Lower Forecast Rejected For Calif. Pension Fund

SACRAMENTO (AP) — Board members of the nation's largest public pension fund on Tuesday rejected a proposal to reduce its forecast of future investment returns, avoiding the politically sensitive move of demanding more money from state or local governments this year.

The unanimous vote by a committee of the California Public Employees' Retirement System is expected to be upheld Wednesday when considered by the full board.

Staff members had proposed the board reduce the annualized forecast of investment returns from 7.75 percent to 7.5 percent.

Had that been approved, it would have increased payments required from the state and California State University system by roughly $400 million. Most of that amount would have come from California's general fund, which has a $26.6 billion deficit. Local governments would have been on the hook for tens of millions more.

Board members say governments cannot afford such higher costs at a time of steep budget deficits. They say leaving the rate unchanged still meets accounting guidelines.

"This is not the time for this kind of adverse change," board member Tony Oliveira said.

State and local governments already have made deep spending cuts, he said, and "this could be a job-killer at a time when we don't need it."

Under questioning by the Benefits and Program Administration Committee, CalPERS chief actuary Alan Milligan said the lower "discount rate assumption" would account for smaller returns expected over the next 10 years yet maintain the same financial cushion the pension fund has assumed for years.

"A 7.75 percent discount rate is still reasonable and prudent" under accounting standards, he said, but the board can make a policy decision to reduce that cushion.

Critics have said the 7.75 percent projection of annualized returns is too rosy and will contribute to unfunded pensions liabilities if CalPERS cannot meet that expectation.

Local officials and retirees spoke out for keeping the rate unchanged. Governments already face higher contributions next year to make up for recession-related investment losses in 2008, they said.

The discount rate change would have boosted costs for the city of Orange by $2.5 million a year on top of the increased contribution for losses, said Richard Jacobs, the city's finance director.

The committee voted 7-0 to keep the rate unchanged, with member Richard Costigan abstaining. The full CalPERS board will consider the rate Wednesday. If no committee members change their votes, the measure to leave the rate alone has enough votes for approval.

The state Finance Department had built the lower assumptions into Gov. Jerry Brown's budget proposal for next year, so leaving it unchanged would free up about $200 million from the state's general fund.

The recommendation comes amid a nationwide debate over public pensions, many of which are badly underfunded yet force taxpayers to provide benefits that have been vanishing from the private sector.

Some economists contend that pension funds have been overestimating their investment returns, which will leave taxpayers on the hook for bailouts to provide the promised benefits to future retirees. While many funds assume annualized returns of around 8 percent, critics say they should base their projections on a far more conservative 4 percent to 5 percent annual return, which would leave pension funds with much larger shortfalls.

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. At that time, 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 the figure this spring. Other studies suggest the gaps are much larger, and Republican lawmakers have introduced at least 11 pension-reform bills in the Legislature this year.

Advocates of public pension reform criticized the CalPERS committee for leaving its investment projection unchanged.

"It continues the fiction," said Dan Pellissier, who heads California Pension Reform, a group working to put the issue on the ballot. The shortfall, he said, "will just continue to grow until they come to grips with reality."

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