SACRAMENTO -- The CalPERS Board of Administration voted Wednesday not to change its assumptions about how quickly its investments will grow, a move that saves cash-strapped governments across California from drastically higher pension rates.

The move also increases the likelihood that the California Public Employees Retirement System's investments will not grow quickly enough to meet its obligations, requiring rate increases later on.

The board voted 8-3 to leave the discount rate, the return it assumes it will receive on its investments, unchanged at 7.75 percent. The agency's chief actuary had recommended the rate be lowered to 7.5 percent, but also said that leaving it unchanged was prudent.

"As pension fund administrators, we want to make sure CalPERS remains financially sound over the long term," Alan Milligan, the agency's chief actuary, said in a statement. "The discount rate adopted is reasonable and achievable, and appropriate for funding the promised benefits."

CalPERS provides pensions for the state of California and about 3,000 local governments and school districts -- 1.6 million current and retired employees.

Three board members supported the lower rate -- Richard Costigan, who represents the state's personnel board; Dan Dunmoyer, who represents the insurance industry; and State Treasurer Bill Lockyer, whose aide Steve Cooney took his place at the dais.

"The 7.5 proposal, we think, leaves us with a little better cushion," Cooney said.


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Over the past 20 years, CalPERS' investments have averaged a 7.9 percent annual rate of return. In the most recent fiscal year, the fund earned a 13.3 percent return.

In December, the Cal- PERS board voted to change the mix of assets it holds, in order to maintain the same projected level of risk in its investments, based on updated CalPERS staff risk projections.

"The effect of that (choice) was to reduce the expect rate of return from just over 8 percent to 7.4 percent," said Joseph Dear, CalPERS' chief investment officer.

The calculations use that 7.4 percent growth rate for the first 10 years and an 8.5 percent growth rate for the following 10 years. In the past, the fund has not averaged 8.5 percent growth over the long term, Dear said.

If the board had adopted the lower rate, the extra cost for each enrolled employee would have varied from 1.7 percent of salary for some state employees to as much as 5 percent of salary for municipal public safety employees, according to a CalPERS staff report. Most of the cost of those increases would have been paid by governments, because most enrolled employees contribute a fixed amount to their pensions.

Lowering the projected rate of return would have meant another rate increase for cities and school districts statewide, on top of rate increases the agency approved last year because retirees are living longer.

City officials across the state will be relieved not to face those additional costs, which would have had a significant effect on already battered local budgets, said Natasha Karl, a legislative representative for the League of California Cities.

Concord City Manager Dan Keen is one of those smiling officials.

"This is good news for the city's budget," he wrote in an e-mail Wednesday. "This is one of many threats we saw to the next few years' budgets. Others remain -- and new threats abound these days -- but at least this one's off the table."

But some city leaders also have mixed feelings, Karl said, with some worrying that leaving the rosier assumptions in place just pushes the pension payment problem farther into the future.

CalPERS' portfolio is 49 percent stocks, 16 percent bonds, 14 percent private equity, 13 percent real assets such as real estate and infrastructure, and 8 percent in other assets.

Contact Paul Thissen at 925-943-8163. Follow him at Twitter.com/pthissen.