California's pension system lowered a key estimate of future investment returns Wednesday, a move that will drive up pension costs for cities across Sonoma County and further squeeze public services.
The board of the California Public Employees Retirement System voted 9-1 to reduce its investment return rate from 7.75 percent to 7.5 percent.
The decision will mean yet another hit to beleaguered local budgets as CalPERS jacks up pension contributions by public agencies to make up for lower investment returns.
The change will cost the state an estimated $303 million, and untold millions more for the municipalities and other local governments whose workers are covered by CalPERS retirement plans.
"This was a difficult, but important, decision for the board to make," Rob Feckner, board president, said in a statement. "We understand the impact this will have on our employers in meeting contribution requirements."
CalPERS is the nation's largest public pension fund, with $233 billion in assets. It provides retirement benefits to 1.6 million public employees and their families. Teachers and some county employees, including Sonoma County, have separate pension systems.
It was the first time in a decade the fund reduced the key interest assumption, known as the discount rate. The last time it was lowered from 8.25 percent to the current 7.75 percent, where it remained throughout the recession that decimated its investments.
To soften the blow on local governments, the board directed staff to come up with a plan to spread the costs over two years.
Local officials told the board that they already are laboring under falling revenues and tight budgets.
The threat of such increases has been one of the reasons Santa Rosa has pressed for long-term pension solutions, said City Manager Kathy Millison.
"I've been warning about this since I arrived," said Millison, whose city faces a $112 million unfunded liability. "We knew they were coming. We just didn't know how much."
Others argued that the board wasn't going far enough.
John Bartel, Santa Rosa's pension actuary, said he thought it would have been wiser for the board to reduce its assumption to 7.25 percent as recommended by its actuary.
"Even though that would have been painful, it would position the plans to be better funded down the road," Bartel said.
The board's move represents a continued pattern of refusing to face up to ballooning pension costs, said Joe Nation, a former state assemblyman representing Marin and Sonoma counties and current professor of public policy at Stanford University.
"I think it's a step in the right direction, I just think it's too small a step," Nation said.
The direction to spread the increases out over two years struck Nation as "absolutely the wrong move."
"Everything is about delay, defer and pushing costs in the future," Nation said. "You know and I know and everyone knows that when you do that you pay more in the long run."
He likened spreading out the increase to choosing not to make the minimum payment on a credit card, leaving the unpaid balance to accrue at a higher interest rate.
One upside for local governments is that the rate won't take effect until July 2013, giving officials time to brace for the impact.
The board rejected a similar proposal last year, citing concern about impacts on local governments, but promised to revisit it this year.