CalPERS' announcement that its preliminary investment return for the fiscal year ended June 30 was 2.4%, compared with its 7.5% assumed rate of return, will increase funding costs for government units that contribute to the plan and could cause rating downgrades, said a report by Moody's Investors Service.
“When public pension funds experience investment performance that is worse than the assumptions, it generates an actuarial loss that increases reported unfunded liabilities along with government contribution requirements,” analyst Thomas Aaron wrote in a Monday report.
The report said the weak investment performance is a “credit negative” for the state of and most of the state's local governments. Moody's current bond rating for the state is Aa3 stable.
Mr. Aaron said compounding the negative effort of CalPERS' underperformance is that absent a multiyear period of outperformance, plan actuaries already expect underfunded liabilities to continue growing at the $302.2 billion Sacramento-based pension plan.
CalPERS was 77% funded as of June 30, 2014, though each of the hundreds of municipalities, school districts and state government units that participate in CalPERS have their own individual unfunded liability.
California Public Employees' Retirement System spokesman Brad Pacheco said it was too early to conclude what impact the 2.4% investment return would have on contributions by government units. He said CalPERS smoothes investment returns over a period of five years to help stabilize employer contribution. He said the return would likely result in a several percentage point decline in the funding ratio.
Mr. Aaron said investment returns from 2008 and 2009, when CalPERS investment portfolio lost around a quarter of its portfolio value, are still having an effect on the pension system.
He cited as an example the state's pension contribution requirement for its highway patrol employees: contributions had reached 42% of payroll for the 2015 fiscal year and the rate was projected to increase to 50% of payroll by the 2019 fiscal year even if the 7.5% investment target return was met each year.
Mr. Aaron said CalPERS' returns are also an indication that other pension plans that follow broadly similar investment strategies are also likely to underperform their return expectations for fiscal years ended June 30.
Mr. Aaron could not be reached by press time.