The California Public Employees’ Retirement System (CalPERS) watched its market value decline 4.8 percent over this past year, dramatically underperforming equity benchmarks. The fund’s value declined from $238 billion on July 1st of 2011, the start of the fiscal year for the fund, to only $226.1 billion to date. This is despite only half of the fund being invested in equities and the S&P 500 index actually providing positive returns (albeit small returns) excluding dividends during that period.

Joe Dear, the fund’s Chief Investment Officer, blames the performance on a recent downturn in stocks, telling his governing board that, “the markets have been tough for us in May and June. These are very difficult market conditions.”

While Dear may be correct that May and June have been tough, with the S&P 500 losing about 5 percent, he neglects to mention that the fund apparently failed to capture the 6 percent rise in the S&P 500 index in the preceding ten months. This is the sort of performance that has earned CalPERS only 5.9 percent over the past ten years, well short of its 7.5 percent return expectation used to calculate its pension obligations.

While CalPERS 10-year returns are not substantially lower than other government related pension funds, the problem is really the fund’s return expectations. The unfunded pension liability owed to California state employees is calculated on the basis that the fund will earn 7.5 percent annually. If this is adjusted downward to a more appropriate level, the unfunded liability would grow substantially, requiring a major cash infusion into the plan from a state that is already stretched for funds. At is stands today under the current aggressive assumptions, the pension arrangement is only 81 percent funded. Kicking the can down the road should not be an acceptable solution to state employees or the California taxpayer.