CalPERS’ Discount Rate Discussed at Board Meetings Next Week
November 10, 2016
The CalPERS’ Finance and Administration Committee at its meeting next Tuesday will discuss the results of a survey it conducted of contracting employers, hopefully spurring a discussion of an earlier-than-planned drop in its current discount rate of 7.5 percent. The survey was intended to gauge public agencies’ awareness of CalPERS’ ongoing discussion of its discount rate and the ability of individual agencies to absorb increased contribution rates over the next 12 months should that rate be lowered.
Counties will recall that the CalPERS Board of Administration last November adopted a risk mitigation strategy to incrementally lower the discount rate in years of good investment returns, help pay down the fund’s unfunded liability and provide greater predictability and less volatility in contribution rates for employers. Specifically, if investment returns exceed the discount rate (currently 7.5 percent) by four points in any fiscal year, the discount rate will be lowered by a minimum of 0.5 percentage points to a maximum 0.25 percentage points. That excess gain will then offset the employer contribution rates that would usually increase when the discount rate is lowered. CalPERS’ staff has projected that the discount rate would most likely decrease to 6.5 percent in 21 years.
The discussion of lowering the current discount rate is actually not calendared for the CalPERS’ Board of Administration until 2018; however, in light of recent lower-than-expected investment returns – and no expectations of an upward trend – retired Chief Actuary Alan Milligan in September strongly recommended that the Board consider lowering the discount rate by at least 0.25% by February 2017. This action would inevitably increase employer contributions to the Fund; the discussion by the Finance and Administration Committee on Tuesday regarding employer feedback on this issue could lead to a first reading at its December meeting of an action to lower the discount rate, with final action being taken in February.
More information can be found here (scroll down to Item 7a on the agenda). To watch a webcast video of the hearing, use that link and click on the webcast box on the right of the page on Tuesday, November 15 at 2:00pm.
Please contact Faith Conley with any questions or concerns.