California’s (STOCA1:US) most fiscally stressed cities and counties will face additional pressure from higher pension contributions because the state’s largest retirement fund lowered its investment forecast, Fitch Ratings said in a report.
Cities with labor conflicts and limited financial flexibility are at the “biggest risk” from the March 14 decision by the California Public Employees’ Retirement System, known as Calpers, to reduce its investment-return forecast rate to 7.5 percent from 7.75 percent, Fitch said today.
Calpers, the largest U.S. pension, lowered its assumed rate of return after the recession reduced equity and real-estate prices. The $239.1 billion fund uses the rate to calculate how much it needs in annual contributions from state and local governments to cover the cost of benefits.
“Some have already taken steps to reduce labor costs, the major cost driver for most local governments, through such methods as furloughs and wage freezes or even reductions,” according to the report. “This may leave them with little flexibility to further reduce employee compensation to accommodate the increase in contributions to Calpers.”
The lower rate of return will add an estimated $167 million, or 4.8 percent, to the $3.5 billion annual retirement bill just for the state, Alan Milligan, an actuary, told the board last month. He didn’t estimate the increased cost to local governments.
For most cities and counties in California, the lower investment forecast would be a positive for credit quality in the long term, Fitch said.
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