CalPERS approves 9.3% budget increase

CalPERS' board on Tuesday approved a fiscal year 2023 budget of $2.1 billion, up 9.3% from the prior year driven primarily by external alternative investment management fees.

The staff at the $474.5 billion California Public Employees' Retirement System, Sacramento, has budgeted more than $1 billion for external money managers' management fees in fiscal year 2023, up from $898 million in its fiscal year 2022 budget and an increase from $724 million spent in fiscal year 2021, a staff report to CalPERS' finance and administration committee shows.

Private equity has the most external management base fees budgeted of all CalPERS' asset classes with $395 million budgeted for fiscal year 2023, up 16.2% increase from the prior fiscal year. Next highest is real assets with $272 million, a 15% increase from fiscal year 2022; followed by opportunistic strategies at $60 million for fiscal year 2023, a 57.9% increase from the prior fiscal year, according to the same report.

The increase in CalPERS' alternatives investment management fees in the fiscal year 2023 budget is tied to the recent increases in its allocation to alternatives assets classes, Michael Cohen, CalPERS' chief financial officer, told the finance and administration committee.

CalPERS adopted a new strategic asset allocation Nov. 15, adding a 5% private debt target, while also boosting private equity by 5 percentage points to 13% and increasing real assets by 2 percentage points to 15%.

CalPERS officials expect to save on management fees by managing its private debt allocation in-house, Mr. Cohen said in response to a question

"Sadly, for real assets and for private equity, there is not an opportunity to scale internal staff to do much improvement" and manage those assets in-house, Mr. Cohen said. The focus of those teams has been to "negotiate more favorable economic terms which … has proven to be a successful strategy," he said.

Separately, CalPERS plans to renew two contracts for five years, beginning in the spring of 2023, of Hamilton Lane to oversee the acquisition or sale of portfolio securities, and State Street Bank and Trust as CalPERS' master custodian, according to a staff proposal approved by the board Tuesday.

In other news, CalPERS' funding ratio moved up 10 percentage points to 80% as of June 30, according to a staff presentation Monday to CalPERS' finance and administration committee.