By Marc Lifsher
March 7, 2012, 11:53 a.m.

The chief actuary of California’s biggest public pension fund is recommending that it cut its assumed-rate-of-return target by half a percentage point.

The change, if adopted by the board of the California Public Employees’ Retirement System next Wednesday, could boost retirement costs by millions of dollars for the state government and more than 3,000 local agencies that participate in CalPERS.

Actuary Alan Milligan in a memo suggests lowering the assumed annual rate of return from 7.75%, where it’s been for the last decade, to 7.25%. It would be the first such reduction since the fund, currently valued at $238.4 billion, lost nearly a quarter of its investment portfolio during the 2007-09 recession.

Milligan also is recommending that CalPERS lower its ongoing inflation assumption from 3% to 2.75%.

The effect of the two changes would raise the state government’s employee pension costs by as much as 4.5% in the fiscal year that begins July 1. Some pension costs for public safety agencies could jump by as much as 6.6%, according to Milligan’s report to the board.

Last year, the board rejected a more modest Milligan recommendation to lower the assumed rate of return rate from 7.75% to 7.5%. Members at the time were concerned about the financial impact on local governments that were struggling to pay for basic services with declining tax revenue.

As an alternative this year, Milligan now also is proposing that it might also be prudent to cut the assumed rate of return to just 7.5%.

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