For years, the California Public Employees’ Retirement System has estimated its investments will earn an average of 7.5% or more a year. Now it plans to slowly reduce that rate to 6.5%.

Melody Petersen
November 18, 2015

The board of California’s largest public pension fund approved a plan Wednesday to lower its estimate of future investment returns — a move that will require taxpayers to pay billions of dollars more than expected over the next decades.

For years, the California Public Employees’ Retirement System has estimated it will earn an average of 7.5% or more a year from its investments. Under the new plan, the pension fund will slowly reduce that rate to 6.5%.

The board voted 7 to 3 on Wednesday to approve the plan that will reduce the rate in small increments over the next 20 years.

With investment income contributing less to the cost of government worker pensions, taxpayers must pay more.

“Ensuring the long-term sustainability of the fund is a priority for everyone on this board, and this policy helps do that,” said Rob Feckner, president of the CalPERS board.

The vote was criticized by Gov. Jerry Brown, who had urged the board to move more aggressively to 6.5% rather than stretching the change over decades.

The pension fund’s staff estimated in May that increases in taxpayer contributions would range from 6% to 20% over the coming decades under the plan.

Those boosts are in addition to recently announced increases of 50% to the rates that CalPERS charges cities, the state and other government agencies.

Fast-rising pension costs have already forced many cities to cut library hours, street repairs and other services. Three California cities — San Bernardino, Stockton and Vallejo — filed for bankruptcy protection in recent years at least in part because of rising payments to CalPERS.

To soften the blow to municipal budgets, CalPERS will make the incremental changes only in years of superior investment returns when government finances should be stronger.

Experts say that government pension plans across the country have long overestimated how much they will earn on their investments. And that has made government worker pensions appear less expensive than they actually are.

For example, taxpayers currently pay amounts equivalent to 37% of state firefighters’ salaries to CalPERS to cover their future retirement checks. That payment is based on estimates that the fund’s investments will continue to earn 7.5% over the decades.

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