SACRAMENTO, Calif. (AP) - California’s largest pension system downgraded its expectations for investment earnings Wednesday, a decision that will require state government agencies to contribute more tax dollars to retirement benefits for public employees.
The decision by the board of the California Public Employees’ Retirement System is a reaction to long-term financial pressures and lower projected returns on global investments over the next decade.
CalPERS will assume investment earnings of 7 percent per year, down from 7.5 percent, over the next three years, and will give government agencies an additional five years to absorb the higher payments.
“This was a very difficult decision to make, but it is an important step to ensure the long-term sustainability of the Fund,” said Rob Feckner, president of the CalPERS board.
For the state general fund alone, the change will increase pension contributions by $100 million next year, and by nearly $1 billion once fully phased in, according to the Department of Finance. Cities, counties and school districts will also face steep increases.
State and local governments contributed $10.8 billion to the pension fund in the last fiscal year.
The move gets closer to CalPERS’ actual experience in the market, but it comes with serious financial consequences for government agencies and the workers they employ.
Money that the pension fund doesn’t expect to earn from investments must come from other sources, which will consume tax dollars that would otherwise go to education, public safety, social services and other government programs.
Even 7 percent is optimistic. CalPERS advisers project the fund will earn on average just 6.2 percent per year over the next decade.
CalPERS, the nation’s largest public pension system with more than $300 billion in assets and 1.8 million members, faces a series of financial pressures. More workers are retiring and living longer once they do, raising benefit costs and leaving fewer people to pay into the system.
The fund has not recovered from massive investment losses during the Great Recession, which wiped out a quarter of the pension fund’s value. And investment returns have fallen far short of the earnings target - 0.61 percent in the last fiscal year and 2.4 percent the year before.
CalPERS now pays out more each month in benefits to its retired members than it earns from cash and investment earnings. The fund has only enough assets to pay for about 68 percent of promised benefits, and each year of below-target earnings creates a bigger chasm between assets and liabilities.
“Today’s action by the CalPERS Board is more reflective of the financial returns they can expect in the future,” Democratic Gov. Jerry Brown said in a statement. “This will make for a more sustainable system.”
Brown has long warned about the precarious finances in the state’s pension system and urged CalPERS to adopt more realistic assumptions.
The decision will strain the budgets of local governments and require their workers to contribute more, but failing to react to the pension system’s growing unfunded liability would be even worse, said Faith Conley, legislative advocate for the California State Association of Counties.
Phasing in the rate over eight years will give counties time to prepare, she said.
“It’s better now than later,” Conley said. “The next 10 years don’t look that great. So if we don’t do it now, we could suffer a much bigger hit later, and that would be bad for us and employees.”
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