Calpers, America's largest public pension fund, could be forced to ask the employers who fund it for more money after suffering a 20pc decline in assets in the six months to October.
By James Quinn, Wall Street Correspondent | The Telegraph (UK)
24 October -- Calpers – the California Public Employees' Retirement System – saw the value of its assets fall by about $50bn (£31bn) from the end of February to October 10 because of stock markets falls and other heavy investment losses.
The pension fund now looks set to tap Californian state employers for higher contributions, at a time when the state's budget is stretched to the limit as a result of its own investment problems.
CalPERS, which was one of the first public pension funds to begin investing in private equity and hedge funds, has seen its net worth fall from approximately $240bn in February to $190bn today.
A decision on whether employers will need to increase their contributions will not be taken until returns for the 2008 fiscal year are known.
"Cushioning the impact of investment setbacks is the fact that Calpers experienced double-digit gains in the four years leading up to the 2007/08 fiscal year," said Ron Seeling, the fund's chief actuary. "We had saved 14pc of the fund for cushioning the blow of a future market downturn, and our smoothing policy is working as it should."
If returns do not improve, Calpers said it may require employers to increase payments. The current average employer contribution rate is 13pc of payroll – but increases in contributions could exceed 4pc if losses continue.
Even if increases are needed, they will only come into effect in the fiscal year beginning July 2010, due to the benefit of substantial gains in previous years.
Whether Californian state and local authorities could meet those payments remains to be seen, however. The state has been one of the hardest hit by the foreclosure crisis, reducing tax-take and leading to additional spending on social welfare.
The situation in California had become so bad at one stage earlier this month that Governor Arnold Schwarzenegger said he may need a $7bn loan from the US government in order to meet short-term cash needs as a result of money locked up in the frozen credit markets.
That immediate need was resolved after institutional investors purchased revenue anticipation notes from the State treasury, but the overall financial picture remains gloomy.
Calpers is not alone in its problems, with the California State Teachers' Retirement System, America's second-largest fund with 795,000 members, seeing a 9.4pc drop in value to $147bn in the three months to the end of September.
The situation adds further woes to Americans already struggling with price inflation and reduced incomes as a result of the continued economic downturn across the nation.