Directors of the nation’s largest pension fund could decide early next year whether to firmly ratchet down long-term investment predictions, an action that would come at a substantial cost to state and local governments.
Board members of the California Public Employees Retirement System discussed the issue at length on Tuesday and could cut the “discount rate,” the official projected rate of return on CalPERS investments, as soon as February.
“There’s a need to look at the funding of the system more closely than ever before, to ensure the sustainability of the fund over the long term,” said Cheryl Eason, chief financial officer of CalPERS, during the hearing.
The $299-billion pension fund uses an assumed annual rate of return on its investments of 7.5%. That assumption has been slightly lowered in recent years, and analysts have suggested it may still be too optimistic.
CalPERS’ own estimates show it doesn’t have enough assets to cover all of its future obligations to public sector employees. And the fund’s top investment officer said last week’s election results add an additional layer of uncertainty to its economic and stock market predictions.
The only solution, some believe, is to force local and state governments to increase annual payments from their operating budgets.
“We are going to have to potentially make some decisions that will not be comfortable,” CalPERS board member Bill Slaton said.
The debate over lowering the pension fund’s investment prediction began last year, with its leaders approving a gradual reduction and shift of costs to taxpayers. The current discussion, though, is whether the 2015 action was too timid.