So far we've looked at CalPERS incompetence and corruption. But they do have new management since then. In "Cleaning Up CalPERS" by Robinson and Marois, 10/2010, CalPERS missteps are described in some detail and the new head, Joe Dear, is quoted saying he has "7.75% burned in his brain" as the goal he has to reach to keep CalPERS on track. That was in October, 2010. So it's a year later - how are they doing now? According to CalPERS their total returns for the last fiscal year ending in 9/30/2011 were 7.0%, for the last 3 years they were 2.2%, for the last 5 years 1.0%, and for the last 10 years 5.5%. The figures before 2011 don't subtract the hefty fees they were paying so they are smaller than they appear. They are not making the 7.75% and there is no reason to suspect that they will in the future.
From the above article: "'Calpers should retreat from making high-risk bets and accept that it won’t outperform the Standard & Poor’s 500 Index and other key benchmarks over the long haul,' says Frederick Rowe, the former chairman of the Texas Pension Review Board" "'It’s folly to think a $200 billion pension fund is going to do better than the economy,' says Rowe ... 'To move out on the risk spectrum to beat the market is imprudent; it’s like running your retirement from Las Vegas.'"
Same article: "As a group, state retirement systems earned a median 3.4 percent annualized return for the 10 years ended on June 30,  ... That about matches the performance of U.S. Treasury bonds."
As CalPERS continues failing to make 7.75% it will fall further and further behind, and it's unfunded liability will grow greater and greater. At some point reality will set in and the actuarial assumption of 7.75% will be AGAIN revised downwards. At that point, the state and employers like Sunnyvale will be hit with a hugely bigger bill in order to make up the unfunded liability.
Here's how that works: Say you invest $100 hoping for 7.75%/year to get $445 in 20 years. If you get 5.5% (like CalPERS), you will have $171 after 10 years. In order to get that $445 you wanted, in the remaining 10 years you need to earn 10% annually. If instead you continue to average 5.5% you will have $292 at the end of 20 years. An unfunded liability of $153 = 34% of the expected return. Except that the sums are waaayy bigger.
This is one of those things that everyone knows but doesn't want to admit. To admit this would mean that every city, and county would have to start NOW making up that unfunded liability when they all feel stretched as it is and are dipping into reserves. Pretending that CalPERS will get 7.75% keeps costs low now - and later?? Later a miracle happens. People go around quoting a single good return from a biased source (like CalPERS) when everything around them is screaming "slooowww growth". Where is that miracle going to come from? Europe (the continent voted most likely to go bankrupt)? US Manufacturing rebounds? (what US manufacturing?) Housing rebounds? (Defaults are increasing in number, house prices are still dropping.) China? (They propped up their economy in 2008 by starting a housing bubble - which is now about to crash, and burn taking much of the world's economy with it).
When that unfunded liability comes due in all it's glory, hiring freezes will become massive layoffs, and bankruptcy will start to look like a good option. With bankruptcy will come a further decrease in tax revenue since no one will be particularly eager to set up shop or buy a house in a bankrupt city which can offer no services.
It would be far better to get out of CalPERS now while the "getting is (relatively) good" and have all city employees be put back on Social Security with a 401K like most people in the US. Better for the taxpayers and better for the employees.