PHOENIX - The California Public Employees' Retirement System's board voted Wednesday to reduce the pension fund's current 7.5% expected annual rate of return on investments to 7% over the next three years.
The decision comes amid increasing worry about lower-than-expected investment returns leaving the pension short of the money it projected would be available to pay benefits.
The pension fund's board began evaluating the assumption reduction after a year-end report in July showed a 0.61% return compared to a 2.4% return in fiscal 2015. CalPERS officials say the returns are in line with other pension funds, which have also experienced lackluster investment returns as of late.
Last year, the board voted to use gradual smoothing over a 20-year period to reduce the rate of return expectations, a decision that the board defended as a protection for cities that participate in the nation's largest pension plan, as those localities would be called upon to make up the difference.
But critics, including California Gov. Jerry Brown, said that move was too ineffectual a response to the problem.
On Wednesday, Brown praised the board for voting to reduce the rate.
"Today's action by the CalPERS Board is more reflective of the financial returns they can expect in the future," Brown said. "This will make for a more sustainable system."
Reduced return assumptions mean higher contributions will be asked from the governments participating in CalPERS to make up for the difference.
"By creating a more fiscally stable system, we aim to keep our promise to public servants in a manner which saves taxpayers money in the long run," Treasurer John Chiang said in a statement after Wednesday's vote.
Earlier Wednesday, Fitch Ratings released a commentary piece saying that pension funding demands on state and local governments are increasing quickly.
"Given the current investment environment, it will be challenging for U.S. public pensions to meet investment return targets," the Fitch commentary said. "These factors, in turn, will likely continue to drive up actuarially determined contributions. The elevated funding burden is being met primarily through employer contributions, as employee contributions to pensions are typically fixed."
