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CalPERS, CalSTRS see long-term credit ratings lowered

Moody's cites the pension funds' steep investment losses in downgrading them three notches to Aa3. The firm keeps their short-term ratings unchanged.

December 11, 2009|By Marc Lifsher

Reporting from Sacramento — Hurt by big investment losses, California's two biggest state-run pension funds lost top long-term credit ratings from Moody's Investors Service on the insurance they sell to municipal governments to make it easier for them to sell bonds.

Moody's blamed the downgrade on steep losses suffered by the funds, which could affect their future ability to meet obligations to retirees.

"Today's rating action reflects our expectation that the cumulative back-to-back market value declines in the investment portfolios of both CalPERS and CalSTRS for the fiscal years ended June 2008 and 2009 will exacerbate long-term projected actuarial funding shortfalls, recent market gains notwithstanding," said Martin Duffy, Moody's vice president and senior credit officer.

The long-term ratings of financial strength for the troubled $200-billion California Public Employees' Retirement System and the $128-billion California State Teachers' Retirement System, fell three notches from the top Aaa category to Aa3. But short-term ratings remained at their previously high levels, Moody's said.

The downgrade is the latest bad news about CalPERS, the country's largest public pension fund.

The Sacramento-based fund, which is closely monitored by the financial media, market analysts and investors around the world, has been rocked by revelations that a former board member was paid more than $70 million to use his political connections and salesmanship to help private investment managers gain billions of dollars' worth of business from CalPERS after leaving the board. CalPERS has hired a Washington law firm to conduct a review of pension fund investments.

The last two years' investment losses also focused attention on CalPERS. The fund's assets, which hit a fiscal year-end record high of $247.7 billion on June 30, 2007, fell 27% over the next two years. They've since rebounded somewhat.

The teachers fund fell 25% in the fiscal year that ended June 30 compared with the previous year.

Spokesmen for both funds said they weren't surprised by the lowered ratings, which they pegged to the ongoing international economic recession.

"Clearly this is a direct impact of the market downturn that has impacted all investors," CalPERS spokesman Brad Pacheco said. "We are confident this downgrade won't impact our ability" to sell bonds.

CalSTRS spokesman Ricardo Duran acknowledged that his pension lost a lot of money and noted that the lowered rating was linked to the overall financial crisis that has hit California's state and local government agencies.

Losses at CalPERS, which covers 1.6 million government workers and retirees, have been particularly heavy in the so-called alternative investments, including real estate and private equity partnerships.

The value of the real estate portfolio fell by nearly half as of June 30, compared with the previous year. Private equity holdings lost 24.6% over the period.

Despite their losses and the rating downgrades at both pension funds, the bond insurance programs, which collect fees for helping local governments gain access to credit, "represent low-risk commitments," Moody's said.

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