Calpers Board Lowers Investment Return Forecast to 7.5%

The California Public Employees’ Retirement System, the largest U.S. public pension, voted to lower its assumed rate of return for the first time since the recession dragged down stock and real-estate prices.

The $235.8 billion fund’s governing board agreed in a vote in Sacramento today to reduce its investment-return forecast rate to 7.5 percent from 7.75 percent, after rejecting its actuary’s 7.25 percent recommendation.

The rate is used to calculate how much money the fund, known as Calpers, expects to have and how much it needs to cover benefits promised to government workers, as well as the size of municipalities’ annual contributions.

“Estimating pension liabilities isn’t about cherry-picking numbers, but instead about how to accurately value pension liabilities which are guaranteed by the state of California,” Eileen Norcross, a senior research fellow at the Mercatus Center at George Mason University in Arlington, Virginia, said in an e-mail.

Public funds such as Calpers have come under fire for using higher investment assumptions to measure their shortfalls, from critics including David Crane, a former economic adviser to Governor Arnold Schwarzenegger. The California State Teachers Retirement System, the second-largest U.S. public pension, cut its expected earnings rate to 7.5 percent in February from 7.75 percent. The 18-month recession ended in June 2009.

Tax Burden

The Calpers change will add an estimated $167 million to the amount California must pay from its budget in the fiscal year starting July 1 to cover the costs of state public-employee pension benefits, Actuary Alan Milligan said in a report to the board. California paid $3.5 billion this year, he said.

It would also boost costs for local governments, such as Stockton, California, which is already considering municipal bankruptcy in part because of employee expenses. The board ordered staff to phase in the increased costs to the state and local governments over two years to help ease that burden.

The fund, which serves 1.6 million people, last adjusted its rate of return in 2004, to 7.75 percent from 8.25 percent.

Calpers has earned 7.5 percent annually on average in the past 20 years, according to Joe Dear, the system’s investment chief. The Standard & Poor’s 500 Index has returned an annual 11.5 percent on average since 1982, according to data compiled by Bloomberg.

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