Dec 20 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
"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
"We operate in a zero-sum budgeting environment, so any
increases that come to us have to come out of something else,"
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)