Chart: Distribution of Assumed Rates of Return

discount rate distribution

The Los Angeles City Employee Retirement System (LACERS) announced this week it was lowering its assumed rate of return from 7.75 percent to 7.5 percent. For some context, here’s a graphic that charts the discount rates of 150 public pension funds as of 2013.

Two District of Columbia funds use among the lowest rates in the country: the Police and Fire fund and the Teachers’ fund both assume a 6.5 percent rate of return on investments.

On the other end of the spectrum are funds like the Houston Firefighters’ fund and the Connecticut Teachers’ system. Those funds assume an 8.5 percent rate of return.


Chart credit: The Center for Retirement Research

After Deadlock, Los Angeles Pension Lowers Assumed Rate of Return

LA Skyline

The board of the Los Angeles City Employees’ Retirement System (LACERS) has voted to lower its assumed rate of return from 7.75 percent to 7.5 percent – a move that was recommended by the fund’s financial consultants and supported by six of its seven board members.

From the Los Angeles Times:

Los Angeles city pension agency voted Tuesday to rein in its long-range earnings forecast, putting in place changes that could throw the city’s budget $50 million deeper into the hole next year.

The City Employees’ Retirement System board responded to financial consultants who said the agency should no longer assume that its investment portfolio — money that helps cover the cost of employee pensions — will deliver an average yearly return of 7.75%.


Pension board member Elizabeth Greenwood cast the only opposing vote, saying the city needs more time to emerge from its recent financial crisis. Greenwood had called for the change, which will reduce the system’s earnings assumption to 7.5%, to be delayed until 2017.

“There is no reason we need to rush into a change that is going to slam the city’s budget that hard,” said Greenwood, who was elected to the board by civilian city employees.


The issue of pension system earnings was raised earlier this year by the LA 2020 Commission, a 13-member group of business, union and civic leaders convened by Council President Herb Wesson. (The commission’s co-chairman, Austin Beutner, is now publisher of The Times.)

In a report released in April, the commission said the city’s pension earnings assumptions should be significantly decreased, so that they are in line with the earnings forecast of Warren Buffett’s company, Berkshire Hathaway.

The commission raised the possibility of a 6% yearly earnings assumption in its report. City Administrative Officer Miguel Santana, the high-level budget official, responded at that time by warning that such a move, if carried out for public safety and civilian workers, would rip a $566-million hole in the budget.

The retirement board initially deadlocked on the proposal to scale back its earnings assumptions. Two weeks ago, pension board member Nilza Serrano said she worried about putting additional pressure on the budget. During the meeting, she walked out of the room to avoid having to cast a vote, leaving her colleagues unable to muster a majority to make the change.

On Tuesday, Serrano reversed course and voted for the reduction, saying she had reviewed the proposal more carefully.

“I got educated,” said Serrano, a Garcetti appointee.

The decision has budgetary implications for the city, because a lower return assumption forces the city to set aside more money for retirement benefits. From the LA Times:

That decision could make it harder for Mayor Eric Garcetti and the City Council to restore services trimmed during the recession, since it forces them to set aside more money in the short term for retirement benefits.


Budget officials now expect a $165-million shortfall next year and have not factored in the pension board’s changes. The board’s consultant had warned that a failure to reduce the investment return assumption now would only force the city’s budget to pay more later if earnings fall short.

The retirement fund relies on three sources of revenue to cover pensions and healthcare for retired civilian city employees: contributions from workers’ paychecks, money taken from the city’s budget and earnings on the system’s $13.9-billion investment portfolio. When investment returns fall significantly below the agency’s projections, the gap has to be made up by the city budget, leaving less money for taxpayer services.

The board’s vote was opposed by the Coalition of L.A. City Unions, which represents about 20,000 city workers — and is now in salary talks with the city. Both the coalition and Councilman Paul Koretz portrayed the move as unnecessary, since the pension fund had strong investment earnings in recent years.

“This makes it more likely that it will be difficult to give employees any kind of a cost-of-living increase … and more likely that we will provide much fewer services than we would otherwise,” Koretz said.

LACERS manages $13.9 billion in assets.

CalPERS Is Ramping Up Its Real Estate Portfolio. Why?

Businessman holding small model house in hands

Last week marked a big shift in investment strategy for CalPERS, and it goes beyond hedge funds. The pension fund’s hedge fund pullout got all the headlines, of course, but CalPERS also decided to invest an addition $1.3 billion in real estate.

The reasoning behind dropping hedge funds has been made clear. But what about the real estate investments? Over at, Erika Morphy explores some of the reasons that could be behind CalPERS’ deep dive into real estate.


It’s business as usual

It was just real estate’ turn, says Stephen Culhane, who heads the investment management practice at the law firm Kaye Scholer.

“Institutional investors are always assessing and reassessing their allocations,” he tells “Commercial real estate valuations are strong and it is perceived as a bit as a safe haven particularly for non US and long-term investors.”

It’s a shift in investment philosophy – and not just a change in asset allocation

CalPERS handles over $300 billion for over 1 million current and former state employees. Their investing philosophy is transitioning from a classic hedge fund, 60/40 model, to more of an endowment model, says Jeff Sica, founder and CIO of Circle Squared Alternative Investments.

“CalPERS is aiming to reduce volatility and obtain a more predictable annual return across their portfolio,” Sica tells “Their move into real estate provides them with stability and a quantifiable income stream. With reduced volatility and a stabilized annual return, it will be more beneficial to them in the long run instead of fluctuating with the equity market,” he says.

Hedge funds have lost their appeal.

Despite CalPERS careful explanations, this is the theory of Bill Militello, co-founder and CEO of Militello Capital.

“The increasing trend of moving away from hedge funds is due in part to their lack of transparency and a lack of understanding of the investments—they are intangible,” he tells “Hedge funds are simply public securities in a different wrapper, they are not an asset class, they are a compensation scheme.”

There is also evidence that hedge funds on an overall basis have actually underperformed versus passively managed funds, Chauncey M. Swalwell, partner with Stroock & Stroock & Lavan LLP, tells—”making the relatively high fees typically paid to hedge fund managers untenable at CalPERS.”

It is an inflation hedge

This is the flip side of fund’s decision, Militello adds. “Properly purchased real estate in supply constrained markets with built in demand drivers provides access to well-insulated investments that protect against rising interest rates.”

There isn’t space here to list all the potential reasons listed. You can read all seven reasons here.

LACERS also committed an additional $190 million to real estate investments last week.

CalPERS, LACERS Ramp Up Real Estate Commitments

Businessman holding a small model house

CalPERS already made headlines today for deciding to pull $4 billion from hedge funds and hedge funds-of-funds.

But there was another bit of news that was less headline-worthy, but still important: CalPERS has decided to invest an additional $1.3 billion in real estate funds, according to a report from Pensions & Investments:

The $298 billion California Public Employees’ Retirement System, Sacramento, added $600 million to Institutional Logistics Partners, a real estate partnership with Bentall Kennedy. CalPERS first invested $250 million in Institutional Logistics Partners in March 2013. The strategy seeks to invest in core industrial properties.

Separately, CalPERS added a total of $700 million to two real estate partnerships with GI Partners.

The pension fund added $400 million to TechCore and $300 million to CalEast Solstice. TechCore invests in “technology advantaged” properties in the U.S., such as data centers, Internet gateways, corporate campuses for technology tenants and life-science properties in U.S. metropolitan areas, according to a news release from CalPERS. The pension fund first invested $500 million in TechCore in May 2012. The size of the CalEast Solstice portfolio could not be learned by press time.

LACERS, meanwhile, is committing $190 million to real estate funds over the next two years, according to a separate Pensions & Investments report:

Los Angeles City Employees’ Retirement System plans to commit $140 million to four new open-end core real estate funds this year and make $50 million in additional commitments in 2015, minutes from the pension fund’s Aug. 26 board meeting show.

Townsend Group, real estate consultant for the $14.4 billion pension fund, is recommending the pension fund this year commit about $35 million each to Clarion Partners’ Lion Industrial Trust, Jamestown Premier Property Fund,Morgan Stanley(MS) Real Estate’s Prime Property Fund, and Principal Real Estate Investors’ U.S. Property Account.

The recommendations will be presented to the board for approval at a later meeting. The recommendation is part of the pension fund’s decision in May to double its exposure to core real estate to a 60% target and decrease non-core investments to 40% from 70%. LACERS has an overall 5% allocation to real estate, with $739 million funded as of March 31.

Photo by thinkpanama via Flickr CC License