Saturday, December 5, 2015

Going Down

The San Diego Union-Tribune has an editorial complaining about CalPERS: [excerpt] Gov. Jerry Brown deserves credit from partisans of all stripes for his push to reduce the state’s debts and financial obligations during a period of growing revenue. It’s vastly easier from both a fiscal and political perspective to execute this smart strategy during up years than in down years. That’s why we share the governor’s frustration with the California Public Employees’ Retirement System, the nation’s largest pension fund. For years, the governor and many outside experts have urged CalPERS to scrap its overly optimistic assumptions about how much its investments would grow annually, assumptions that serve to mask how underfunded the agency is. Brown believed he had made his case to the CalPERS board for significant changes in the status quo. That’s why he has been sharply critical of the board’s recent decision to lower its estimate of future investment returns from 7.5 percent to 6.5 percent — but over a 20-year span, not immediately.That’s a trivial response to a real problem...

Full editorial at

So what's the significance of such critiques for UC? UC's assumed pension return was recently cut from 7.5%/annum to 7.25%. But there continue to be statements from UC's finance and budget types that even 7.25% is too high:

Chief Investment Officer Jagdeep Singh Bachher: 6-ish rate (Sept. 9, 2015, meeting of UC Regents' Committee on Investments):

Associate Chief Investments Officer Arthur Guimaraes: 5 to 7 percent (Oct. 29, 2015, statement to retirees):

Nathan Brostrom and Regents consider 7% or less: (Nov. 19, 2015, Regents meeting):

These public statements suggest that the estimated unfunded liability of the pension - other things constant - is likely to rise as the expected rate of return is lowered. That (likely?) outcome has implications for planning for a new capped pension tier for new hires. Any plan for such a tier should consider the estimated unfunded liability which will have to be paid off over time. Simply creating a new (lower) tier for new hires is bad enough. Getting payments from those new hires - directly or indirectly - to cover that liability is going to be a problem. All of that should have been considered by the Committee of Two, but obviously wasn't. Now it's in the hands of another committee that is operating under a very tight time frame, too tight to solve such problems (assuming they can even be solved). 

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