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Dec 20 (Reuters) - The California Public Employees' Retirement System recommended on Tuesday that the pension plan lower its expected rate of investment returns to 7 percent over the next three years, a move that would place a greater financial burden on the state's cities and counties as well as their public workers.
The recommendation comes after two years of investment returns at CalPERS that were considerably lower than the expected 7.5 percent.
The country's largest public pension fund is currently 68 percent funded and recently became cash negative, meaning that it paid out more in benefits, approximately $19 billion last year, than it collected from workers' contributions - about $14 billion.
"The environment we are working in today is very different than the environment ... nearly two years ago," CalPERS Chief Executive Marcy Frost said on Tuesday.
The burden to fill the gap due to lower investment returns will fall to the cities, counties and other local government agencies across California that rely on CalPERS pensions.
Due to lower anticipated investment returns, CalPERS' financial advisors have warned that the coming decade will likely be "a challenging market environment for us," according to Chief Investment Officer Ted Eliopoulos.
If the assumed return rate is reduced to 7 percent, CalPERS estimates that the cost to its members would grow to 14.15 percent from 12.37 percent of public worker payrolls on average and to 26.95 percent from 22.95 percent of safety worker payrolls. Member contributions are split between local government employers and public employees.
Staff proposed on Tuesday that the discount rate, or the assumed rate of investment returns, be lowered to 7.375 percent in fiscal year 2017-18, 7.25 percent in 2018-19 and 7 percent in 2019-20. A decision must now be weighed by CalPERS' board.
Local governments and public workers groups pled for moderation in lowering the discount rate. Dr. Ruben Ingram of the School Employers Association of California, representing mostly superintendents, asked for time to budget in the added cost.
"We operate in a zero-sum budgeting environment, so any increases that come to us have to come out of something else," said Ingram.
Sacramento Finance Director Leyne Milstein said lowering the discount rate is a necessary action, but "some employers are not going to be financially capable of paying these costs and continuing to deliver programs and services and salary and wage increases that are expected by employees." (Reporting by Robin Respaut, editing by G Crosse)