CalPERS lowers its rate of return

The CalPERS board unanimously voted to lower its assumed rate of return on its investments from 7.5 percent to 7.0 percent. The assumed rate of return has a direct impact on school employer contribution rates. For school districts, the reduction will be phased in over three years beginning in 2018-19.

The discount rate will reduce as follows:

  • 2017-18 – 7.5 percent
  • 2018-19 – 7.375 percent
  • 2019-20 – 7.25 percent
  • 2020-21 – 7.00 percent

Impact on school employers

A reduction in assumed investment earnings increases CalPERS’ unfunded liability. The difference must be made up through increased employer and employee contribution rates. The proposal that was adopted by the CalPERS Board increases employer contribution rates significantly higher than the amounts districts were anticipating. The revised projected rates, using the lowered assumed rate of return, climb dramatically over the next seven years.

CalPERS – Updated Projected School Employer Contribution Rates:

  • 2017-18 – 15.8 percent
  • 2018-19 – 18.7 percent
  • 2019-20 – 21.6 percent
  • 2020-21 – 24.9 percent
  • 2021-22 – 26.4 percent
  • 2022-23 – 27.4 percent
  • 2023-24 – 28.2 percent

The CalPERS rate hikes coincide with increasing CalSTRS employer contribution rates, which will reach 19.1 percent in 2020-21.

Low growth

The CalPERS board was compelled to lower its assumed rate of return to address the system’s negative cash flow, minimize risks within the fund’s stock portfolio, and align projected investment returns with the low growth expected over the next decade. This past year, CalPERS had a 0.6 percent return on its investments and CalPERS currently has 68 percent of what it needs to meet its pension obligations. Furthermore, CalPERS and its financial consultants project a 6.2 percent return on its investments over the next 10 years.

The governor pushed the CalPERS board to adopt a more conservative assumed rate of return; and while all indications were that a decision would not happen until the spring, an eleventh hour deal between the Administration, Labor, and CalPERS was reached. ACSA advocated to delay a vote so our members would have time to weigh-in on the proposal but the Board moved forward arguing that it would give employers more time to plan their budgets.

ACSA’s position

When CalPERS began discussing a reduction to its assumed rate of return, CalPERS staff recommended an adoption of a 7 percent rate for the 2017-18 year. This would have raised school employer contribution rates in 2017-18 from 15.8 percent to 18.5 percent. There were also CalPERS board members who sought a discount rate lower than 7 percent which would have resulted in even greater increases to school employers’ pension obligations. ACSA opposed all proposals that would have increased employer rates for the 2017-18 year. While far from ideal, the adopted proposal has no impact on school employers for the coming year, the reduction will be phased-in over a three year period, and the rate increases are lower than other options that were seriously considered. This is a direct result of ACSA’s advocacy efforts.

Given the magnitude of pension contribution increases, ACSA staff is examining all options to mitigate their impact on LEAs. The CalPERS and CalSTRS funds must be viable so the systems can pay out future retirement benefits, but their viability cannot be at the expense of student programs and services. The anticipated employer contribution increases are not sustainable. ACSA will deliver this message loudly and clearly to the Legislature and governor during this legislative session.

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