CalPERS gives local government ROI-al pains

State employees, and county and local governments have just begin reacting to recent news that the Board of the California Public Employees’ Retirement System (CalPERS) on Wednesday voted 9 to 1 to reduce its expected, average annual return on its investments to 7.5% from its current estimate of 7.75%.

Prior to the vote, a senior actuary at CalPERS had proposed reducing the assumed rate of return to 7.25%. Wary of what fallout a cut that dramatic might cause, the Board opted to hold its reduction to 7.5%, in an effort to slow or otherwise mitigate inevitable increases in local government pension costs.

In addition to lowering the assumed rate of return, the board also agreed to reduce its assumed average annual inflation rate to 2.75% from 3%.

The changes take effect for state government and school districts starting July 1, and will cost the state general fund $167 million in higher pension costs during the 2012-2013 fiscal year budget. School districts will have to kick in an additional $137 million for non-teaching staff retirements.

The consensus among CalPERS regulators was that the pension fund could no longer kick the can down the road. The agency has faced criticism in recent years for not lowering its forecast sooner. A lower rate of return will have a negative financial impact on many struggling local governments, though it’s not clear yet how much.

Locally, Mono County Finance Director Brian Muir described the CalPERS Board move as a forecast. “It will affect rates, but the only thing that matters are actuals,” Muir said. “It will be amortized over a long period.”

Muir said that he wouldn’t know how much the County’s rates would go up as a result of the downgrade until September or October, when CalPERS releases its actuarial study. “The rate of return is only one piece of the study,” he said. “Our rate is not going to be significantly different.”

Town of Mammoth Lakes Uber Financial Consultant Whiz Marianna Marysheva Martinez said she’s followed the downgrade “with great dissatisfaction,” and is hoping for as long an adjustment time as possible. “Our rates are already going up under the previous rate, and will go up even more under the new one, it’s just a matter of how much,” she commented. “CalPERS tells us what we’ll owe, and we pay it, but we might get a couple of years to adjust.”

Marysheva Martinez explained that set rates are usually based on a 16-year amortization cycle, and it’s possible that the clock will be reset and begin another cycle with the new calculations. “My hope is that the 2012-2013 fiscal year will be unaffected, and at the earliest we have to start making adjustments in 2013-2014. But a lot will depend on the new schedule that CalPERS sets.”

Public Agency contributions will have to increase between 1 and 3 percent for various plans. Costs will increase between 5 and 13 percent depending on the individual circumstances of members. Retirement applications with a retirement date on or after March 15, 2012, will be calculated with the new discount rate, leaving local governments and agencies to make up the difference.

According to a report in the Sacramento Bee earlier this week, Peter Ng, an official with Santa Clara County, pleaded with the CalPERS Pension and Retirement Committee, which advised the Board’s vote, to keep the current rate of 7.75 percent intact. He said Santa Clara County has slashed its budget to cope with declining revenue. “The CalPERS decision would cost the county about $34 million a year at a time when we are just beginning to see the situation stabilize,” Ng told the Committee during its Tuesday meeting.

CalPERS, the nation’s largest public pension fund, pointed to a volatile stock market and weak investment climate as major contributors to the downgrade. The $240-billion CalPERS fund has relied on the 7.75% assumed rate of return for more than a decade and over that time has exceeded the benchmark, on average. Recent losses included 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.