Calif. pension fund may reduce investment target

March 14, 2011

By ADAM WEINTRAUB, Bloomberg News

The nation’s largest public pension fund could make a small accounting change that would carry a large price tag for taxpayers when board members meet this week.

Staff of the California Public Employees’ Retirement System have recommended that the board reduce its estimate about how much money the fund’s investments will make in future years, dropping the so-called “discount rate assumption” from 7.75 percent to 7.5 percent.

While it’s a relatively small change, the reduction could force the state and other employers with workers covered by CalPERS to increase the amount they pay into the pension fund, probably by $200 million or more. The pension fund could take all or part of that from California’s general fund, the part of the state budget that pays for day-to-day operations but is facing a $26.6 billion deficit.

Gov. Jerry Brown’s budget proposal, now pending in the Legislature, was based on the assumption that the giant pension fund would lower the rate. A committee of the pension fund’s board is scheduled to consider the change on Tuesday.

“If the assumed rate of investment return is lowered, it has the effect of increasing contributions by employers,” said Edd Fong, a spokesman for the pension fund.

In this case, the employers are government agencies that typically pay their bills with tax dollars. That puts the CalPERS accounting decision in the middle of a national debate about public pension reform.

As of February, the pension fund estimated a shortfall of about $75 billion between its accrued liabilities and the market value of its assets. The state’s second largest public pension fund, the California State Teachers’ Retirement System, had an estimated shortfall of $40.5 billion as of June 2009 and is expected to update that figure this spring.

Assemblyman Allan Mansoor, R-Costa Mesa, welcomed the recommendation to lower CalPERS’ expected rate of investment return.

“It brings us closer to reality in what we’re facing,” said Mansoor, who has introduced a bill to ban collective bargaining over pension benefits by public employees. “Any time there’s a shortfall, the taxpayers have to make up the difference because there is a guaranteed benefit. What we have is not sustainable.”

Some economists say pension funds should adopt even more conservative assumptions about their annual rates of return — in the range of 4 percent to 5 percent. CalPERS, which serves 1.6 million current and former government employees and their families, says it has averaged a 7.9 percent return on its investments over the past 20 years.

The fund had assets valued at $230 billion in February. It was valued at $251 billion in mid-2007, before the recession hit, and fell as low as $165 billion in early 2009.

The defined benefit plans enjoyed by many government employees across the nation, where retirees are guaranteed a benefit for the rest of their lives, are rapidly disappearing from the private sector. Republican lawmakers, taxpayer groups and certain business interests say the current public pension systems provide an unsustainable level of benefits and are pushing for reforms.

A recent report by an independent state auditing agency, the Little Hoover Commission, estimated a $240 billion shortfall for the 10 largest public employee pension plans in California. The report said some cities will have to devote from one-third to one half of their budgets to support retiree benefits in the near future.

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