Pension costs for state and local government will begin to rise in 2017 after CalPERS officials voted to throttle back the expectations on profits earned from its $299 billion portfolio.

By John Myers
Dec. 21, 2016

In the four years since California’s largest pension fund recalibrated its investment projections, the annual contribution from state and local governments — in effect, the money paid by taxpayers — has slowly been on the rise.

By the summer of next year, the pace of those payments will quicken, as the California Public Employees’ Retirement System throttles back the expectations of profits earned on its $300-billion portfolio.

Those expectations were officially made more conservative on Wednesday by CalPERS’ board of directors, a half-percentage-point decrease in assumed returns over three years that will send shock waves through all sectors of state and local government faced with billions of dollars in new pension costs.

Even so, those higher contributions could add some long-term strength to a government employee retirement program that has fallen deeper into the danger zone in recent years.

“This will make for a more sustainable system,” Gov. Jerry Brown said in a statement after the pension board’s vote.

The final approval for shrinking CalPERS’ official rate of investment profit, from its current 7.5% to 7%, came one day after the proposal was vetted and recommended by the board of directors’ investment committee, putting in place the mechanism to shrink CalPERS’ expectations to its lowest rate in modern history.

“This is very monumental for the organization,” said Richard Costigan, the CalPERS board member whose finance committee vetted the proposal.

It was a decision some members of the pension board, most notably those from the ranks of public employee unions, have resisted. Other board members said it was simply a matter of the math for CalPERS, the biggest public employee pension fund in the nation.
The Pension Gap: Read the story

That was best seen in Wednesday’s report by the fund’s chief investment officer that actual investment returns over the last 20 years have averaged only 6.9%, and returns for the current fiscal year are a paltry 2.3%.

The impacts will first be felt in the state budget, which already makes annual payments of $5.4 billion a year into the CalPERS fund. While local governments and schools won’t have to boost their pension contributions until 2018, the state budget will begin to feel the effects of the CalPERS decision in almost six months.

Pension fund leaders were told on Tuesday that Brown, who will unveil his new state budget in less than three weeks, believes the ratcheting down of CalPERS’ investment profits will force the state to pay an additional $2 billion above current pension mandates by the summer of 2024.

“These costs have very real and significant budget pressures,” Eric Stern, a pension adviser to Brown, said in testimony on Tuesday.

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