By Rory Carroll
SAN FRANCISCO (Reuters) - The California Public Employees' Retirement System board voted on Wednesday to lower the pension plan's expected rate of return from investment to 7 percent by 2020, a decision that comes after the fund failed to meet its 7.5 percent target the past two years.
The move by the country's largest public pension fund will place a greater financial burden on the state's cities, counties and other local government agencies across California that rely on CalPERS pensions.
The $300 billion fund is currently 68 percent funded and recently became cash negative, meaning that it paid out more in benefits, approximately $19 billion last year, than it collected from workers' contributions - about $14 billion.
"This was a very difficult decision to make, but it is an important step to ensure the long-term sustainability of the Fund," Rob Feckner, president of the CalPERS Board of Administration, said in a statement.
"We know this will have an impact on the state, schools, and public agencies that partner with us, and we're committed to making sure the changes are implemented in a phased approach so our employers and affected members have time to plan their budgets responsibly," he said.
The board agreed that the discount rate, or the assumed rate of investment returns, be lowered to 7.375 percent in fiscal year 2017-18, 7.25 percent in 2018-19 and 7 percent in 2019-20.
It remains to be seen whether other large U.S. pension plans will follow CalPERS lead and lower their targets.
The average assumed rate of return across the 100 largest state plans in fiscal year 2015 was 7.6 percent, according to the Pew Charitable Trusts' public sector retirement systems project.
Only seven plans in four states - Idaho, Indiana, Virginia, and Wisconsin - assumed a rate of return of 7 percent or lower.
Governor Jerry Brown, who has been critical of CalPERS in the past for not moving aggressively to cut the target, praised the move in a statement after the vote.
"Today's action by the CalPERS Board is more reflective of the financial returns they can expect in the future," Brown said.
"This will make for a more sustainable system."