California State Pension Moves to Slash Investment Forecasts

The change is designed to reflect the reality of lower recent returns. But it means billions more in contributions from taxpayers and state employees.
by | December 21, 2016 AT 9:45 AM

By Dale Kasler

The cost of that government pension is about to go up again, for California taxpayers as well as some public employees.

CalPERS moved to slash its official investment forecast Tuesday, a dramatic step that will translate into billions of dollars in higher annual pension contributions from the state, local governments and school districts.

Employees hired after January 2013, when a statewide pension reform law took effect, will also have to kick in more money. Older employees could see higher contributions, too, although that would be subject to contract bargaining.

CalPERS' Finance and Administration Committee voted 6-1 to lower the forecast from 7.5 percent to 7 percent in phases over three years, starting next July. Although the committee's vote must be ratified by the entire board Wednesday, most other board members indicated they support the move as well.

It would be the first adjustment to the forecast in four years.

The move is a recognition that investment returns are falling and that the California Public Employees' Retirement System, which is just 68 percent funded, needs higher contributions from government agencies to solve its long-term problems.

"We're in a low-growth (investment) environment, and it's expected to remain that way the next five to 10 years," board member Henry Jones said.

CalPERS adviser Wilshire Consulting has predicted the fund will likely earn just 6.2 percent a year over the next decade, and critics such as Dan Pellissier of California Pension Reform said Tuesday's move doesn't go far enough.

Board members, however, defended the action as a compromise; it will help stabilize the fund while giving municipalities and other government agencies some breathing room before they absorb the impact. Richard Costigan, chairman of the finance committee, said CalPERS officials will continue to look at the fund's investment strategies over the next year.

"This is just a start," Costigan said.

The state will start to absorb the impact of higher rates with the start of the new fiscal year next July. Municipalities and school districts won't start feeling the effect until a year later. All told, the higher contribution rates will be phased in over eight years.

Government officials said they aren't thrilled about the higher rates but appreciate the phase-in period. The move will cost the city of Sacramento about $6 million a year but is still "a reasonable and responsible action," city finance director Leyne Milstein told the committee.

Board members said they fully understood the impact on government agencies. But they said letting the pension fund drift financially would be considerably worse. "An unfunded pension is a hollow promise," said board member Richard Gillihan.

Eric Stern of the state Department of Finance said the phased-in plan is supported by Gov. Jerry Brown, who previously scolded CalPERS for moving too cautiously on lowering its investment forecasts. Stern said the annual payment to CalPERS from the state's general fund, now about $5.4 billion, will likely rise by $1 billion.

CalPERS has been looking at its investment outlook for some time but wasn't expected to make any decisions until February. The timeline was moved up because "it allows folks to begin planning for it," Costigan said.

CalPERS last year adopted a mechanism that was designed to lower the forecast by 1 point, but it would take 20 years to kick in. After earning just 0.61 percent on its investment portfolio in the latest fiscal year, the second straight year of subpar returns, the pension fund decided to move more aggressively.

Despite predictions of lower investment returns, CalPERS has been wary of adjusting its investment forecasts. Six of CalPERS' 13 board members are affiliated with public workers or retirees, and a lower investment forecast means government agencies will pressure employees during contract bargaining to put more money toward their retirement. By imposing higher contribution rates on cash-strapped school districts and municipalities, the adjustment also could energize pension-reform advocates who are advocating steep cuts in retirement benefits.

(c)2016 The Sacramento Bee (Sacramento, Calif.)