SACRAMENTO, Calif. (CN) - The nation's largest public pension fund agreed Wednesday to gradually reduce its investment risk in a move that drew criticism from California Gov. Jerry Brown and could cost local governments and taxpayers billions.
The board for the California Public Employees' Retirement System - known in the Golden State as CalPERS - voted 7- 3 to approve a policy that will reduce the amount the pension fund expects from its investments from its longstanding 7.5 percent average.
CalPERS said the change was prompted by its maturing workforce and will decrease the fund's investment risk.
"It makes significant strides in lowering risk and volatility in the system, and helps lessen the impacts of another financial downturn," CalPERS board president Rob Feckner said in a statement.
The move drew immediate criticism from Gov. Jerry Brown, who had encouraged the board to quickly reduce its assumed rate of investment returns to 6.5 percent as opposed to the gradual reduction CalPERS approved.
"I am deeply disappointed that the CalPERS board reversed course and adopted an irresponsible plan that will only keep the system dependent on unrealistic investment returns. This approach will expose the fund to an unacceptable level of risk in the coming years," Brown said in a statement.
As CalPERS minimizes investment income contributions to the fund, local governments and taxpayers subsequently will be forced to contribute more to government workers' pensions.
Under the plan, CalPERS says it will minimize the assumed rate only in years of positive investment returns in order to lessen the burden on local governments that help fund the $295 billion public pension. Last year CalPERS paid $18 billion in pension benefits to its more than 1.7 million members, compared to $13 billion in contributions.
According to the fund's financial statements, last year employees contributed $3.8 billion to the fund while municipalities paid $8.8 billion. After several years of positive returns, CalPERS announced in July that it missed its 7.5 percent target, returning 2.4 percent for the fiscal year.
The fund was decimated in 2008 by the recession, suffering a nearly 28 percent loss.
According to the board, taxpayer contributions could increase six to 20 percent over the duration of the strategy but the change will ultimately minimize the pension's volatility.
"Our goal is to be fully funded with an acceptable level of risk," CalPERS CEO Anne Stausboll said. "This policy is a balanced approach that recognizes the fiscal constraints on California's local agencies and represents a milestone for CalPERS."
Earlier this month, CalPERS agreed to sell off approximately $3 billion of its $27 billion real estate portfolio. More moves are expected as CalPERS attempts to reduce the number of external investment managers from 200 to approximately 100 by 2020.
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