SAN FRANCISCO/NEW YORK | BY RORY CARROLL AND EDWARD KRUDY
For the second straight year, U.S. public pension funds have fallen well short of their investment targets, swelling their vast unfunded liabilities and placing a greater burden on municipalities to offset the underperformance through increased contributions, estimates show.
The funds, which guarantee retirement benefits for millions of public workers, logged total returns of around 1 percent for the fiscal year ending June 30, while private pension funds earned more than triple that, according to preliminary estimates from consulting firms Wilshire Consulting and Milliman, respectively. Those figures could change as complete data for the period becomes available.
That is a poor showing relative to the 7 percent or more that pension funds seek to earn annually.
The shortfalls could add fuel to the growing debate about the long-term viability of public pensions – which financier Warren Buffett once referred to as a “gigantic financial tapeworm.”
The funds have suffered from years of underfunding exacerbated by states lowering their contributions when the funds were performing well, political resistance to increasing taxpayer contributions, overly optimistic return assumptions and retirees living much longer than they used to.
The 100 largest U.S. public pension funds were just 75 percent funded, according to a 2015 study conducted by Milliman.
The pension funds have been challenged by a multi-year environment of rock-bottom interest rates and mixed stock market performance.
Public pension funds likely did worse than private funds, because the public funds had more money in short-term bonds which, during the fiscal year, underperformed the long-term bonds that private pension funds favor, said Ned McGuire, vice president and member of the Pension Risk Solutions Group at Wilshire Consulting.
Complete data on the public funds isn’t available yet, but early reporters reveal significant underperformance.
The California Public Employees’ Retirement System (CalPers) and The California State Teachers’ Retirement System (CalStrs), the two largest public pension funds, returned 0.6 percent and 1.4 percent respectively, in the 12 months ending June 30. That is a huge miss compared with the 7.5 percent they need to reach fund their liabilities in the long run.
The New York State Common Retirement Fund, the nation’s third-largest public pension fund, earned just 0.19 percent return on investments, missing its 7 percent target.
The Wisconsin Retirement System, the ninth-largest U.S. public pension fund, had a return of 4.4 percent for its core fund in fiscal 2016, well below its assumed rate of return of 7.2 percent.
In response to missing its target, also known as its “discount rate,” CalPers on Monday said it was reviewing the changing demographics of its members, the economy and expectations for financial markets.
“We will conduct these reviews over the next year to determine if our discount rate should be changed sooner rather than later,” CalPers said in a statement.
Public funds had a return of just over 1 percent, while corporate funds had a return of 1.64 percent, according to a report released on Tuesday by Wilshire Trust Universe Comparison Service, a database service provided by Wilshire Analytics.
At the same time, the top 100 corporate funds returned 3.3 percent, according to Milliman. Becky Sielman, an actuary at Milliman, said the most recent underperformance is harder to handle because it continues a troubling trend for public and private funds.
“It’s easier to absorb one down year followed by a good year,” she said. “Likely what we have here for many plans is two down years in a row.” (Reporting by Rory Carroll; editing by Linda Stern and Dan Grebler