The CalPERS Board will decide next week whether lowering the discount rate assumption to 7.50 percent more “reasonably prudent” than retaining the current rate of 7.75 percent. If the Board adopts the lower discount rate assumption, cities starting in FY 2012-13 will pay higher rates to CalPERS.
Essentially the discount rate is CalPERS’ assumption about what its return on investments will be over a given period of time. This assumption, along with other demographic information, is used to set a contribution schedule of employee and employer contributions.
Public agencies will see significant increases if this new rate is adopted. CalPERS estimates that employer contribution rates for public agency miscellaneous plans will increase 1.5 – 3 percent of payroll. Public agency safety plans are expected to increase between 3 – 5 percent of payroll.
A new Asset Allocation Policy Mix was adopted by the Board last December. In a report to the Board, actuaries Alan Milligan and David Lamoureux indicate that once the Board adopted this new asset mix, it was necessary to revisit the discount rate assumption. They also express that lowering the rate takes into consideration that “returns are expected to be lower than historical returns over the next 10 years.”
If city officials want to attend the CalPERS Benefits and Program Administration Committee, where this issue will be taken up, the meeting will be held on March 15 at 8:30 a.m. at CalPERS headquarters in downtown Sacramento.