The retiring forecaster for California’s largest public employee pension fund offered some final advice on Tuesday: State and local governments should be required to pay more into the system as soon as next year.
Alan Milligan, who is stepping down as chief actuary of the California Public Employees Retirement System, told the agency’s directors that investment returns continue to come in lower than expected and the pension fund should recalibrate its long-term investment prediction — the “discount rate” — no later than February.
“If you were to adopt a lowering of the discount rate now, that would buffer the impact” on state and local government budgets, Milligan said at the meeting in Sacramento.
CalPERS currently assumes an average annual return of 7.5% on its investment portfolio. That number influences how much governments, as the employer, must contribute. A lower long-term assumption can add billions of dollars in government expenses, but missing the mark over the long haul can add to CalPERS’ unfunded liability.
Milligan told the CalPERS directors that they should consider lowering the long-term discount rate to 7.25%, though his report on Tuesday projected the coming decade will only see an average return of 6.12%.
“The capital markets are simply not expecting to return as much in the next 10 years or so as they have historically,” Milligan said.
Gov. Jerry Brown lobbied the pension system last year to move quickly to shrink its investment assumptions, an effort to get a more full accounting of the ultimate price tag for taxpayers.