Gov. Jerry Brown is famously conservative on fiscal matters. So why did he criticize the California Public Employees’ Retirement System on Wednesday for adopting a less aggressive benchmark for investment returns?
The short answer: Because the move, in Brown’s view, didn’t go far enough.
In order to protect the fund from a market downturn, CalPERS decided on Wednesday to reduce by one percentage point its projected return rate, down to 6.5 percent. The move represents a safer investment strategy that will protect pensioners, though it could raise taxpayer contribution rates in the short term.
But taking a more conservative investment strategy was not what concerned Brown. The governor said he was troubled because the timeline to get to 6.5 percent was not quick enough. The plan adopted Wednesday lowers the expected rate of return over 21 years; the administration had proposed a faster, more aggressive timeline.
“The CalPERS Board reversed course and adopted an irresponsible plan that will only keep the system dependent on unrealistic investment returns,” Brown said in a statement. “This approach will expose the fund to an unacceptable level of risk in the coming years.”
Lowering the expected rate of return on a faster timeline would place more burden on the state budget in the near term. That’s because budgeting for lower investment returns increases the amount taxpayers have to contribute to cover the fund’s obligations. But it also lowers the potential consequences of a risky investment going awry, an event that would leave taxpayers on the hook to pay even more money to CalPERS.
It’s a question of “how much do we want to pay now instead of later,” said Jason Sisney, chief deputy for the Legislative Analyst’s Office.
The CalPERS action has a greater potential to lead to “years of big investment losses, whereas if the state had adopted Brown’s plan, there would be less” of that chance, Sisney said.
The pension’s action aims to mitigate the burden on taxpayers by only reducing the projected return rate — known as the discount rate — in years when the fund outperforms its projected return rate by at least 4 percentage points.
Other observers criticized CalPERS for shielding public employees from the true expense of their pensions.
David Crane, a former advisor in the Schwarzenegger administration who frequently comments on state fiscal management, said the board should have adopted Brown’s strategy because it would save taxpayers billions and require government employees to shoulder more of their pension costs.
But the CalPERS board prioritized pensioners over taxpayers, he said, who must cover both the the annual contribution rate plus any unfunded liabilities that result from investments failing to meet projections.
“The slower they drop the discount rate, the more taxpayers pay and the less employees pay,” said Crane, who is also a public policy lecturer at Stanford University, in an email.
CalPERS countered on Wednesday that the change would bring greater predictability and less volatility to the system.
“Our goal is to be fully funded with an acceptable level of risk,” said CalPERS chief executive Anne Stausboll, in a statement. “This policy is a balanced approach that recognizes the fiscal constraints on California’s local agencies and represents a milestone for CalPERS.”
The total annual state payment to CalPERS was $4.7 billion this year, said Sisney from the analyst’s office. The 2015-16 state budget, signed by the governor in June, totaled $167.6 billion, including special funds.