A collective sigh of relief after CalPERS board votes to keep discount rate at 6.8% following compelling testimony by city officials
On Monday, Nov. 15 the California Public Employees' Retirement System (CalPERS) Board of Directors voted to keep the discount rate — the long-term interest rate used to fund future pension benefits — at 6.8%. Several city officials, including League of California Cities President and Walnut Creek Council Member Cindy Silva, testified against lowering the discount rate due to the detrimental impact it would have on city budgets.
The discount rate had already been automatically lowered in July, from 7.0% to 6.8%, due to the CalPERS investment return for fiscal year 2020-21. While cities would have preferred the discount rate to return to 7.0%, the financial implications of further lowering the discount rate would have been disastrous for cities, making this an important win for local government.
During her testimony, President Silva, who helps lead a full-service city of 70,000 residents, noted that her city’s 2021 pension payments are roughly 15% of their $87 million operating budget. “If you drop the discount rate by just a half-point, Walnut Creek’s pension costs will jump by another three-quarter million — the equivalent of four fully-funded police officers,” she stated.
Additionally, many cities are still reeling from the economic fallout of the pandemic. For Walnut Creek, the American Rescue Plan Act only covered 40% of their pandemic-related cuts to services and staffing. Officials from the cities of La Mesa, Sacramento, Pasadena, Hayward, and Rancho Cucamonga also pointed out that cities are still grappling with the financial pressures of the previous reduction of the discount rate in July.
“CalPERS has been struggling to catch up due to past decisions and the price is being paid by municipalities that did not have a say in those decisions,” said La Mesa Director of Finance Tammi Royales. “Projects will have to be deferred due to lack of funding. As inflation starts to rise, we cannot ask our constituents to pay a price for past decisions.”
Likewise, Sacramento Assistant City Manager Leyne Milstein stated, “Sacramento and many cities have struggled to keep pace with the pension contribution increases of 2016. This increased costs for the city of Sacramento by nearly $67 million or more than 10% of our general fund, making pension costs 17% to 18% of our general fund budget.”
City officials were also joined by Rural County Representatives of California, California Special Districts Association, California Schools Employee Association, Rancho Cucamonga Fire Protection District, and others, who shared many of their concerns. The full testimony is available online.
Monday’s vote was a part of CalPERS Asset Liability Management process, a recurring, integrated review of its assets and liabilities with the intent of informing decisions designed to achieve a sustainable fund. During the proceedings, the CalPERS Board was presented with three investment portfolios, with discount rates of 6.5%, 6.8%, and 7.0%. Among the factors considered were the tolerance for market drawdown risk, acceptable volatility, and employers' ability to absorb different rate changes.
Cal Cities remains committed to working with CalPERS to find balanced solutions that safeguard retirement security while ensuring local governments have the resources needed to deliver essential services to our communities.