Bruised by heavy losses and wary of the economic road ahead, California's two big public pension funds are considering reducing their official forecasts of future investment results.
Such changes would have huge implications for taxpayers and public employees. A reduction in the investment projections would put more pressure on taxpayers and workers to support the two retirement systems, which already are significantly underfunded.
The less the California Public Employees' Retirement System and the California State Teachers' Retirement System believe they'll earn from their investments, the more they have to depend on other sources.
For instance, CalSTRS long has assumed it would earn 8 percent a year on its investments — but is now being urged by consultants to scale back that figure. Board members are sweating the potential impact.
"If we go less than 8 percent, we're going to make it up where?" board member Kathy Brugger asked her colleagues at a meeting last month. The board plans to decide in September if it should lower the estimate.
Even minor changes in investment assumptions could have enormous consequences for the two California funds, which control a combined $331 billion in assets and have billions of dollars in pension obligations stretching decades into the future.
Both systems are significantly underfunded, which means their liabilities outweigh their assets by tens of billions of dollars. Cutting their investment predictions makes that outlook worse.
Even if the two funds don't lower their investment forecasts, they're still looking to taxpayers to help them recover from recent investment losses.
CalPERS, which has the authority to set its contribution rates, is imposing increases of about 6 percent to 10 percent on the state as well as the local governments that use it for pensions. CalSTRS, which needs the Legislature's approval to raise rates, plans to petition lawmakers for an increase sometime next year. Employee contributions might go up as well.
In rethinking their investment forecasts, the two funds are responding to the combined $100 billion they lost in the fiscal year that ended in June. Although they've recouped some of their losses, the prospect of a tepid economic recovery is prompting pension funds across the nation to lower their predictions. In CalPERS' case, some of the pressure is coming from the Schwarzenegger administration, which accused the fund of not facing up to its problems.
Nationwide, several public pension funds are cutting or are about to cut their investment forecasts, consultant Nick Collier told the CalSTRS board last month.
Collier said CalSTRS' current forecast of 8 percent is reasonable but "somewhat aggressive." Most of his clients assume annual returns of 7.75 percent, and several are cutting the forecast by a quarter point. He suggested CalSTRS reduce its forecast.
That put board members in a bind. Several indicated they would be willing to reduce the forecast but fretted about the implications.
"We need to do something," said board member and state Controller John Chiang. "I also don't want to overreact."
Predicting investing results is difficult but also vitally important. About 75 percent of CalSTRS' money comes from its investment returns, with the rest coming from school districts, the state and teachers. Although results in any given year can vary widely, the forecasts have an almost sacred quality to them. They represent a pension fund's fundamental long-term expectation of its financial health.
They change incrementally — maybe half a percentage point or less — and hardly ever.
Although both California funds re-examine their assumptions every three years or so, CalSTRS hasn't altered its forecast since 1995. The CalPERS estimate has held steady at 7.75 percent since 2003.