CalPERS is considering making a significant cut in its investment forecast next week, which would likely force the state and local governments to increase their annual contributions to the big pension funds.
Senior actuary Alan Milligan recommended lowering the annual return forecast a half point, to 7.25 percent. It would be the first time the California Public Employees' Retirement System has changed the forecast since 2003.
The forecast is a sensitive topic. The less CalPERS assumes it will make on its investments, the more it must turn to employers for help. CalPERS already takes in $11 billion a year combined from employers and workers.
With the state, cities and counties facing big deficits, CalPERS' decision could also intensify the political debate over the cost of public pensions. Democratic Gov. Jerry Brown and many Republican lawmakers are seeking to roll back retirement costs by placing newly hired workers in "hybrid" plans.
In a memo to his board Tuesday, Milligan suggested CalPERS could take a less dramatic route on the forecast.
The board could cut the forecast just a quarter point, to 7.5 percent, "given that the state of the economy has put severe pressure on employers' budgets," he wrote.
Milligan pushed for a quarter point drop a year ago but was rebuffed. The board said it was concerned that cash-strapped local governments couldn't afford the increased burden.
While the forecast takes into account factors like inflation, actuarial trends and payroll growth, it revolves largely around long-term investment outlooks. CalPERS earned just 1.1 percent on its investments in calendar 2011.
The California State Teachers' Retirement System, or CalSTRS, cut its forecast to 7.5 percent a month ago. It was the second cut in a little more than a year for the system.
Milligan's recommendation is scheduled to go before CalPERS' pension and health benefits committee next Tuesday and the full board a day later.