CalPERS bets it can earn at least 7.75% a year

The state?s largest public pension fund is sticking with the assumption that it can earn at least 7.75% a year on its investments, on average, over the next 20 years.

The board of the California Public Employees? Retirement System on Wednesday voted to maintain the 7.75% rate, despite some board members? concerns that the assumption was too optimistic.

Cutting the rate would have forced municipalities statewide to raise their contributions to the fund to make up for the potential future shortfall in the $225-billion investment portfolio, which owes retirement benefits to 1.6 million retired and active state and local workers.

CalPERS? chief actuary, Alan Milligan, had recommended lowering the assumed return rate to 7.5%, but also said that the 7.75% rate was ?reasonable and achievable.?

The fund says that over the past 20 years its returns averaged 7.9% a year before deducting administrative and investment expenses. But that period includes the 1990s, which were years of soaring stock prices and of bond interest rates far above current levels.

The state?s other huge pension fund, the California State Teachers? Retirement System, also assumes it can earn 7.75% a year over the long term. The CalSTRS board trimmed its rate from 8% in December.

A study by the National Assn. of State Retirement Administrators last year found that the majority of large public pension funds had assumed average annual returns of 8% or more.

Critics say those assumptions are too rosy and that pension shortfalls are inevitable if employers and/or employees don?t raise their current contributions to the funds, or if benefits aren't reduced.

CalPERS? reputation has been tarnished over the last year by the scandal over insider dealings at the fund. The fund this week released an independent report that accused its former chief executive of pressuring subordinates to invest billions of dollars of pension money with politically connected firms.

-- Tom Petruno