By Marcie Frost, CalPERS chief executive officer

Twenty years ago, CalPERS was 128 percent funded. The strength of the system combined with the strong economy led to changes in retirement benefits and lower contributions for new members and retroactively for existing members.

Then the unexpected happened. The Great Recession hit and global financial markets nearly collapsed. The value of the CalPERS fund fell 24 percent in a single fiscal year, to about $180 billion. Our funded status — back above 100 percent following the dot-com bust of the early 2000s — dropped to 61 percent. The road to recovery would be long but necessary to provide members with the retirement security they earned through a career of dedicated public service.

Fast forward to today. We've made strong progress. The fund has nearly $375 billion in assets and is just over 70 percent funded. Yes, we're on the right track, but we aren't where we want or need to be.

Earlier this month, CalPERS reported fiscal year investment returns of 6.7 percent, just shy of our 7 percent target. It's a signal that the financial world is changing, and we must change with it. What we've done over the last 20 years won't take us where we need to go in the future. New thinking and innovation are in order.

CalPERS' Long-Term Plan to Protect Retirement Security

CalPERS management and our Board of Administration have worked closely to develop a plan to close the gap and improve our funded status. The focus is on sustainable growth, smart decisions, and maintaining the discipline to weather economic forces and global competition. To protect you, our members, employers and taxpayers, we took a hard look at how we do business, making important changes so that we can be even more efficient, effective, and successful.

Strong Foundational Changes

We lowered our target rate of return from 7.5 percent to 7 percent, changed our investment mix, and shortened the period in which employers pay their unfunded liability, enabling them to significantly save in the long term. This has greatly improved our financial position and given us new opportunities that can only be achieved by increasing the money coming into our system.

Positioning the Portfolio for Growth

To hit our investment targets, CalPERS must take informed risks and be disciplined in our decision-making. Ben Meng, our new chief investment officer, is a globally respected investor, and he's focused on driving the Investment Office to meet and beat our targets. He recognizes the opportunities CalPERS can seize in the private markets and is helping develop new private equity models that will allow us to capitalize when the right opportunities arise. Private equity can meaningfully strengthen the fund. As Ben says of private equity, "We need more of it, and we need more of it now." But we'll be prudent and patient, investing only when the opportunity properly aligns with our interests.

Ben's goals are big. He wants a CalPERS Investment Office that can compete with Wall Street's very best. Some may suggest that, as a public sector organization, this is a difficult task. We believe in CalPERS and know that we have strong competitive advantages that allow us to be among the top investors in the world.

Efficient and Effective Operations

To maximize the success of our investments, CalPERS must run the organization in the most cost-efficient manner possible.

Last year, we improved service to our members and employers. This included better and easier-to-use online services for our members, more customer service tools like our open enrollment app, and a new trust fund for our employers to pre-fund future pension costs.

Our leadership team also has been on the road sharing our commitment to our members, employers, and policymakers. We told the CalPERS story across the state, fiercely defending defined benefit plans and highlighting their economic impact on local communities large and small. At every stop, we restated our opposition to divestment and voiced strong support for engaging with companies to change behavior that can harm their financial bottom line — and ours. To succeed, we need access to all investment opportunities across all asset classes. Divestment shrinks our investment universe and can seriously hinder our progress to hit our investment return targets.

A Vote of Confidence

During his tenure, Governor Jerry Brown contributed an additional $6 billion to the fund. In his first budget as California's chief executive, Governor Gavin Newsom and the Legislature appropriated about $3 billion more to the system, reflecting their commitment to reducing unfunded liabilities and supporting our efforts moving forward. We appreciate these investments, but we cannot and do not expect it every year. But one thing is clear: The state has done its part, employers have done their part, and members have done theirs.

Improving the Health of You and Your Family

It's sometimes overlooked that we're the second largest health care purchaser in the nation. With this strength, we're making health care more affordable. In 2019, we introduced a value-based insurance design for one of our PPO plans that gives members the opportunity to reduce their annual deductible by completing healthy activities, such as a getting a flu shot or obtaining a non-smoking certification.

Through education, we worked to curb the use of opioids. Our efforts are working: Between 2017 and 2018 we saw a 15 percent decrease in opioid use among members and a 32 percent decrease in dosage.

The Next Chapter

The benefits of the changes we've made are taking hold, but the next decade is critical. Pension costs are rising, and we must do all we can to control them. We remain laser-focused on our top priorities, and we're building the team to achieve our goals. At the same time, we're working to give the employers that contract with us to administer their pension plans more tools to budget for and address future costs. Benefits are only as secure as our employers' ability to pay them.

Our goals may be ambitious, but our commitment never wavers. We're all partners in this critically important effort to provide the retirement security that public employees have earned.