A key decision from California’s largest public pension fund will have major ripple effects on state and local budgets.
The California Public Employees’ Retirement System board voted Wednesday to reduce the projected “rate of return” on its investments from 7.5 percent to 7 percent, phased in over the next three fiscal years.
“This was a very difficult decision to make, but it is an important step to ensure the long-term sustainability of the Fund,“ said CalPERS board president Rob Feckner in a statement. “We know this will have an impact on the state, schools, and public agencies that partner with us, and we're committed to making sure the changes are implemented in a phased approach so our employers and affected members have time to plan their budgets responsibly.“
The “rate of return” is what CalPERS projects it will earn in the stock market – but it’s just that, a projection.
Still, that projection determines how much money must be contributed to retirement benefits each year by the more than 3,000 employers that contract with CalPERS – including cities, counties, school districts, other public agencies, and yes, the state of California.
That’s because the money CalPERS doesn’t raise through investments must be made up for by taxpayers.
So CalPERS cutting the projected rate of return will trigger increased contributions. For example, Gov. Jerry Brown’s administration projects the state will need to chip in an additional $2 billion a year – including half from the state's general fund.
“Today’s action by the CalPERS Board is more reflective of the financial returns they can expect in the future,“ the governor said in a statement Wednesday. “This will make for a more sustainable system.”
CalPERS is phasing in the contribution hikes over the next three fiscal years, giving all those government budgets a little extra time to adjust.