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UPDATED: CalPERS vote this week could cost state $425 million – per year

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





23 Responses to “UPDATED: CalPERS vote this week could cost state $425 million – per year”

  1. Lets be Reasonable says:

    @RC – I’m not saying Mitt will not represent the working family because he is rich, but rather because it is only the rich who are voting for him. It is only the rich who are backing his campaign financially. Santorum has been winning the the vote of those making less than $100,000. Right or wrong, but in our political system, politicians tend to pay more attention to those who get them elected…

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  2. Reality Check says:

    LBR,

    How about being reasonable. By your standards, did FDR represent the interests of working Americans? Or women? He was, after all, male. It it possible for someone to represent the interest of America and not just those of his sex, race, wealth, etc. etc.

    Your side keeps saying they aren’t playing the class warfare card. Your comment suggests otherwise.

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  3. Lets be Reasonable says:

    @JL – “The larger question is why do voters around here so blindly follow the self-serving Democrats who do NOT represent working families in any way.”
    .
    The only financial demographic that the likely Republican nominee (Mitt) is winning are those who make more than $100,000. Do you really believe that he will represent working families!?

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  4. J L Anderson says:

    @Mockingbird – You’re even more hilarious than Otto, but he was actually TRYING to be sarcastic and humorous (good job Otto).

    The larger question is why do voters around here so blindly follow the self-serving Democrats who do NOT represent working families in any way.

    Must be something in the water (according to the Board of Stupes, maybe adding fluoride will fix the problem).

    Thumb up 10 Thumb down 4

  5. MOCKINGBIRD says:

    I’m Just Saying-Thank you. However, anyone who thinks the unions can compete with the superpacs is misguided. We’re talking millions against BILLIONS. Plus the fact Unions don’t hide who they are on ads and mailers with bogus patriotic sounding names so you know just who paid for the ads. Unions have no tricks up their sleeves.
    The corporate sponsored prop on the November ballot (called “paycheck protection”, like they really want to protect workers’ paychecks) will take away any voice workers still have, and that’s union representation. It’s aimed right at ALL UNIONs, private and public, because it will ban deduction of dues from union members paychecks. Since corporations don’t deduct political donations from their workers paychecks it WON’T AFFECT THEM AT ALL and they can continue to fund political campaigns with their billions of dollars UNCHECKED. The way the prop is written it won’t have ANY impact on any corporations or rightwing superpacs, and that’s intended. Corporations will have an even a bigger voice in government than they have now and workers WILL HAVE NONE.

    As a union member myself, I have my dues automatically deducted along with a voluntary monthly donation to the political fund of my union. Notice the word VOLUNTARY. Union dues are for union representation for workers. Many of us also contribute, VOLUNTARILY, to the political fund. This prop is designed to destroy unions and takeaway union members’ freedom of speech. We will have NO representation, no lobby, for workers’ interests in government.

    And, yes, we usually donate to Democrats. Find us a Republican that will represent workers fairly, protect workers and their families, and maybe they will receive funds. The last Republican I can remember who really represented workers and their families was IKE. Unions donate to the political campaigns of politicians who represent workers and their families and that doesn’t include any current Republican candidate who are all corporate shills.

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  6. I'm just sayin' says:

    The voters control the state, not the unions.

    The intelligence of the public is what’s questionable. Don’t start blaming the unions and SUPER PACS when you, Mr. Public, exhibit such voter apathy.

    We, the public of the United States and California, let them control it.

    This is a beautiful country and a beautiful governmental system.

    Too bad the public is so weak minded and lazy.

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  7. BigJim says:

    @Otto

    I had a good laugh at your sarcastic humor.

    But then I realized that this is exactly how the democrats and their union puppet-masters think, and that is no joke!

    Thumb up 11 Thumb down 3

  8. Canthisbe says:

    Otto Greener,

    Couldn’t vote up or down since I assumed you are being sarcastic but only you know for sure. So?
    By the way, does your nom de plume mean you make Teslas or Volts?

    Thumb up 6 Thumb down 2

  9. Canthisbe says:

    “The state’s progressive tax-and-spend experiment is broken, threatening basic services, from courts and parks to education and health care for its most vulnerable citizens. Mr. Brown’s tax initiative only exposes the state to an ever more dangerous roller-coaster ride.

    No wonder many Silicon Valley CEOs say they won’t expand in California because of high taxes and burdensome regulation. And no wonder net migration has recently reversed, with hundreds of thousands of workers and their families leaving the state in search of better opportunities.”

    http://online.wsj.com/article/SB10001424052702304537904577277242682364690.html?mod=WSJ_Opinion_LEADTop

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  10. Living in Paradise says:

    @ Captain Bly

    What public jobs have been cut? The only services cut have been to inconvience we who pay the taxes by closing public offices filled with cranky public employees.

    The state legislature has not and cannot even introduce a bill to modify public pensions.

    All of this crocodile tear crying is just a few drops on the nose of a smiling reptile, the public unions, who have the local and state government by the throat.

    Defined benefits are just a small problem of a much larger problem of democrat and union control of this state.

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  11. Just a Thought says:

    VETERAN, CAREER cop charged with two felonies in southern California.

    Those public pensions really help weed out the bad apples from the public employee candidates !!!

    Jeffry Paul Quinton, 48, of Anaheim Hills, faces two felonies — grand theft and commercial burglary, said officials with the Orange County district attorney’s office.

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  12. Otto Greener says:

    CalPERS is not in trouble and never will be. The money pit of State government is bottomless and has all the money needed to fund everything.

    It’s just the right wing nuts who want to control spending. We need more spending, not less. This is a very rich state with too many rich people. We need to soak the rich and give it all to the poor and our hard working public employees who have put up with so much.

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  13. GAJ says:

    From Dan Walters’ column in today’s PD:

    “Corporations are required by law to periodically adjust their “discount rates” — in effect, their assumptions of future pension fund earnings — by tying them to corporate bond interest.

    Discount rates vary a bit but currently are in the 4 percent to 5 percent range and have been dropping because the Federal Reserve System has kept interest rates low as an economic stimulus.

    When discount rates decline, the assumed values of pension funds also drop, thus requiring companies to put in more cash to maintain their capacity to pay future pensions. General Electric, the Wall Street Journal reported, had to pump $7.4 billion more into its pension fund when its discount rate dropped from 5.3 percent in 2010 to 4.2 percent in 2011.

    California’s big public pension funds also use discount rates, but they are in the 7.5 percent to 8 percent range. Unlike their corporate cousins, the public funds are not required by law to adjust them. Pension boards and public employee unions, not surprisingly, trumpet the fiction that high discount rates are realistic — exactly the opposite of the positions taken by private company unions in Washington, D.C.

    Underlying that posture is this simple, if disturbing, fact: Public pension systems can maintain artificially high discount rates only because they know that should real earnings fall short, taxpayers will be on the hook for the difference, without any recourse.”

    http://www.pressdemocrat.com/article/20120312/WIRE/120319920/1070/opinion?p=1&tc=pg

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  14. Lo Sbandato says:

    @ Bill – You’re lost without a map is you think any pension program, public or private, is run by some financial geniuses who can consistently provide even above average returns. 7+% per year for 30+ years? Most funds are lucky to survive 5 years, much less make that kind of return consistently.

    “Leveraging” is the brilliant idea that crashed the economy in 2008 and still threatens the whole system today (guessing wrong is far more dangerous than guessing right is profitable). These guys sell themselves as smarter than the unwashed, but they’re mostly good salesman and mediocre gamblers.

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  15. BigJim says:

    Calpers pretending that they can earn 7.75% when reality is 1.1%, or anything higher than the likely average market return going forward only serves to defer problems with pension funding to the next generation. The Boomers are very good at this. I don’t object in the least if public employees want a professional organization to run their investments, be it Calpers, or mutual funds typical in 401k – they are the same. What I do object to as a taxpayer is being legally liable to make up for the underperformance of those “professionals” when they can’t achieve thier unrealistic projections for returns. It is those unrealistic projections that fooled the politicians into guaranteeing unrealistic pensions in the first place.
    The solution – defined contributions to whatever plan the employees want. If the contry does well, we all have a good retirement, and vice-versa. At least then we are all working towards the same goal, prosperity for all, not just the entrenched few.

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  16. GAJ says:

    Remember all the comments that Union members pay their fair share and are fully funding their own pensions?

    Hardy har har.

    And I agree, despite my IRA jumping in value by 50% since 2009 an expected rate of 7.25% for the next 20 years is overly optimistic given retiring Boomers will be selling their stock to fund their living expenses.

    As more and more sell, prices will hardly skyrocket.

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  17. John Bly says:

    This potential “realism” is the best news I have heard in a while. When we have to cut even more services, jobs, and programs to fund public pensions, the people might actually get ticked off enough to start paying attention to the REAL problem-and defined benefits is the monster that needs to be destroyed before it destroys us.

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  18. Follower says:

    @FC
    Yes, that would “fix it” FOR NOW! But as soon as the economy recovers and everyone is looking the other way we will return to business as usual.

    The permanent “fix” is BANNING PUBLIC EMPLOYEE UNIONS!

    Thumb up 21 Thumb down 6

  19. Reality Check says:

    Misleading headlines are hardly uncommon these days. But, the one above wins the prize.

    Changing the expected rate of return will not cost anyone a single dime . . . . . in the long run. The actual rate of return determines the amount taxpayers pay for public pensions to make good on the promises made.

    Would it save county taxpayers money to pretend investment returns will average 10%? Only until it became obvious that they won’t. Lowering the expected rate to 7.25% is overdue. It probably should be no more than 5-6%, then if the fund returns more we can all celebrate that we haven’t unduly burden our grandchildren.

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  20. Bill says:

    Fiscal Conservative – Why on earth do you think an individual who has no special knowledge of finance can do better than a large pension system that has the benefit of leverage through its sheer size and teams of financial experts ? I imagine there could be some exceptionally talented individuals or those with inside knowledge who might be able to do better but are you aware of how much money the average IRA has lost in the recent downturn vs the investment portfolio of Calpers? I guess the logic of your argument would be that individuals would be more motivated but it takes more than motivation. Witness all those deflated IRAs.

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  21. THE ONLY WAY says:

    TO FIX THIS THING, IS TO STOP PAYING FOR ILLEGAL ALIENS EDUCATION AND HEALTH CARE!

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  22. Money Grubber says:

    Expensive public pensions, but, hey… we know those criminally excessive public pensions draw the “best qualified candidates.”

    Right, “Bear” ?? lol.

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  23. Fiscal Conservative says:

    The ONLY way to fix this snafu is to change the defined benifit pension system.

    When each individial is responsible for their pension equity, the chance of it being blown in/by vegas decreases significatly.

    Thumb up 22 Thumb down 10

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