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CalPERS Board Eying Discount Rate Reduction (Assumed Rate of Return)

With Potential Action as Soon as Dec. 20, Cities Encouraged to Share Concerns and Comments with CalPERS and the League

December 9, 2016
CalPERS reported another year of low annual investment returns in July 2016.
 
Due to volatile financial markets and challenging global economic conditions, the country’s largest pension fund reported 0.61 percent net return on investments — well below the assumed rate of return of 7.5 percent. Of additional concern, overall CalPERS pension funded status recently dropped from 73 percent funded to 68 percent.

Fund Stability Concerns Growing
 
Concern about overall sustainability of the pension fund has been building. In September 2016, then CalPERS Chief Actuary Alan Milligan (now retired) advised the CalPERS board’s Administration and Finance Committee on ways to mitigate market volatility and reduce volatility of employer contributions to bring more long-term stability to the fund. The focal point of the recommendation was to lower the discount rate (the assumed rate of investment return), phased in over time. Specifically, the board is considering lowering the discount rate for state and local agencies effective January of 2018 from 7.50 percent to 7.25 percent — then to 7.00 percent in 2019. 
 
CalPERS has been proactive in reaching out to the League and other local agencies to solicit feedback on this proposal through in-person meetings and an online survey. League staff has attended the in-person meetings and over 240 cities responded to the survey.
 
Lowering the discount rate means higher contribution rates for city employers and employees, and runs counter to previous recommendations to smooth the rate over a 20 year period. Survey results reflected that sentiment. When asked about the option of lowering the discount rate over time versus one sudden drop in the rate, 82 percent of city respondents preferred the phased-in-over-time approach. When asked to rate the level of (financial) impact lowering the discount rate in the next 12 months would have on cities, 26 percent of respondents rated the impact as “extremely high,” while 42 percent rated the impact as “high.”
 
City officials understand the importance of bringing stability to the fund while reducing spikes in employer contributions. When asked what the most important aspect to lowering the discount rate was to a city, 70 percent of respondents noted reducing the volatility of employer contributions as their primary reason for supporting a potential reduction in the discount rate.
 
Board May Take Action Dec. 20, Comments Encouraged Immediately
 
The full board could vote as early as Dec. 20 on this potential change, however, action could be delayed until February. CalPERS has asked that the League and city officials provide public comment on this pending action. League representatives and several city officials plan to be there on Dec. 20.
 
If your city is concerned about this proposed change, please send comments to CalPERS_Stakeholder_Relations@calpers.ca.gov or call David Teykaerts with questions at (916) 795-3991.
 
Reporting on California Pension Crisis
 
CalMatters, a nonprofit reporting outlet, in conjunction with the Los Angeles Times, has produced a series of articles on California’s pending pension crisis. The articles have played a strong part in applying pressure to the CalPERS board to address the major unfunded liabilities within the system.
 
The articles are:


 
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