The full CalPERS board voted this morning to lower its forecast from 7.75 percent to 7.5 percent. The change is expected to cost the state an additional $167 million a year out of the general fund. CalPERS’ chief actuary had recommended a reduction to 7.25 percent. But the CalPERS pension and health benefits committee on
Tuesday voted 6-2 to ignore the advice and recommended only a quarter-percent cut.
It’s said that truth is stranger than fiction. When it comes to retirement systems, it’s also more expensive. On Tuesday, the California Public Employees’ Retirement System (CalPERS) will discuss a recommendation to lower its forecast on investment returns a half-percent from 7.75 to 7.25 percent, a sizeable drop.
The forecast, otherwise known as the “discount rate,” is essentially CalPERS’ best guess on how its investments will perform. Right now, it’s projecting an average 7.75 percent return per year over the next 20 years. Many argue that’s an overly rosy projection given that the market hasn’t come close to that over the past 10 years. Last year, CalPERS earned a return of 1.1 percent.
CalPERS was encouraged to drop its discount rate to 7.5 percent a year ago, but it declined to do so. This year, its chief actuary is recommending a rate of 7.25 percent. A committee will discuss the issue on Tuesday. The full board is expected to vote on Wednesday.
If it goes with the full reduction, it may be a more honest reflection of what’s likely to happen with investments, but it would be costly. When the retirement system drops its anticipated return, it increases the fund’s projected shortfall in retirement obligations. That means state and local governments will need to make up the difference. No doubt, that will fuel more public debate about the need for pension reform.
According to the Sacramento Bee, if the rate is lowered the full half-point, it would cost the state an additional $425 million a year. The state already faces a projected $9.2 billion deficit next year.
If CalPERS lowers its rate, it’s a good bet that the Sonoma County Employee Retirement Association, which also has its forecast set at 7.75 percent, will do the same. Again, that’s good news in terms of being realistic, but it’s bad news in terms of debt. Sonoma County already faces $249 million in unfunded liabilities in addition to $515 million in outstanding bonds issued to cover its retirement costs.
CalPERS last adjusted its discount rate in 2004, when it was lowered from 8.25 percent to 7.75 percent. CalSTRS, which oversees retirement benefits for teachers, lowered its forecast rate to 7.5 percent in February, the second time it had cut its rate in about a year.
- Paul Gullixson