SACRAMENTO (CBS/AP) – The nation’s largest public pension fund lowered its forecast Wednesday for investment returns and asked the state of California, school districts and local governments to increase contributions—a move that could siphon more money from basic services.
The California Public Employees’ Retirement System voted to lower its projected annual return from 7.75 percent to 7.5 percent. The change will cost the state an extra $303 million a year, with about $167 million coming from the general fund.
It also bumps the overall annual state contribution to CalPERS to $3.8 billion, or about 4 percent of the overall general fund budget for the coming fiscal year.
The action by the CalPERS board marked the first time in a decade it has lowered its projected return. The fund, which serves 1.6 million California government workers, retirees and their families, has an unfunded liability of at least $85 billion.
Representatives of local agencies said they were concerned the board’s action will further hurt their budgets at a time when many are facing deficits.
Sacramento Metropolitan Fire District Chief Kurt Henke acknowledged that the investment rate eventually will need to be lowered even further but warned the board before the vote that “you have a lot of local governments on the edge.”
“Implementing this in one fell swoop would be devastating for us,” he told board members before their vote. “I don’t see the bottom in Sacramento.”
In taking its action, the board directed its staff to examine phasing in the rate adjustment over two years as a way to lessen the immediate budget impact on local governments.
Henke estimated the reduction would cost his district $2.5 million and would affect service. He said employees previously agreed to $28 million in long-term contract concessions and the district has closed six stations.
The CalPERS action came amid increasing scrutiny of the cost of providing for government retirees, who receive the types of defined-benefit pensions that are unavailable in the vast majority of the private sector.
Those covered by CalPERS are guaranteed a certain monthly benefit for life, no matter how well or how poorly the fund’s investments perform. Many state and local government employees can retire in their 50s and receive full family health care in retirement that is separate from Medicare.
Supporters of pension reforms said CalPERS made a modest change by lowering the discount rate and should have done even more. They noted that the federal government assumes its pension fund will have a 6.2 percent rate of return, and most private employers that still have pension plans use a rate of 5 percent.
“They’ve been paying too little for the (retirement) benefit value and finally it’s caught up to them,” said Marcia Fritz, president of the California Foundation for Fiscal Responsibility.
Fritz said taxpayers will not want to see public services reduced to pay for pensions and will demand that the money come from public workers making concessions, either through wages or health benefits.
“I can’t see us laying off more teachers or taking more cops off streets,” she said.
Under the CalPERS action, school districts would have to chip in another $137 million to cover the pension costs for non-teaching personnel. Cities, counties and local agencies will see an increase in contributions by 1-2 percent for civil workers and 2-3 percent for public safety workers starting in fiscal year 2013-14.
The action was taken on a voice vote, so there is no official tally. Just one board member, J.J. Jelincic, said he was opposed, arguing that he believes inflation will rise and he did not want governments to pay more.
CalPERS’ chief actuary previously recommended lowering the assumed annual investment return from 7.75 percent to 7.25 percent, citing the risk to taxpayers in the future. But the fund’s pension and health benefits committee on Tuesday voted 6-2 to ignore the advice and went with the higher estimate of returns.
Several cities and districts had written the board when its investment committee was considering the larger reduction—a move that would have required even greater contributions from the state general fund and local governments.
Peter Ng, employee benefits director in Santa Clara County, home of Silicon Valley, wrote a letter warning that it would have cost the county an additional $67.5 million starting in fiscal year 2013-14.
“This additional cost to the county will undoubtedly result in more program and position cuts that will further reduce critical services to the community,” Ng wrote.
In many cities and counties, the rising costs of public employee pensions and retiree health care have forced cuts to basic services such as law enforcement, parks and libraries.
CalPERS staff had urged the board to take some action, warning that deferring tough decisions now would only push costs to future taxpayers.
The $233 billion fund has earned an average return of 8.4 percent annually over the past two decades, but the economy’s gyrations over the past few years have pressured pension funds to take more precautions.
The fund recorded a 20.9 percent increase in the fiscal year that ended June 30, 2011, but had an increase of just 1.1 percent for the 2011 calendar year.
With California facing a $9.2 billion budget deficit, Gov. Jerry Brown, a Democrat, has proposed reducing retirement benefits for new and current public workers. He is calling for increasing the retirement age and having local and state workers pay more toward their retirement and health care.
He also wants to put new workers in a hybrid plan with a 401(k)-style vehicle to better match private-sector benefits but the Democratic-controlled Legislature has yet to enact any of his proposals.
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