PHOENIX - The California Public Employees' Retirement System reported a preliminary 11.2% net return on investments for the 2017 fiscal year, well above its target and last year's 0.6% earnings.

CalPERS announced the returns Friday, following the close of the fiscal year June 30. That brought the funding ratio of the nation’s largest public pension fund up to 68% by CalPERS' own estimate, an increase of 3% from the previous fiscal year. The estimate is based on a 7% assumed rate of return, which CalPERS missed badly last year amid market conditions that were unkind to many long-term investors.

Marcie Frost joined CalPERS as chief executive officer in October 2016.
"We welcome this fiscal year's strong returns, but we also remain about 68% funded and vulnerable to a downturn in stock markets," said Marcie Frost, CalPERS chief executive officer.

"I am proud of our investment team for achieving double digit returns this year," said Ted Eliopoulos, CalPERS chief investment officer. "Our globally diversified portfolio performed well across most asset classes, and we were able to take advantage of what the market gave us. However, I want to emphasize that as pleased as we are with this one-year return, our focus is always on the long-term. We invest for decades, not years.”

The FY 2017 returns bring total fund performance to 8.8% for a five-year time period, 4.4% for the 10-year time period, and 6.6% for the 20-year time period.

"CalPERS is focused on the long-term sustainability of our system," said Marcie Frost, its chief executive officer. "Of course, we welcome this fiscal year's strong returns, but we also remain about 68 percent funded and vulnerable to a downturn in stock markets. This will be our focus as we continue to move through the asset allocation process over the next six months."

Some pension funding advocates remain skeptical of CalPERS’ assumed rate of return and warn that the fund’s underfunding remains a severe challenge that a few years of good investment performance won’t fix. David Crane, a Stanford University lecturer on public policy and frequent CalPERS critic, wrote after the CalPERS announcement that pension funds are not like California’s years-long drought, which was ended by heavy rainfall this year. Pension deficits compound, Crane said, so even solid investment returns for years won’t catch up to the amount of money needed.

“It would be wonderful if pension deficits operated like droughts but they do not," Crane wrote. “Unfortunately, California's students and citizens will be engaged in the budget-equivalent of a worsening drought for decades to come.”

CalPERS' 2016-17 final fiscal year investment performance will be calculated based on audited figures and will be reflected in contribution levels for the state government and school districts in fiscal year 2018-19, and for contracting cities, counties and special districts in fiscal year 2019-20, CalPERS said.

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Kyle Glazier

Kyle Glazier

Kyle Glazier is a reporter covering market trends, infrastructure, and the Far West region for The Bond Buyer.