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Roseville leaders greet strong CalPERS returns with cautious optimism

Struggling public employee retirement program posts 11.4-percent return for 2016-17
By: Graham Womack, Staff Writer
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The California Public Employees Retirement System has faced problems in recent years, falling well short of investment returns needed to fund civil servant pensions.

That’s an area of concern in a city like Roseville, which is sending CalPERS approximately $32 million this fiscal year, including $16.5 million in payments for previous years where CalPERS didn’t meet investment returns.

So Roseville leaders greeted a rare bit of recent good news from CalPERS on July 14 – that it had capitalized on surging financial markets and achieved a preliminary 11.2-percent net return on investments for the 2016-17 fiscal year – with cautious optimism.

Roseville Chief Financial Officer Jay Panzica said it could take many years to make up for CalPERS struggles, which date back to the Great Recession. A good year is welcome news to Panzica, but likely not the end of Roseville’s challenges with CalPERS.

“This one won’t move the needle a lot,” Panzica said.

He added, “If it’s a trend, it’s great news for all of the cities.”

CalPERS essentially covers pension costs by taking money that employees and cities contribute and then investing it in a variety of financial arenas, with an assumed 7-percent rate of return by 2020.

For the 2015-16 fiscal year, though, CalPERS achieved just a 0.61-percent rate of return. It fell short the year before as well, posting a 2.4-percent rate of return.

Pete Constant, a Roseville resident and former San Jose city councilman, said that while strong returns for CalPERS were “a refreshing change,” the previous shortcomings will temper these gains.

“CalPERS has a policy of smoothing investment returns over time, so not only will they not recognize this gain all at once, they must also subtract the losses from prior years that they have not yet recognized,” Constant wrote in an email.

What Constant referred to occurs because CalPERS lets cities pay two-thirds of its future retirement costs each year, provided it meets investment returns. Panzica said in April that Roseville, for instance, was currently funding 68.5-percent of its retirement costs with CalPERS.

When returns fall short, however, CalPERS forces cities like Roseville to repay the amount over subsequent years.

Roseville spokeswoman Megan MacPherson said in April that the city expected to send just over $32 million to CalPERS in the 2017-18 fiscal year that began July 1, including $16.5 million in unfunded liability payments.

These unfunded liabilities have had some ramifications locally. In the latest round of labor negotiations in 2016 between Roseville leaders and the city’s various unions, both sides agreed to the adoption of a lower salary schedule for new hires.

The consequences have been more severe in other cities, where pension costs have come to consume a large part of their budgets.

It remains to be seen if CalPERS can keep posting strong returns, with its fortunes tied to the stock market. While the Dow Jones Industrial Average has been up more than 20 percent since the beginning of the 2016-17 fiscal year, financial analysts in recent months have been predicting a modest market decline.

“Investors are in for a rude awakening about a coming stock market correction — most just don't know it yet,” wrote Leslie Kramer for CNBC.com on May 27.

Long-term, CalPERS is also still short of where it’d like to be, with program representatives noting in a July 14 statement that while the fund’s five-year rate of return was a healthy 8.8 percent, it had achieved 4.4 percent over the past decade and 6.6 percent over the past 20 years.

CalPERS Chief Investment Officer Ted Eliopoulos said in the statement that the system wouldn’t rest on its recent positive accomplishment.

“As pleased as we are with this one-year return, our focus is always on the long-term,” Eliopoulos said. “We invest for decades, not years.”

George Titus, union president for the Roseville Firefighters Local 1592, isn’t worried about CalPERS’ long-term rate of return.

“Marching it out, they’re comfortable with where they are,” Titus said.

Panzica isn’t worried either.

“CalPERS will do what it has to, to make sure the cities are funded and we’ll do what we have to, to make sure the bill gets paid,” Panzica said.

Constant has expressed more pessimism.

“For the sake of employees and taxpayers alike, I hope this trend continues so that eventually they can make up for the significant shortfalls they have experienced for over a decade,” he said.