CALPERS proposal may boost retiree costs for governments

The pension fund is considering lowering its target return and inflation assumptions.

Directors of the California Public Employees’ Retirement System are expected to vote next week on a staff recommendation to cut its target for investment returns, raising the prospect that state and local governments may have to boost their contributions to the pension fund.

In a memo to the CALPERS board, actuary Alan W. Milligan suggested lowering the assumed annual rate of return to 7.25% from 7.75%, a decade-old benchmark, as the state continues to grapple with the slow recovery from the Great Recession.

Milligan also is recommending that CALPERS, the nation’s biggest public pension fund with a value of $238.4 billion, lower its ongoing inflation assumption to 2.75% from 3%.

The effect of the two changes would raise the state government’s employee pension costs as much as 4.5% in the fiscal year that begins July 1.

Some pension costs for public safety agencies could jump as much as 6.6%, according to Milligan’s report to the board.

Last year, the board rejected a more modest Milligan recommendation to lower the assumed rate of return rate to 7.5%.

Members at the time were concerned about the financial effect on local governments that were struggling to pay for basic services because of declining tax revenue.

This year, as an alternative, Milligan said it might be prudent to cut the assumed rate of return to just 7.5%.

The board is expected to vote on the issue at its regular meeting Wednesday.

CALPERS’ rate of return has averaged 8.4% over the last 20 years through June 30, spokesman Brad Pacheco said. In recent years, the actual CALPERS’ rate of re- turn has been volatile. It hit 20.9% for the fiscal year that ended June 30, but it was only 11.6% the previous year and negative 23.4% in 2009, when the deep recession officially ended.

Since then, CALPERS has struggled to rebuild its portfolio without burdening taxpayers.

CALPERS faces potentially large shortfalls of the money it needs to meet future pension obligations for its 1.6 million members, including active government workers, retirees, dependents and their families.

As of June 30, 2010, the various plans in its portfolio had 63% to 70% of the money to meet future obligations, according to the pension fund’s website.

Experts consider 80% to be the minimum safe funding level.

Gov. Jerry Brown has asked the Legislature to pass a 12-point plan that would cut pension benefits, raise retirement ages and make other changes aimed at reducing the looming deficit.