CalPERS
The California Public Employees' Retirement System (CalPERS) is the largest defined-benefit public pension fund in the United States, administering retirement, disability, and health benefits for more than two million members including current and former state, local, and public agency employees, as well as over 1.5 million health program participants.[1][2] Established to provide lifetime pensions based on service credit and salary, CalPERS operates under a 13-member Board of Administration that oversees investment decisions and policy.[3] As of June 2025, the Public Employees' Retirement Fund holds approximately $556 billion in assets under management, following an 11.6% preliminary return for fiscal year 2024-25 driven by gains in equities and private equity.[4][5] CalPERS invests across public equities, fixed income, real estate, and alternatives to target long-term returns sufficient to meet obligations, though historical performance has varied, including a 6.1% loss in fiscal year 2021-22 amid market volatility.[6] The fund's activist shareholder approach, known as the "CalPERS effect," has targeted underperforming companies to improve governance and returns, correlating with excess stock performance in some studies.[7] However, CalPERS faces ongoing scrutiny for its funding status, with a system-wide funded ratio around 71% as of recent valuations and unfunded liabilities exceeding $180 billion, attributed to factors such as investment shortfalls, extended life expectancies, and prior benefit increases outpacing contributions.[8][9][10] Controversies have centered on high private equity fees, totaling billions since 1990, and probes into fee transparency, alongside debates over environmental, social, and governance (ESG) integration, which has drawn opposition from stakeholders prioritizing pure financial returns over divestment mandates like those in fossil fuels.[11][12][13] Despite reforms under the 2013 Public Employees' Pension Reform Act to curb costs, CalPERS' structure—balancing taxpayer-funded employer contributions, employee payroll deductions, and investment income—continues to highlight tensions between generous benefits and fiscal sustainability in California's public sector.[14]History
Establishment and Early Expansion (1940s-1970s)
The California Public Employees' Retirement System (CalPERS), originally known as the State Employees' Retirement System (SERS), was established on January 1, 1932, through the California State Employees' Retirement Act, which aimed to deliver defined benefit pensions to state civil servants facing economic insecurity during the Great Depression.[15][16] This foundational legislation created a contributory system where both employees and the state shared funding responsibilities, emphasizing long-term financial security over ad hoc relief measures prevalent in the era.[17] From inception, CalPERS prioritized conservative investment strategies to safeguard principal and generate steady income, restricting assets initially to U.S. government bonds and municipal securities, which aligned with prevailing actuarial practices for public pensions seeking minimal risk exposure.[18][17] These fixed-income holdings reflected a focus on stability rather than growth, as public pension fiduciaries at the time avoided equities to prevent potential losses that could undermine benefit payments during volatile economic periods.[18] Expansion accelerated in 1939 when state legislation authorized local public agencies, such as counties and cities, to contract into the system, broadening its scope beyond state employees to encompass a wider array of government workers.[15] This contractual framework facilitated steady membership growth through the 1940s and 1950s, as cash-strapped local entities opted for CalPERS' economies of scale over standalone plans, with participation extending to school districts and special districts by mid-century.[15] By the 1970s, the system had evolved into the California Public Employees' Retirement System, administering benefits for hundreds of thousands of active and retired members across state and local levels, supported by accumulating reserves from contributions and bond yields.[15]Benefit Growth and Investment Shifts (1980s-1990s)
During the 1980s, CalPERS enhanced pension benefits through negotiated formulas that permitted earlier retirement ages and higher multipliers, exemplified by the adoption of 2% at age 50 for state safety members and 2% at age 55 for miscellaneous members, which increased payout generosity relative to prior standards without equivalent rises in employer or employee contributions.[19][20] These changes, driven by public employee union advocacy and state legislation, effectively amplified lifetime benefits for vested participants by allowing accrual of full credits at younger ages, such as 50 for certain public safety roles involving higher occupational risks. Membership expanded significantly amid broader public sector growth and system consolidations, surpassing 1 million active and retired participants by the mid-1990s, reflecting inclusions of additional local government employees and administrative efficiencies from absorbing smaller retirement pools, though primary teacher coverage remained under the separate CalSTRS system.[21] This surge amplified long-term liabilities as newer cohorts entered under the enriched formulas, with benefit costs rising faster than initial actuarial projections assumed, foreshadowing funding pressures despite contemporaneous asset growth.[22] Parallel to benefit expansions, CalPERS pivoted its investment strategy in the late 1980s from predominantly conservative fixed-income holdings toward greater equity exposure and nascent alternative assets like real estate, aiming to generate higher long-term yields to offset escalating obligations. This reallocation aligned with broader public pension trends, increasing stock allocations from under 50% to over 60% by the early 1990s, which positioned the fund to capture substantial gains during the ensuing bull market. Annual returns averaged above 12% through much of the 1990s, propelled by equity market surges, temporarily masking the mismatch between benefit hikes and contribution inflows while elevating assets from approximately $49 billion in 1990 to $159 billion by 1999.[23] Yet, these dynamics sowed early underfunding risks, as retroactive benefit improvements and lower retirement ages outstripped contribution adjustments, with funded ratios dipping to around 55% in the early 1980s before rebounding on investment windfalls, but actuarial assumptions increasingly strained by unchecked generosity absent proportional funding mechanisms.[24][25] The reliance on optimistic equity returns to bridge gaps, rather than bolstering contributions, highlighted nascent vulnerabilities, particularly as benefit spikes—such as enhanced service credits—amplified liabilities without immediate fiscal offsets.[22]Political Reforms and Volatility (2000s)
In the early 1990s, amid state budget shortfalls, Governor Pete Wilson withdrew $1.6 billion from CalPERS reserves in 1991 to help close a $14.3 billion deficit, while also implementing reduced retirement benefits for new hires under a second tier structure.[23][26] These measures reflected acute fiscal pressures but drew opposition from public employee groups, who sponsored Proposition 162—the California Pension Protection Act—passed by voters in November 1992 to grant CalPERS' Board of Administration constitutional autonomy over benefit administration and fund investments, limiting elected officials' ability to redirect assets or alter payouts without board approval.[27][28] Despite this insulation, union influence over board decisions and policy persisted, enabling expansions in benefits during economic upswings. Under Governor Gray Davis, Senate Bill 400, enacted in 1999 with bipartisan legislative support, retroactively enhanced pension formulas for state workers, raising multipliers and allowing credit for prior service at higher rates, predicated on sustained stock market gains from the late-1990s boom.[23][29] Such reforms compounded liabilities through practices like employer "pension holidays"—skipped contributions during surplus years in the 1990s—and benefit spiking mechanisms, including airtime purchases where employees bought unused sick leave or service credits to inflate final salaries for higher payouts.[26][30] These politically driven changes deferred costs to future taxpayers, assuming perpetual high returns, but overlooked risks from market dependence. The dot-com bust of 2000-2002 triggered sharp investment losses for CalPERS, whose portfolio—over 60% equities—plummeted as tech stocks collapsed, erasing gains that had masked expanding obligations.[31][32] Funding levels, which peaked above 130% in 2000, began eroding amid this volatility, with liabilities swelling from retroactive enhancements and demographic shifts toward more retirees.[33] This early-2000s downturn prompted initial acknowledgments of underfunding risks, as CalPERS reported actuarial shortfalls and called for higher employer contributions, exposing how state-level political reforms had prioritized benefit generosity over prudent funding amid economic cycles.[34][29]Post-Recession Challenges and Recent Performance (2010s-2025)
The 2008 financial crisis severely impacted CalPERS, generating a negative 24% investment return for fiscal year 2008-09 and erasing approximately $67 billion in assets, which reversed prior gains and exacerbated funding shortfalls.[35] [36] These losses prompted substantial hikes in employer contribution rates, with rates for some pools rising from near zero in the early 2000s to over 13% by 2016-17 and projected to reach 18.6% by 2019-20, straining public budgets and necessitating structural reforms.[37] [38] In response, Governor Jerry Brown enacted the California Public Employees' Pension Reform Act (PEPRA) on September 12, 2012, effective January 1, 2013, which capped defined benefit formulas for new hires, limited pensionable compensation, and introduced cost-sharing mechanisms to curb future liabilities and promote long-term solvency.[39] [40] Recovery efforts in the 2010s included a strategic pivot toward alternative investments, with CalPERS adopting a revised asset allocation policy in December 2010 to emphasize private equity and infrastructure for enhanced risk-adjusted yields amid low interest rates and volatile public markets.[41] [42] This shift, which increased commitments to these illiquid asset classes, drew scrutiny over heightened liquidity risks and dependency on manager performance, as private equity allocations targeted 8% of the portfolio by the mid-2010s despite fees eroding net returns in some periods.[43] [8] By 2025, CalPERS membership had stabilized above 2 million active and retired participants, while the Public Employees' Retirement Fund reached approximately $556.2 billion in assets under management as of June 30, 2025, buoyed by a preliminary 11.6% net return for fiscal year 2024-25 that outperformed the long-term benchmark.[44] [4] Under Governor Gavin Newsom's administration, policies maintained focus on funding discipline inherited from prior reforms, yet underlying deficits persisted due to actuarial assumptions and demographic pressures, underscoring the fragility of reliance on market rebounds for sustained recovery.[45]Governance
Legal Foundation and Structure
The California Public Employees' Retirement System (CalPERS) is established and governed by the Public Employees' Retirement Law (PERL), codified in California Government Code sections 20000 et seq., which outlines the framework for administering public employee pensions.[46] This statutory authority designates CalPERS as the administrator of a cost-sharing multiple-employer defined benefit plan, providing lifetime annuity payments calculated via formulas incorporating years of service credit, age at retirement, and final compensation.[47] The plan extends coverage to employees of state agencies, over 2,800 participating local governments and districts, and select school employers, encompassing miscellaneous and safety classifications with benefits tailored to occupational risks.[46] Core structural principles include vesting of benefits after five years of credited service under most plans, granting members nonforfeitable rights to accrued pensions upon meeting age and service requirements.[48] Portability is facilitated through reciprocity provisions allowing service credit transfers among CalPERS and other California public retirement systems, preserving benefit eligibility across employers without mandatory benefit reductions.[49] Many plans coordinate with Social Security, offsetting CalPERS benefits by estimated Social Security amounts to avoid dual coverage duplication, though certain categories like state miscellaneous members may participate in integrated plans.[50] Accrued benefits hold irrevocable status under California law, with the state constitution (Article XVI, Section 17) imposing a fiduciary duty on the retirement board to manage assets exclusively for the interest of participants and beneficiaries, shielding vested rights from unilateral diminishment. This protection stems from judicial interpretations affirming pensions as deferred compensation, where modifications must preserve the overall value of earned benefits amid fiscal pressures, as evidenced in legislative evolutions like the 2013 Public Employees' Pension Reform Act, which capped future accruals for new members without retroactively altering vested entitlements.[14] Such framework underscores tensions between immutable employee rights and solvency mandates, requiring actuarial funding to cover long-term liabilities.[51]Board of Administration Composition and Influence
The CalPERS Board of Administration comprises 13 members responsible for overseeing the fund's governance, investment policies, benefit determinations, and actuarial assumptions.[52] Six members are elected by beneficiaries: two at-large by all active members, one by active state members, one by active school members, one by active public agency members, and one by retirees.[52] Three members are appointed: two by the Governor (one local government elected official and one insurance industry representative) and one public member by the Senate Rules Committee and Assembly Speaker.[52] The remaining four are ex officio: the State Treasurer, State Controller, Director of the Department of Human Resources, and a representative from the State Personnel Board.[52]| Category | Number | Selection Method |
|---|---|---|
| Elected by Active Members | 5 | 2 at-large; 1 state; 1 school; 1 public agency |
| Elected by Retirees | 1 | Direct election |
| Appointed by Governor | 2 | Local official; insurance rep |
| Appointed by Legislature | 1 | Public member |
| Ex Officio | 4 | State officials |
Executive Leadership and Accountability
The Chief Executive Officer (CEO) of CalPERS directs the operations of the organization, overseeing approximately 2,853 employees responsible for administering benefits and managing investments for over 2 million members.[60][2] Marcie Frost has held the position since October 2016, marking her as the ninth CEO and the second woman in the role; prior to joining CalPERS, she accumulated 30 years in Washington state public service, including 16 years in pension administration without a formal college degree.[61][62] Former CEO Federico "Fred" Buenrostro Jr., who served from 2002 to 2008, exemplified accountability challenges when he pleaded guilty in 2014 to a corruption conspiracy and was sentenced in 2016 to 54 months in federal prison for accepting over $200,000 in bribes, often in cash-filled paper bags, from placement agents seeking fund commitments.[63][64] Executive compensation reflects the fund's scale, with Frost's base salary at $578,000 supplemented by performance-based incentives; her total package reached $1.2 million in fiscal year 2023-24 and exceeded $1.4 million in some projections tied to strong returns, such as the 11.6% preliminary gain for fiscal 2024-25 on assets surpassing $515 billion.[65][66][4] Proponents justify these levels by the complexity of stewarding the nation's largest public pension fund, though critics have questioned the alignment between high pay and sustained long-term performance amid funding shortfalls.[67] Accountability mechanisms include direct oversight by the Board of Administration, internal audits via the Office of Audit Services, and annual reporting under the State Leadership Accountability Act, which mandates executive review of program risks and compliance.[68][69] The 2009-2011 placement agent scandal, which exposed millions in unnecessary fees and ethical lapses, prompted reforms such as banning contingency-based placement agent fees, requiring their registration as lobbyists, and enhancing transparency in external manager contracts.[70][71] As of 2025, Frost's leadership emphasizes portfolio optimization through expanded private market allocations, including private equity and infrastructure, alongside cost controls and adaptation to economic volatility, such as tariff threats and AI integration for member communications.[72][73][74]Investment Operations
Asset Allocation and Risk Management
CalPERS maintains a strategic asset allocation policy aimed at generating long-term returns sufficient to meet its actuarial discount rate while mitigating downside risks through broad diversification. In March 2024, the CalPERS Board approved updated targets reducing public equity to 37% from 40%, increasing fixed income to 28% from 23%, maintaining real assets at 13%, and raising private equity to 17% from 13%, with the balance allocated to strategic credit, liquidity, and overlays.[75] This framework approximates 54% overall equity exposure (public and private combined), 28% fixed income for stability and yield, and 30% in alternatives for inflation protection and uncorrelated returns, reflecting a growth-oriented tilt calibrated via periodic asset-liability studies.[75] [76] Risk management emphasizes asset-liability matching through an integrated ALM process that evaluates portfolio duration, cash flows, and sensitivity to economic scenarios against pension obligations.[77] CalPERS employs stress testing, scenario modeling, and risk budgeting to quantify exposures to market crashes, interest rate shifts, and inflation spikes, with hedging via derivatives to offset volatility in equity and currency positions.[78] [79] Real assets, including real estate and infrastructure, serve as core diversifiers, providing inflation-linked cash yields less correlated with public markets.[80] The portfolio's higher equity weighting contributes to elevated volatility relative to more conservative peers, amplifying both upside gains and drawdowns, as seen in historical responses to recessions where equity-heavy allocations experienced sharper recoveries but deeper interim losses.[79] To optimize this profile, CalPERS incorporates modest leverage in its SAA, borrowing to overweight lower-volatility assets like fixed income and real assets, thereby enhancing diversification and expected returns without linearly increasing risk.[81] [76] This strategy, informed by peer analyses such as Canada's CPP Investments, counters the limitations of unlevered conservative portfolios that underperform growth targets amid low bond yields.[82] Historically, CalPERS has transitioned from predominantly passive indexing in liquid public assets to active management in illiquids like private equity and credit, seeking alpha through operational improvements and deal sourcing in inefficient markets where passive benchmarks underperform.[83] This evolution addresses the constraints of scale in public indexing, where beta dominates, by allocating resources to generate excess returns net of fees in alternatives, subject to rigorous manager selection and risk limits.[84]Historical Investment Returns (1999-2025)
From fiscal year 1999 to 2008, CalPERS' investment returns were highly volatile, driven by the dot-com market collapse in the early 2000s and the 2008 global financial crisis, which led to substantial drawdowns across equities and alternatives. The portfolio posted negative returns in multiple years, including sharp declines in FY 2001 (-14.3%), FY 2002 (-6.1%), and FY 2009 (-23.6%, overlapping the period's end). Annualized returns over this decade approximated 7% pre-fees, reflecting diversification efforts amid equity-heavy exposure but underscoring vulnerability to broad market corrections. These outcomes trailed passive benchmarks like the S&P 500, which delivered negative annualized returns of approximately -1% over the same span due to similar busts, though CalPERS' active management and fees amplified underperformance in recovery phases. The recovery from 2009 to 2021 featured robust rebounds in public equities and private markets, fueled by prolonged bull markets post-Great Recession and quantitative easing. CalPERS achieved strong single-year gains, such as 21.3% in FY 2020-21, driven by equity rallies and alternative assets. However, net returns often lagged passive indices; for instance, over select periods, the fund underperformed the S&P 500 by several percentage points annually due to higher fees (averaging 0.5-1% net of external management costs) and allocation tilts toward underperforming segments like international equities. Long-term annualized net returns through this era aligned closely with the then-7.5% assumed rate but highlighted inefficiencies in active strategies versus low-cost indexing peers. From 2022 to 2025, returns stabilized amid inflationary pressures and interest rate hikes, with FY 2024-25 yielding a preliminary net 11.6%, propelled by 16.8% in public equities and 14.3% in private equity. The 10-year annualized net return ending June 30, 2025, stood at 7.1%, modestly exceeding the 6.8% discount rate but trailing the S&P 500's 13.5% over the same horizon and failing to fully offset inflation-eroded purchasing power for liabilities. Net-of-fees impacts were notable, as external manager costs deducted from gross performance contributed to shortfalls against benchmarks; comparisons to peer public funds showed occasional outperformance in alternatives but consistent lags in public markets. Overall, 30-year annualized net returns through FY 2024-25 reached 7.6%, providing a baseline above actuarial targets yet insufficient for fully funding without contribution hikes given historical volatility.[4]| Fiscal Year | Net Return (%) | Key Driver |
|---|---|---|
| 2020-21 | 21.3 | Equity rebound post-COVID |
| 2021-22 | -6.1 | Market downturn |
| 2022-23 | 5.8 | Modest recovery |
| 2023-24 | 9.3 | Strong equities |
| 2024-25 | 11.6 (prelim.) | Equities and alternatives |