CalPERS and CalSTRS reported vastly improved investment profits Monday, but both pension funds still face multibillion-dollar shortfalls that will put pressure on California taxpayers for years to come.
CalPERS said it earned 12.5 percent in the just-ended fiscal year, well above the 1 percent gain from a year ago. CalSTRS chimed in with a 13.8 percent return, a big leap from the 1.8 percent profit it earned a year earlier. The returns exceed each fund's official investment forecast of 7.5 percent.
Both funds benefited from a year-long runup in global stock prices. They also made strategic investment changes in response to the 2008 market crash; CalPERS, for instance, overhauled its real estate portfolio to create more predictable results.
"These numbers are convincing evidence that CalPERS has the ability to produce good returns on a sustainable basis," said Joe Dear, chief investment officer at the California Public Employees' Retirement System.
Still, each organization is wrestling with major long-term deficits, known officially as unfunded liabilities, that will strain state and local government budgets over the next several decades.
While both funds have plenty of cash to pay claims for the foreseeable future, CalPERS is $100 billion short over the long term and CalSTRS's deficit is $70 billion.
Of the two, CalSTRS probably faces the more severe problem. Unlike CalPERS, which has been raising contribution rates the past few years, the California State Teachers' Retirement System is at the mercy of the Legislature and Gov. Jerry Brown to increase the flow of taxpayer dollars into the fund.
Even though the state has finally emerged from years of budget deficits, lawmakers so far have resisted calls to pour more money into CalSTRS, and the fund says its deficit grows by $22 million a day.
"The reality is that even good investment performance addresses only part of the long-term needs of the fund, which suffered a severe setback in the crash of 2008," said Harry Keiley, chairman of CalSTRS's investment committee, in a prepared statement.
Added CalSTRS Chief Executive Jack Ehnes: "It's clear that the Legislature and governor must implement a long-term funding plan that includes gradual, predictable and fair contribution increases for all parties involved."
The Legislative Analyst's Office recently estimated that CalSTRS needs another $4.5 billion a year in contributions from the state, school districts and teachers. That's about 75 percent more than what the fund currently receives from those sources.
If nothing changes, CalSTRS says it's on course to run out of cash in 2044. That would force the state to directly pay for constitutionally mandated teacher pension obligations. Those benefits cost $10 billion last year.
The latest investment results barely put a dent in the problem, said Dan Pellissier, president of the advocacy group California Pension Reform.
"Our tremendous (pension) debt is probably a couple billion less," said Pellissier, who argues that California must take a tougher stance on pension benefits. "We're not even close to out of the woods."
Pellissier said he doesn't doubt either pension fund's ability to generate profits, but "we can't invest our way out of this."
Brown last fall signed a pension reform law reducing benefits for newly hired public employees. The new law rolls back many of the more generous benefits granted to workers in a now-controversial 1999 law.
Nonetheless, CalPERS and CalSTRS are still in a huge hole, with the market crash a major culprit.
The 2008 crash left the two funds with a smaller pile of cash to invest, and even though they've now recouped most of their losses, they haven't been able to keep pace with growing pension obligations as older workers accrue more service time.
Although CalPERS reduced contribution rates for the new fiscal year, that represents a modest breather in what has been a significant increase during the past few years. The increases are expected to continue.
In April, the CalPERS board adopted an accounting policy that forces the fund to fix its deficit far more quickly than before.
The result will be rate hikes of up to 50 percent over five years for state and local governments, starting in 2015. CalPERS currently gets $11 billion a year from taxpayers and public employees, including $3.9 billion from the state.
Call The Bee's Dale Kasler, (916) 321-1066. Follow him on Twitter @dakasler.