CalPERS Effect: Implications for the broader state and local government sector

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The California Public Employees’ Retirement System (CalPERS), the nation’s largest public pension fund, recently voted to reduce its discount rate or rate of return on its investments from 7.5% to 7% over the next three years. This is a change from the original plan that they adopted last year. The original plan was to reduce the discount rate by 0.25% annually only during high-return years in order to minimize the budgetary impact on local governments. With a de minimis investment return of 0.61% for fiscal year 2016, CalPERS had a $4 billion negative cash flow as it only received $16 billion in contributions and investment income while paying out $20 billion in benefits. CalPERS had to sell investments for the shortfall. CalPERS has determined that achieving a 7.5% investment return over the next 10 years will be a significant challenge.

 

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