CSAC Bulletin Article

CalPERS Board Approves Lowering Assumed Rate of Return

December 22, 2016

In an overall effort to strengthen the long-term sustainability of what is the largest public employees retirement system in the country, the CalPERS Board of Administration approved a recommendation to gradually lower the “discount rate” during its December 21 meeting. Counties will recall that the discount rate is the percentage of expected returns on investments made by CalPERS. A lower discount rate means that employers, including counties, will be contributing more to the retirement fund over the next three years.  

The current discount rate is 7.5 percent. It will gradually decrease over the next three years to 7.365 percent for fiscal year 2018-19, 7.25 percent for fiscal year 2019-20, and 7.0 percent for fiscal year 2020-21.

One day prior to the Board’s decision, the CalPERS Finance and Administration Committee thoroughly vetted the proposal during a public workshop at which independent consultants presented an outlook on investment returns, stakeholders provided public comment, and committee members ultimately voted to move the motion to the Board for action. CSAC provided comments supporting the concept of lowering the discount rate and noted that a phased-in approach would ensure predictability and less volatility for county budgets as it provides ample time to prepare for the eventual drop to seven percent.

According to financial experts, the low-return environment is expected to continue over the next ten years. Long-term low returns combined with growing pension outflows place the pension fund at risk of a dangerously low-funded status. The general consensus among employer stakeholders – including CSAC, the League of California Cities, the Association of California School Administrators and the

California Special Districts Association – was that action must be taken soon to ensure the sustainability of the Fund.

To further help facilitate member agencies as they prepare for each incremental drop in the discount rate, CalPERS staff provided the employer’s normal cost as a percent of payroll at various discount rates, depicted below.

Sample Miscellaneous and Safety Plans with Classic Formulas – Employer Contributions

Discount Rate

7.5%

7.25%

7.00%

Miscellaneous Plan A

8.73%

9.75%

10.77%

Miscellaneous Plan B

8.24%

9.18%

10.12%

Safety Plan A

16.00%

17.93%

19.85%

Safety Plan B

16.23%

18.08%

19.92%

Sample Miscellaneous and Safety Plans under PEPRA – Employer Contributions

Discount Rate

7.5%

7.25%

7.00%

Average Misc. Plan

6.12%

6.51%

7.15%

Average Safety Plan

11.45%

12.40%

13.10%

The CalPERS’ Finance and Administration Committee in February will revisit the risk mitigation plan put into place last year and possibly vote to shelf that plan until the phased-in discount rate decrease is complete. For questions, please contact Faith Conley at 916-650-8117.

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