Investments of California's two big pension funds lose ground

Jon Ortiz

Jul. 19, 2008 (McClatchy-Tribune Regional News delivered by Newstex) -- It's been a tough year for California's two biggest public pension funds.

The $239 billion California Public Employees' Retirement System, the nation's largest public pension fund, said Friday that its investments lost 2.4 percent for the fiscal year that ended June 30.

The nation's second-largest public pension fund, the $162 billion California State Teachers' Retirement System, also said Friday it lost money -- about 3.7 percent for the fiscal year.

Both systems said the one-year setback won't affect retiree benefits.

The stock market's precipitous decline in the past year has hammered investors, deflated individual retirement accounts and pummeled public pension funds that traditionally invest heavily in U.S. equities.

A recent Merrill Lynch (NYSE:MER) (OOTC:MERIZ) report found that public pension funds on average have lost 5 percent in the past year.

And according to Chicago-based Northern Trust (NASDAQ:NTRS) Universe, which tracks institutional investors, the median performance of the 50 public funds it analyzes was a 4.3 percent loss for the year that ended June 30.

"It could have been a lot worse for CalPERS and CalSTRS. Take a look at the market right now -- down 25 percent from the peak, $5 trillion wiped out," said Sanjay Varshney, dean of the business school at California State University, Sacramento. "(Cal- PERS and CalSTRS) aren't immune from these problems, but they both have wide-ranging portfolios that act like an insurance policy. Considering everything, they had a very good year."

CalPERS lost an estimated 10.7 percent on public equities, which make up about half of its investments. Those losses blunted gains in private equity (19.6 percent), real estate (8.1 percent) and global fixed income (7.7 percent).

The fund's new ventures into infrastructure, commodities, timber and inflation-linked bonds gained 22.9 percent, but the so-called "inflation-linked assets class" is just 2 percent of Cal- PERS' portfolio.

"It was difficult for any investor to make positive returns in stocks this past year, but we realized gains in other areas, ending the year in good financial shape," said Anne Stausboll, CalPERS interim chief investment officer, in a press statement.

CalPERS' fiscal 2007-08 loss breaks a four-year streak of double-digit investment gains for a fund that provides retirement and health benefits to 1.5 million public workers, retirees and their families. The loss won't affect retiree benefits or what employers will pay into the fund, which remains 93 percent funded, said spokeswoman Pat Macht.

"We've been squirreling away investment gains for several years," Macht said.

No. 2 fund CalSTRS reported it took a 13.4 percent hit on U.S. stocks and lost 5.8 percent on foreign stocks, which together make up about 60 percent of its investments.

The losses offset gains of about 11.6 percent in private equities, 11.8 percent in real estate and 6.1 percent in fixed income investments.

CalSTRS officials said that the one-year decline, its first in six years, won't affect its obligations to its 813,000 members. The fund's investments have averaged an 11.5 percent return for the last five years; it needs an average 8 percent return to meet its commitments.

Unlike CalPERS, CalSTRS does not invest in commodities.

"The pension fund is secure," said CalSTRS spokeswoman Sherry Reser.

Newstex ID: KRTB-0178-26777795