December 20, 2016 5:17 PM - The Sacramento Bee
CalPERS moves to slash investment forecast. That means higher pension contributions are coming.
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.
CalPERSf 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 committeefs 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 Employeesf Retirement System, which is just 68 percent funded,
needs higher contributions from government agencies to solve its long-term
problems.
gWefre in a low-growth (investment) environment, and itfs expected to remain
that way the next five to 10 years,h 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 Tuesdayfs move doesnft
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
fundfs investment strategies over the next year.
gThis is just a start,h 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 wonft 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 arenft 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 ga reasonable and responsible action,h 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.
gAn unfunded pension is a hollow promise,h 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 statefs 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 wasnft
expected to make any decisions until February. The timeline was moved up because
git allows folks to begin planning for it,h 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 CalPERSf 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.
CalPERS already raised rates two years ago, largely in response to actuarial
studies showing retirees are living longer.