"Simply-stated, we must fully fund our pensions systems within the coming decades," California Treasurer John Chiang said.

PHOENIX - The California Public Employees' Retirement System this week reported a preliminary 0.61% return on its investments over the past year.

The fund's leaders described the weak figure as a win in the face of market volatility, but critics said it continued to grow CalPERS' unfunded liability and will require contributions to the fund to rise.

The earnings covered a 12-month period ending June 30, off from the 2.4% returns of the previous year and well below its assumed 7.5% return rate.

CalPERS officers celebrated a positive net return despite "volatile financial markets and challenging global economic conditions," and touted the benefits of the fund's recent portfolio diversification, including its infrastructure and fixed income investments.

Fitch Ratings analyst Doug Offerman said the CalPERS announcement was no surprise to him, and would likely be the first of many public pensions to report lackluster returns for the past year.

"It was already a pretty choppy year before the whole Brexit situation came about," Offerman said, referring to the market-moving referendum in which Great Britain voted to exit the European Union.

Fixed income earned a 9.29% return for CalPERS, nearly matching its benchmark. Infrastructure delivered an 8.98% return, outperforming its benchmark by 402 basis points. The CalPERS Private Equity program also bested its benchmark by 253 basis points, earning 1.70%.

"Positive performance in a year of turbulent financial markets is an accomplishment that we are proud of," said Ted Eliopoulos, CalPERS chief investment officer. "Over half of our portfolio is in equities, so returns are largely driven by stock markets. But more than anything, the returns show the value of diversification and the importance of sticking to your long-term investment plan, despite outside circumstances. This is a challenging time to invest, but we'll continue to focus on our mission of managing the CalPERS investment portfolio in a cost-effective, transparent, and risk-aware manner in order to generate returns for our members and employers."

CalPERS' global equity returned negative 3.38%, which the system said outperformed its benchmark by 58 basis points. The real estate program generated a 7.06% return, underperforming its benchmark by 557 basis points.

"It's important to remember that CalPERS is a long-term investor, and our focus is the success and sustainability of our system over multiple generations," said CalPERS Investment Committee chair Henry Jones. "We will continue to examine the portfolio and our asset allocation, and will use the next Asset Liability Management process, starting in early 2017, to ensure that we are best positioned for the future market climate."

The ending value of the CalPERS fund is based on several factors and not investment performance alone, the fund pointed out in its announcement. Contributions made to CalPERS from employers and employees, monthly payments made to retirees, and the performance of its investments, among other factors, all influence the ending total value of the fund. CalPERS assets stand at about $302 billion.

The year's lackluster return means that the fund's unfunded liability – the gap between how much money it needs and how much money is being put in – almost certainly grew even faster than in recent years.

David Crane, a lecturer in public policy at Stanford University and president of the legislative advocacy group Govern For California, wrote online in response to reporter inquiries that CalPERS liability continues to grow even in good investment years and may be about $140 million by now.

"If you are looking for someone to blame, don't point the finger at CalPERS' investment staff," Crane wrote. "They are not responsible for markets reverting to the mean and they had plenty of good years before the last two years. And don't blame government employees and retirees. They did not cause this problem. You should blame your elected officials and pension fund board members. Together they are responsible for hiding the true size of pension promises at the time they are made and failing to properly fund those promises when they are made."

CalPERS adopted a policy late last year of slowly reducing its assumed returns from 7.5% according to a performance-based formula activated in years when it exceeds its assumed returns, but Crane and others, including Gov. Jerry Brown have said that action does not go far enough toward bringing the fund's assumptions in line with reality.

Offerman said Fitch believes the net result is that CalPERS will have to increase contribution rates, which many believe could increase fiscal stress on local governments that contribute to the plan.

CalPERS board president Rob Feckner cited the impact on municipal finances as one justification for not more rapidly increasing contribution rates under the new policy adopted last year.

"At the end of the day it's going to mean higher contributions," Offerman said.

California Treasurer John Chiang told The Bond Buyer that a long-term investor like CalPERS can't overreact to short-term news.

"During the past half-decade alone, we've seen investment peaks approaching 23% and valleys barely above zero, Chiang said. "As long-term investors, we have learned to avoid popping champagne after a good year, or panicking during a poor one.  Our view and strategies must span decades, not years. Be wary of those who capitalize on short-term bad news to call for the wholesale dismantling of public pensions, the effect of which will only drag more working Californians into the growing ranks of impoverished retirees."

But Chiang also warned that new actions will be necessary in the face of market conditions that don't seem likely to change soon.

"At the same time, we can't close our eyes to the stark reality that low interest rates, lackluster bond performance, and market volatility will continue to be the norm for the foreseeable future," said Chiang.

"We have been and must continue to make course corrections ensuring California can fulfill each and every promise made to our public servants, but not break the back of taxpayers in doing so," he said. "Simply stated, we must fully fund our pension systems within the coming decades. To get there, we will have to embrace new and different strategies, as well as show patience in allowing recently-adopted pension reforms to generate savings."

CalPERS most recently issued numbers on its unfunded liability for the period ended June 30, 2014. At that time, the pension system was a bit over 76% funded with a roughly $93 billion unfunded liability.

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