(The Center Square) – Some public employees in California must soon contribute more of their pay to their retirement after an investment policy change from the California Public Employees’ Retirement System (CalPERS).
The CalPERS board voted Monday to select a portfolio with a return of 6.8% and an expected volatility rate of 12.1%. This expected rate of return is two-tenths of a percentage point lower than last year’s target of 7%. The vote concluded a review of the pension fund’s assets, which occurs once every four years.
This expected reduction in the rate of return means that some employees will have to contribute more to their pension funds because the fund expects to earn less from its investment portfolio.
For employees hired after the implementation of the Public Employees’ Pension Reform Act (PEPRA) in January 2013, CalPERS estimates they will contribute an average of 1.2% to 1.5% more toward their pensions. These changes will go into effect for school employees, excluding teachers, in July 2022 and will be enacted for most other local government employees in July 2023.
"We understand that the law will affect the contributions that PEPRA employees pay, and we’ll make sure we’re accurately communicating that information so they fully understand the change,” CalPERS CEO Marcie Frost said in a statement. “And we know that even the smallest change to our portfolio can have an effect on employers’ bottom line, especially as they recover from a global health and economic crisis. We’re committed to working with our employer partners to make sure they have the resources necessary to plan their budgets and prepare for the future.”
CalPERS is the largest defined-benefit public pension in the nation, with a current total fund market value of $495 billion. The pension fund serves more than two million members and administers benefits to about 1.5 million members through its health program.
Yet, despite being the largest pension fund in the nation, it is the least funded pension program in California, according to 2020 data from Truth in Accounting, a nonpartisan think tank. While promising about $531.2 billion in benefits, CalPERS is only about 70% funded, meaning the fund promised more than $158 billion that projected assets could not cover.
Bill Bergman, the director of research at Truth in Accounting, said the move by CalPERS to require increased contributions on the part of employees is a marginal solution to a much bigger problem.
“CalPERS remains dominantly invested in risky assets to justify its rate of return and discount rate assumption, and this represents a threat to California (and other) taxpayers that deserves wider awareness and concern,” Bergman told The Center Square. “The increased contribution requirements facing government employees are only marginal, and come nowhere near what is required for CalPERS to dig out of the hole it has dug.”
The board’s decision on Monday came just months after CalPERS announced historic gains on investment returns in the 2020-2021 financial year. The organization reported a net return of 21.3% between June 2020 and June 2021.
The windfall profits will go toward long-term debts that local governments pay in addition to pension costs, the Sacramento Bee reported. This means the debt payments will go down for local governments while regular pension prices increase, which will result in a slight decrease in the average pension cost for local governments.