CalPERS lowers forecast for investment returns

(AP) — The nation's largest public pension fund voted Wednesday to lower its estimate for annual investment returns, meaning it will need more money from the state, school districts and local governments to maintain its ability to fund promised retirement benefits.

The board of the California Public Employees' Retirement System decided to lower the fund's estimated rate of return from 7.75 percent to 7.5 percent.

Representatives of local agencies said they were concerned the move will further hurt their budgets at a time when many are facing deficits and have had years of cutbacks.

Several cities and local districts had written the board when its investment committee was considering lowering the rate by a half percentage point, to 7.25 percent, a move that would have required even greater contributions from the state's general fund and local governments.

Sacramento Metropolitan Fire District Chief Kurt Henke told the board before its vote that he doesn't dispute the rate eventually needs to be lowered even further but warned that "you have a lot of local governments on the edge."

"Implementing this in one fell swoop would be devastating for us," he said. "I don't see the bottom in Sacramento."

Henke estimated the reduction would cost the district $2.5 million and would affect service. He said employees previously agreed to $28 million in long-term contract concessions and the district has closed six stations.

The move by the CalPERS board will require an extra $303 million a year from the state, of which about $167 million would come from the general fund, which has a $9.2 billion deficit. It will bump the overall annual state contribution to CalPERS to $3.8 billion.

School districts would have to chip in another $137 million to cover the pension costs for non-teaching personnel. The board has yet to determine the increased contribution amounts for cities, counties and local agencies.

In taking its action Wednesday, the board directed its staff to examine a plan that would phase in the rate adjustment over two years as a way to lessen the immediate budget impact on local governments.

Board member Steve Cooney said he supported the phase-in "not to do violence" to the state, cities, counties or others that have budget problems.

The action was taken on a voice vote, so there is no official tally. One board member, J.J. Jelincic, said he was opposed, arguing that he believes inflation will rise.

CalPERS' chief actuary previously recommended lowering the assumed annual investment return from 7.75 percent to 7.25 percent, citing the risk to taxpayers in the future. But the fund's pension and health benefits committee on Tuesday voted 6-2 to ignore the advice and went with the higher estimate of returns, meaning local governments will not have to contribute as much as they otherwise would have.

CalPERS staff urged the board to take some action, warning that deferring tough decisions now will only push costs to future taxpayers. The fund's estimated rate of return was last changed 10 years ago, but the recession has eroded tens of billions of dollars in CalPERS assets.

As of June 30, CalPERS had an unfunded liability of at least $75 billion.

The $233 billion fund administers retirement benefits for more than 1.6 million California public employees, retirees and their families.

It has earned an average return of 8.4 percent annually over the past two decades, but the economy's gyrations over the past few years have pressured pension funds to take more precautions. For example, the fund recorded a 20.9 percent increase in the fiscal year that ended June 30, 2011, but had an increase of just 1.1 percent for the 2011 calendar year.

Wednesday's action came at a time when public pension benefits and their costs to taxpayers are among the top issues facing state lawmakers and local government officials.

In many cities and counties, the rising costs of public employee pensions and retiree health care have forced cuts to basic services such as law enforcement, parks and libraries.

Last month the California State Teachers' Retirement System lowered its investment forecast for the second time in 14 months, acknowledging the prospect of lower market returns in the years ahead. The teacher pension system lowered its assumed annual investment return from 7.75 percent to 7.5 percent, increasing its projected unfunded liability by $5.9 billion.