The good news is that the California Public Employees’ Retirement System has finally recognized that its goal for investment returns for the next 20 years is just wishful thinking.
The bad news is the bill for this recalibration of thinking is going to be handed primarily to taxpayers — once again.
The CalPERS governing board on Wednesday agreed to cut its official investment forecast by half a percent from 7.5 percent to 7 percent.
While this is probably a more realistic assessment of what the future holds for CalPERS’ $303 billion investment portfolio — the largest of its kind in the world — it will require higher pension contribution rates for the state and for local governments, including cities, counties and school districts. Under the state’s pension reform changes made four years ago, it also will require public employees hired since then to contribute more.
CalPERS had predicted that the average annual return for its investment portfolio over the next two decades would be 7.5 percent. But over the past 20 years, the plan has had an average return of just 6.9 percent. The return on investments for the year that ended June 30 was a mere 0.6 percent, and CalPERS isn’t doing much better this year.
CalPERS, in fact, had debated whether to drop its rate even lower, particularly after one of its key investment consultants, Wilshire Associates, predicted that investment returns would likely average 6.2 percent over the next decade. Said Gov. Jerry Brown following the board’s vote, “This will make for a more sustainable system.”
We hope that’s true. But what’s also true is that CalPERS will need to make up for the projected shortfall in investment returns primarily by requiring more funds from the state and its member agencies, including cities such as Santa Rosa, Petaluma and other cities in the county. The increases will be phased in over three years, and local governments won’t have to start paying higher pension contributions until 2018. Nonetheless, it’s likely to mean more reductions in city services, more deferred maintenance and more unfilled city positions being left vacant.
The decision by CalPERS also could influence agencies such as Sonoma County, one of 20 independent county pension systems in the state. This could put more pressure on the Sonoma County Employee Retirement System board to downgrade its own forecast, which stands at 7.25 percent. If so, it would mean another big hit for the county, which already has seen its annual pension costs increase from $20 million in 2000 to $113 million last year.
Meanwhile, the state is expected to see its payments to CalPERS increase by $2 billion a year within eight years. To put that in perspective, it’s equal to all of the money that Proposition 56 ($2 cigarette tax) and Proposition 64 (legalization of marijuana) are expected to bring in to the state in added tax revenue.
All of this is to say that the state and local agencies are a long way from seeing the pension crisis resolved. The state made significant strides with the California Public Employees’ Pension Reform Act of 2013. But as the governor himself has pointed out, and is underscored by decisions like this, it didn’t go far enough.