Reporting from Sacramento — Bowing to the realities of a volatile stock market and a weak investment climate, the nation's largest public pension fund lowered its benchmark assumed rate of return.
The board of the California Public Employees' Retirement System voted 9 to 1 to reduce its expected, average annual return on its investments to 7.5% from 7.75%. That was a quarter of a percentage point higher than what had been recommended by CalPERS' chief actuary, Alan Milligan.
In addition to lowering the assumed rate of return, which had been previously approved by a CalPERS committee, the board also agreed to reduce its assumed average annual inflation rate to 2.75% from 3%.
The changes, which kick in for the state government and school districts July 1, will cost the state general fund $167 million in higher pension costs in the next budget year. School districts' bill for non-teaching staff retirements will increase $137 million.
The financial effect on hundreds of county and city governments hasn't been calculated. Those costs will increase July 1, 2013.
The CalPERS board, wary of that effect, directed the pension fund's staff to consider ways to slow or otherwise mitigate a dramatic boost in local government pension costs.
The change in the assumed rate of return has created widespread concern among local government officials, who told the board that they already are laboring under falling revenues, tight budgets and, in extreme cases, the threat of bankruptcy.
"To implement this in one fell swoop would be detrimental to my organization," said Chief Kurt Henke of the Sacramento Metropolitan Fire District. "You've got to give us some breathing room."
The $240-billion CalPERS fund has used the 7.75% assumed rate of return for more than a decade and over that time has exceeded the benchmark, on average. But recent losses, including a drop of nearly a quarter of the value of the portfolio during the recession of 2007-2009, has upset the historic performance predictability.
CalPERS' annual return averaged 5.4% for the 10 years that ended June 30, 2011, and the five-year annual return was 3.4%. However, the volatile fund earned a whopping 21.7% return in the last fiscal year.