Patt Morrison For March 14, 2012

CalPERS reduces investment forecast – How will California cover the difference?

CA's Gov't Pension Fund To Report Loss Of One Quarter Of Its Holdings

Max Whittaker/Getty Images

The California Public Employees' Retirement System building in Sacramento, California July 21, 2009.

In the midst of massive budget deficits and recent heat over pension reform, the Board of Directors of the California Public Employees' Retirement System, known as CalPERS, voted today to lower its assumed rate of return for the first time since the recession dragged down stock and real-estate prices.

They’re readjusting from 7.75 to 7.5 percent, which might not sound like a lot, but in actual dollars, it means finding an additional $167 million in the state budget to pay pensions, for which California spent $3.5 billion in 2011. The new rate will take effect on July 1, although CalPERS has been asked to phase the change in over two years, hopefully sparing cities from more cuts.

As much as a squeeze as this appears to be, is CalPERS just dodging the bullet? While the fund has earned an average return of 8.4 percent annually over the past two decades, it earned just 1.1 percent in 2011, and CalPERS’ own actuarial staff recommended a larger rate reduction, of 0.5 percent, not 0.25 percent.

Were its investment forecasts just too optimistic?

WEIGH IN:

And why is this happening now, when markets appear to be on an upswing? Do you think that CalPERS should have made a bigger cut? What do you think the tangible effects will be of this decision? Patt gets the latest on this breaking story and how it fits into a larger trend of pension funds nationwide asking state government for more help.

Guests:

Alicia Munnell, director of the Center for Retirement Research at Boston College; professor of management sciences

Eileen Norcross, senior research fellow at the Mercatus center at George Mason University


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