CalPERS Committee Delays Action on Risk Mitigation Proposal
October 23, 2015
The California Public Employees’ Retirement System (CalPERS)
Finance and Administration Committee this week discussed a risk
mitigation proposal by CalPERS’ staff aimed at increasing the
long-term sustainability of the pension fund.
The discussion comes after nearly a year of internal discussions that included CSAC, among other local government stakeholders and employee representatives, and almost four years of ongoing work by CalPERS to address market volatility issues after the large losses in 2008 and demographic changes in the retiree population. Counties contracting with CalPERS will note that the system increased contribution rates in the last few years after a review of its asset allocation and demographic assumptions. This week’s discussion was the second round of the Committee hearing a risk mitigation plan proposal from CalPERS staff, which would effectively result in reducing the CalPERS discount rate when annual investment returns exceed that discount rate by a certain percentage (or four points). The savings from that action would be used to allocate more money into what CalPERS considers “safer investments.” The discount rate would drop to 6.5 percent over the next 20 to 30 years. While CalPERS staff stressed the need to gradually reduce the discount rate to ensure that the state and local agencies are not hit as hard with contribution hikes, the state’s Department of Finance urged CalPERS to move faster to reduce the discount rate to shore up CalPERS’ funded status (currently 77 percent).
While CSAC has not taken a formal position on any of the risk mitigation path proposals issued by CalPERS, CSAC has been involved in the ongoing discussion with CalPERS and has advocated for an approach that would ensure the long-term sustainability of the Fund and, most importantly, that the lowering of the discount rate under the proposal to occur automatically and not require a vote by the Board, which would create a lack of predictability for our public agencies in budgeting future contribution rates.
CalPERS staff was directed by the Committee to bring back an alternative proposal that would lower the discount rate after annual returns exceed it by two percentage points rather than the currently proposed four. CSAC will keep counties apprised of any actions by the Board.