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


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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