots of the compensation package were the defined benefit pension and retirement medical. Clearly I should have treated that as a political promise, rather than a contractual commitment.

To this we add an even lower salary — involuntary furloughs (a 9.5% pay cut without workload reduction) — in parallel to our our University of California brethren. While both the CSU and UC have management problems, in this case the proximate cause is a 20% funding cut from the politicians who are mismanaging our banana republic.