The state's cost of supporting CalPERS could jump by as much as $425 million in the next fiscal year, generating more political heat on public pensions at a time of massive budget deficits.

The additional cost would result from a proposed reduction in CalPERS' all-important investment forecast. The pension fund today will consider slashing its forecast by half a percentage point, to 7.25 percent.

With the forecast lowered, the California Public Employees' Retirement System would need another $772 million from the state each year, according to figures CalPERS released Monday. The higher contribution would kick in when the new fiscal year starts July 1.

Because much of the money would come from so-called special funds, the hit to the general fund would come to $425 million. That would bring the total annual contribution to CalPERS from the general fund to more than $3.9 billion.

CalPERS has the power to set the contribution rate without the Legislature's approval. But the pension fund isn't oblivious – or immune – to political forces. It's leery of increasing the burden on taxpayers, with the state facing a $9.2 billion deficit and Democratic Gov. Jerry Brown leading a push for pension reform.

Yet in the turbulent climate following the 2008 market crash, CalPERS also is under pressure to reduce its investment forecast, as many other pension funds have. CalPERS rejected a staff proposal to cut its forecast last year, but this time appears ready to act.

Cutting the rate "sounds like a sensible series of actions," said Alicia Munnell, head of the Center for Retirement Research at Boston College.

CalPERS Chief Executive Anne Stausboll said the decision "might be difficult for some of our employers, but it is the right course of action to protect the benefits of our members and their families."

By cutting the forecast, CalPERS would be "recognizing what the current financial markets can deliver," she said in a prepared statement.

The issue is so sensitive, CalPERS staff has proposed an alternative, less dramatic change – reducing the forecast by just a quarter point, to 7.5 percent. In a memo to the board last week, senior actuary Alan Milligan said the quarter-point change might be advisable, "given that the state of the economy has put severe pressure on employers' budgets."

The less severe adjustment would cost the general fund $167 million a year.

CalPERS spokesman Brad Pacheco said the fund has earned an average return of 8.4 percent annually over the past two decades. Its return in 2010 was more than 20 percent. But it earned just 1.1 percent in 2011, and critics have said it has been dragging its feet on reducing its forecast.

Any change in CalPERS' investment forecast trickles down to the local level as well.

School districts, which use CalPERS to cover employees other than teachers, would see their annual contribution grow by $339 million if investment forecast is slashed by the more severe amount. If CalPERS took the gentler approach, and cut the forecast by just a quarter point, the schools' contribution would grow by $137 million.

Pacheco said CalPERS hadn't yet calculated the impact on cities, counties and other municipal agencies that belong to the pension fund.

It was pressure from these local governments that weighed heavily on the CalPERS board last year, when it decided against reducing the investment forecast. City officials from up and down the state, citing their difficult budget situations, begged the fund not to touch the rate.

The forecast is driven largely by the long-term investment outlook, but also takes into account actuarial trends and other factors. CalPERS hasn't changed its forecast since 2003.

But many other pension funds have lowered their rates since the 2008 crash. Notably, the California State Teachers' Retirement System cut its forecast to 7.5 percent last month.

It was CalSTRS' second rate cut in a little over a year. The teachers' fund says it needs hundreds of millions of dollars in extra contributions from the state. But unlike CalPERS, it can't impose higher contributions without the Legislature's OK.

CalPERS' pension and health benefits committee will take up the forecast today. The full board is expected to vote on it Wednesday.

As CalPERS wrestles with its investment outlook, elected officials are ramping up the debate over pension costs.

Brown has proposed raising the retirement age for newly hired public workers and putting them in "hybrid" plans that would make them share some of the financial risk. Republican lawmakers last month said they would try to put Brown's exact plan on the November ballot.

While Democratic leaders controlling the Legislature say they're open to some type of pension reform, they could face resistance from their union allies.

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