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Some clients have asked about the financial condition of CalPERS and CalSTRS from which their pensions are derived. On Monday, December 14, 2009, the Wall Street Journal (page C3) reported on the sharp downgrade of each from AAA to Aa3 by Moody's Investors Service. The article suggested the three notch downgrades were, in part, a reflection of the recent spike in unfunded liabilities following the funds' negative returns for the year ended in June.
"CalPERS is trying to reduce its unfunded liabilities, or the difference between assets and obligations, which were $35 billion before the 24% investment loss last year. Yet many California municipalities are struggling with their own budget pressures and didn't welcome higher contributions." Therefore, "CalPERS... last month (agreed) to defer an increase in local-government contributions to the fund from 2011 until 2012."
I suspect this issue will become more prominent as the calendar approaches 2012. If investment returns permit a more gentle increase, then we may hear very little. If investment returns are meager, or there is a genuine effort made to close the preexisting gap in funding, then we may see a political debate about continuing the benefit for new hires.
I do not foresee politicians risking a hostile response by the unions regarding current employees. It is possible, however, that future employees will be less likely to have this pension available upon retirement.
The views expressed are those of Lindsey Randolph and should not be construed as investment advice. All economic information is historical and not indicative of future results. All information is believed to be from reliable sources; however, we make no representations as to its completeness or accuracy. Discuss all information with your advisor prior to implementation.