CalPERS lowers investment forecasts, liabilities to increase

December 22, 2016

By JOSH FRIEDMAN

The California Public Employees Retirement System (CalPERS) has decided to lower its discount rate from 7.5 percent to 7.0 percent, which will cause pension costs to rise for state and local government agencies.

CalPERS’s discount rate is the percentage the pension system expects to earn as a return on its investments. When the discount rate decreases, pension payments and unfunded liabilities go up.

Numerous government agencies in San Luis Obispo County, including all seven cities, are CalPERS members and thus face rising costs. The SLO County government, though, has its own pension system.

At a meeting held Wednesday, the CalPERS Board of Administration voted to lower the discount rate by half of a percentage point over the next three years. The board also voted to delay the changes by one year for school districts and local government agencies in order to give them time to prepare for the increased pension payments.

For state government agencies, the discount rate will lower to 7.375 percent in the 2017-2018 fiscal year, followed by 7.25 percent in the 2018-2019 fiscal year and 7.0 percent in the 2019-2020 fiscal year. The changes will begin taking effect for school districts and other local government agencies on July 1, 2018.

Local government agencies and public employee unions had been attempting to stall decreases to the discount rate.

“This was a very difficult decision to make, but it is an important step to ensure the long-term stability of the fund,” board president Rob Feckner said. “We know this will have an impact on the state, schools and public agencies that partner with us, and we’re committed to making sure the changes are implemented in a phased approach so our employers and affected members have time to plan their budgets responsibly.”

In the 2015-2016 fiscal year, CalPERS earned a return of just .6 percent on its investments. That was the retirement system’s worst performance since 2009. The returns earned thus far in the current fiscal year are 2.3 percent, according to the LA Times.

Total CalPERS returns have averaged 6.9 percent over the last three years, 5.1 percent over the last 10 years and 7 percent over the last 20 years.

In 2009, CalPERS lost a quarter of its value. The retirement fund has since been plagued by market volatility.

CalPERS received a record return of 20.7 percent in fiscal year 2011 and then fell to 1 percent the following year. In 2015, CalPERS earned a return of 2.4 percent.

The CalPERs board last lowered the discount rate in 2012, bringing it down from 7.75 percent to 7.5 percent.

Following the board vote Wednesday, Gov. Jerry Brown issued a statement commending the decision to lower the discount rate.

“Today’s action by the CalPERS board is more reflective of the financial returns they can expect in the future,” Brown said. “This will make for a more sustainable system.”