CITY HALL — The organization that manages the majority of public pensions in California announced Wednesday that employers would have to kick in more money to cover employee retirement costs because of bad investment returns and falling inflation.

The California Public Employees Retirement System board approved a reduction in its discount rate from 7.75 percent to 7.5 percent, a move which means state and local governments will have to make up the difference for their employees.

It’s the first time the rate has dropped in a decade, and it will cost California $167 million per year, not counting impacts to local government, said CalPERS spokesperson Amy Norris.

Employer contributions for miscellaneous employees, which compose the majority of Santa Monica’s public workforce, will go up between 1 and 2 percent by the 2013-14 fiscal year.

Contributions for police and fire will increase between 2 and 3 percent.

In a worst case scenario, that could equate to $2.8 million from the general fund, said Gigi Decavalles-Hughes, City Hall’s finance director.

It’s not good news, but City Hall is better positioned to absorb the impact than it was a year ago when the reduction was first proposed, Decavalles-Hughes said.

Negotiations with the miscellaneous employees resulted in a two-tiered retirement system that promises a lighter package of benefits to new employees starting July 1.

Public safety employees, including police and fire, will begin contributing to their retirements for the first time on a graduated scale that will increase over the next three years from 1 percent to 3 percent.

It will save $5 million over five years, Decavalles-Hughes said.

City Hall also used a surplus to pay down unfunded liability to CalPERS, which will result in $800,000 in savings per year for the next two decades.

“Based on what we’ve done last summer and last fall, it’s a testament to how city staff and the city in general can adjust,” she said.

The adjustments came at a time when city budgets were strained and public benefits packages fell under intense scrutiny.

City Councilmember Bobby Shriver called public employee costs the “800-pound gorilla,” and studies came out of Stanford University suggesting that CalPERS itself was fiscally unstable.

The economic collapse resulted in a $69.7 billion hit to its stock portfolio between Dec. 31, 2007 and Dec. 31, 2008.

It took two years for those losses to ripple through the system, and they already resulted in higher costs to cover promises to retiring employees.

The newest change only drives those up further.

Still, it’s better than it could have been, Norris said.

CalPERS’ actuarial proposed two avenues. The first brought the discount rate down to 7.25 percent, which would have given the investment portfolio a larger margin for error.

CalPERS’ board chose to go with the gentler option to cut beleaguered state and local governments some slack.

“We’re taking these steps to make sure that the fund remains stable,” Norris said. “We don’t want to lower the discount rate, reduce stability and drive employer costs higher.”

The CalPERS board may also choose to phase the increases in over two years to reduce the stress on municipalities, but that has not yet been decided, Norris said.

ashley@www.smdp.com

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