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State Pension Fund Returns Not What They Used to Be : Investment: CalPERS managers are criticized as paying more for advice that is yielding less.


SACRAMENTO — The high-flying California Public Employees Retirement System, praised for its innovations and a source of pride to its hundreds of thousands of members, is drawing unaccustomed criticism these days.

The investment performance of CalPERS' huge and fast-growing fund of pension money--$73.6 billion at last count--has deteriorated in recent years, even with costly and increasing reliance on blue chip advisers.

Since a particularly poor showing in 1992 led to the second major write-down of its real estate holdings in two years, CalPERS' five-year investment record is worse than that of most public pension funds, according to its own consultants.

The poor showing in comparison to other funds has prompted a wide-ranging review of the investment approach used for the huge portfolio. CalPERS is the nation's biggest public pension fund.

"We just haven't cut the mustard," CalPERS trustee and state controller Gray Davis said. "None of us are happy."

A close look at CalPERS reveals an organization whose coffers are overflowing with member funds. Yet it is so short of operating money that it has trouble answering its own telephones. Its nationwide reputation as a shareholder activist has remained intact, however, even as its own investment performance has deteriorated.

CalPERS' primary responsibilities are managing the enormous nest egg and administering pension benefits for more than 900,000 active and retired workers from the state's public sector.

Created in 1931, CalPERS has evolved into a complex retirement system for employees and retirees--and not just those from state government. Its members come from the ranks of more than 1,200 local agencies--from the Ojai Valley Sanitary District to the Oroville Mosquito Control District--and non-teaching school employees statewide.

The fund pays an average pension of $784 a month to about 270,000 retirees and other beneficiaries. It takes in about $12 million a day from taxpayer and employee payments and interest earned on the growing portfolio. Membership is growing by 40,000 to 60,000 people a year, a rate that should balloon the size of the fund to $200 billion by the year 2000.

Despite the sub-mediocre investment performance and other problems, such as yearlong backlogs in paperwork servicing its diverse membership, CalPERS seems to have lost none of its glitter for members, legislators and others in the state government community that created it. Cheered for wielding its stock ownership to shake up industrial giants such as IBM and General Motors, the retirement system is also held in awe for its sheer size, and its managers are applauded for steadily adding to the vast pot of gold.

"I'm glad I'm not running it," said lobbyist Aaron Read, who represents six major organizations of CalPERS members and was surprised to hear that most public pension funds do better. "PERS has done an extraordinary job. It's been growing almost geometrically. Every time I check, we're up a few billion."

CalPERS' declining investment performance is especially striking in light of the fact that it has tripled--to $53 million in 1992--the fees doled out to more than 40 money-management firms for investment advice over the last three years.

This was considered a prudent way to manage an increasingly sophisticated investment strategy that moved more pension money out of domestic stocks and into more risky areas, such as real estate and foreign securities.

"The fund is a lot larger than it was, and more diversified," said DeWitt Bowman, the fund's chief financial officer. "So there has been a tendency to hire more outside advisers, and they charge fees."

That CalPERS is getting a lot less bang for a buck was highlighted last month in a report from the California Legislative Analysts Office, a nonpartisan state government research arm.

According to the report, the system is now spending about as much for investment advice as it spends on its entire administrative budget, which includes paychecks for 800 and the bureaucracy to run the extraordinarily complex pension operation.

The report highlighted the fact that the outside investment advisers were actually outperformed by an in-house CalPERS staff of about 35 who also manage part of the monies. As the report dryly pointed out:

"What appears on the surface to be a runaway spending situation might be justified if the PERS could demonstrate that the significant expenditures for investment advisers were resulting in higher returns on investments than reasonably could have been achieved without such spending. The record, however, does not demonstrate this case."

William Crist, an economics professor at Cal State Stanislaus who is president of CalPERS' board of trustees, said the legislative report "brought a lot of things to people's attention which we need to address. We are not unconcerned about this."

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