CalPERS Beats Expectations Again

On July 14, 2025, CalPERS reported a preliminary net investment return of 11.6% for the 12-month period endingJune 30, 2025, beating their 6.8% discount rate (target rate of return) for the second straight year, this time by 4.8% (CalPERS Announces Preliminary 11.6% Return for 2024-25 Fiscal Year|CalPERS). Preliminary total fund annualized returns for the five-year period ending June 30, 2025, stood at 8%; the 10-year period at 7.1%; the 20-year period at6.7%; and the 30-year period at 7.6%.

As a result, the overall estimated funded status for the Public Employees’ Retirement Fund (PERF) increased to 79%.The funded status stood at 71.4% in 2023 and 75% in 2024. As NHA detailed in its 2024 NHAlert (CalPERS Beats Target in FY’24|NHA Advisors), these aggregate funded ratios are slightly skewed given over $4 billion of Pension Bonds(POBs, Lease Revenue Bonds, or other UAL Refinancing Structures) issued between 2020 and 2022.

Based on a review of a small subset (34 total) of NHA’s pension clients, 50% of whom issued Pension Bonds and 50% who did not, the average funded ratio after the 11.6% returns is projected to be 75% for non-Pension Bond issuers (most between 73-78%) and 92.5% for Pension Bond issuers (most between 90-98% depending on how much UAL was refinanced). While this data set isn’t inclusive of all agencies within CalPERS, it does include a diverse set of agencies (different size agencies, types of CalPERS plans, varying pension bond structuring strategies, etc.) to help illustrate these differences and should serve as a good proxy for other CalPERS members.

As shown below, funded ratios are projected to trend upwards by 6.0-7.5% based on the two years of strong investment returns. As shown in the orange dots, funded ratios for most non-Pension Bond issuers in this example range from 70-80%, and average 75.3%.

The Pension Bond issuers shown in the teal dots generally range from 90-98%, and average 92.5%. Notably, most of the projected funded ratios for the Pension Bond agencies in this dataset are back to being very close to the targeted funded ratio at the time the Pension Bond was issued (shown in the chart as a purple dot). Comparing Pension Bond performance across agencies is complex given the varying funding amounts, structuring strategies and timing of issuance (i.e. before, during or after CalPERS’ strong 21.3% investment return in FY 2021), but generally speaking, this analysis demonstrates that funded ratios have mostly recovered from the negative 7.5% returns in FY 2022.

The reduction in UAL payments associated with the FY 2025 investment returns will be phased in over a 20-year period starting with FY 2028, with a five-year credit ramp-up: 20% of the full annual credit in FY 2028, 40% in FY 2029, 60% in FY 2030, 80% in FY 2031, and 100% in FY 2032 (and at this level for the 15 years thereafter). The FY 2025 investment returns will help “shave down the mountain peak” in UAL payments that most CalPERS members have been preparing for, and that were magnified after the negative 7.5% investment returns in FY 2022. As demonstrated in the graphic below, NHA estimates that many non-Pension Bond issuing agencies will see their UAL payments reduced by roughly 20% due to the strong investment performance by CalPERS over the last two fiscal years.

Pension Bond issuers continue to experience higher volatility to both positive and negative CalPERS returns. As shown in the graphic below, many of these agencies will experience a >50% reduction in annual UAL payments (60% on average across the 17 agencies NHA analyzed) compared to the annual UAL Payments shown in the FY 2023 actuarial reports. This only reflects the impact on UAL payments and does not include the Pension Bond debt service because the debt service is fixed through maturity. This analysis highlights the additional exposure Pension Bond agencies have to investment returns in the early years following bond issuance, and how critical it is to have adopted policies to ensure these fluctuations can be absorbed, and opportunities capitalized on.

Not surprisingly, Section 115 Trust providers performed well for the second straight year. The chart below depicts estimated ranges of investment returns for Section 115 Trust portfolios based on various equity/fixed income allocations. Even most conservative portfolios (> 80% fixed income) reported investment returns above 7.0%,while more aggressive portfolios (< 20% fixed income) reported investment returns up to 14.0%. The chart below summarizes estimated FY 2025 investment performance (based on information received from three different Section 115 Trust providers) based on portfolio risk tolerance. NHA recommends that agencies with a Section 115 Trust re-visit their cost management strategies at least annually to ensure that deposit/withdrawal strategies are optimized given the ever-changing UAL landscape, future uncertainty, and individual financial goals and constraints.

New Actuarial Reports — The June 30, 2024 actuarial reports have been released and can be downloaded from the MyCalPERS portal. This will be the first year that both Classic and PEPRA plans will be included under one report for all pooled-plan members. These reports will reflect the benefit of the 9.5% investment returns from FY 2024 and other factors that reconcile actual plan experience vs. actuarial assumptions during FY 2024. The impact of the FY 2025 investment returns of 11.6% and other plan experience results from this past fiscal year will be included in the June 30, 2025 actuarial reports that will be released in the summer of 2026. CSMFO is hosting a webinar on September 4, 2025 to discuss all the changes that can be found in the latest actuarial reports. For more information and to sign up, please visit: CSMFO Webinar – Interpreting and Communicating the New CalPERS Actuarial Valuation Reports – September 4, 2025.

2025 Asset Liability Management Study — The Asset Liability Management(ALM) process is an integrated review of CalPERS assets and liabilities to inform decisions designed to help achieve a sound and sustainable fund. The goal of the ALM process is to balance the expected cost of future pension payments with the expected future investment returns. During the process, the CalPERS board reviews its overall risks, taking into consideration the long-term sustainability of the system. This formal process runs on a four-year cycle and includes a review of CalPERS’ investment portfolios and retirement plan liabilities.

While it is probable that some changes will be made to demographic and economic factors, NHA is keenly focused on potential changes to the Discount Rate, as changes to that rate often impact members in a significant way. To give the reader a sense of potential impact, a reduction in the discount rate from 6.8% to 6.5% (as a hypothetical example) would increase the annual Normal Cost by roughly 7% for many agencies according to the CalPERS Outlook Tool projections, with annual UAL payments projected to rise by over 10% for most agencies, and even higher for Pension Bond issuers who are at higher funded ratios and exposed to increased volatility. It should be noted that the payment impacts associated with assumptions changes stemming from the ALM study would be reflected in the FY 2025 actuarial reports, with cost impacts starting in FY 2028. Amortization bases layered in for a discount rate reduction would not be “ramped-up” like those from investment gains/losses but rather phased in immediately and amortized over 20 years with level payments based on CalPERS’ current policy.

While we hope that recent strong investment performance encourages CalPERS to maintain the discount rate at current levels, NHA often recommends analyzing potential downside scenarios as part of any long-term financial and risk mitigation planning. We encourage all members to follow this ALM process closely and use the following link (Asset Liability Management (ALM)|CalPERS) to stay abreast of the latest news. The Board meetings in September and November are highly anticipated and may provide direction as to where new assumptions are likely to be heading.

Once the results of the ALM study are finalized in November, CalPERS anticipates having their free Outlook projection tool updated as early as December 2025 which will be very helpful for members beginning their FY 2027 budget process and refining their long-term financial forecasts.

NHA’s Pension Group has been advising agencies on pension cost management strategies for over 10 years. In our opinion, educating stakeholders to translate the complex world of CalPERS is a critical first step. From that position, cost management strategies can be analyzed to develop an approach and policy that works within each agency’s budgetary constraints and long-term financial sustainability objectives. NHA has learned that there is no“one size fits all” approach to dealing with volatile pension costs. All agencies face competing priorities, whether its deferred capital, staffing needs, liquidity concerns, economic development investment, or climate adaptation, just as examples. A policy and plan that adapts to these competing needs, while also ensuring that pension cost volatility can be moderated over the long term can be helpful when developing both near-term budgets and long-term financial plans.

For more information on potential approaches to manage pension liabilities, please feel free to contact the NHA Advisors team at Pension@NHAadvisors.com or Mike Meyer at Mike@NHAadvisors.com.