The rate, now 7.75 percent, is used to calculate how much money the $234 billion fund expects to have and how much it needs to cover benefits promised to workers, as well as the size of annual contributions by state and local government.

Rising public-employee retiree costs are straining the budgets of states such as California and cities across the U.S. still coping with tax revenue reduced by the longest recession since the Great Depression. Public funds have come under fire for using assumptions that hide the true size of shortfalls.

“It could have a very significant impact on employer contribution rates,” actuary Alan Milligan told the Calpers governing board in Sacramento today. He said he would make more specific recommendations to the panel in March.

Calpers last year rejected his proposal to reduce the presumed rate of return to 7.5 percent. Board members at the time expressed concern that the lower figure would burden local governments when they were already facing financial strains.

Three-Quarters Covered

The pension fund estimates that it has about 75 percent of the money it needs to cover promised benefits. That differs from a Stanford University report that said Calpers was only 58 percent funded, based on a 6.2 percent annual return on assets.

The California State Teachers’ Retirement System, the second-largest U.S. public pension with $133 billion of assets, agreed Feb. 2 to lower its assumed returns to 7.5 percent from 7.75 percent, the second reduction since 2010.

The teacher’s fund had 71 percent of what it needs to pay future benefits as of June 30, 2010. The lower rate added $5.9 billion to a $56 billion shortfall projected at the time, according to Milliman Inc., the fund’s consulting actuary.

At Calpers, volatility in the public markets has caused wider than expected variations in the fund’s annual returns. In the fiscal year ended June 30, Calpers earned 20.7 percent, its best result in 14 years, led by stocks and private equity.

Decline in 2009

Since then, the fund has dropped 4.5 percent. It lost almost a quarter of its value in 2009 as the global recession dragged down stock prices and real-estate values.

The fund earned 1.1 percent in the calendar year that ended Dec. 31 as global stocks, which make up about half of its assets, dropped about 8 percent in the period. The Standard & Poor’s 500 Index of U.S. shares had a total return of 2.1 percent last year.

Calpers spreads losses and gains over 15 years to blunt the impact that annual changes may have on the amount of money the fund charges taxpayers to finance benefits for more than 1.6 million government retirees and their families.

Through Dec. 31, Calpers earned almost 5.1 percent over a decade and 7.5 percent the past 20 years, according to a report prepared for the board by Joe Dear, the system’s investment chief.

California’s pensions in 2010 had about 81 percent of what they needed to pay promised benefits, down from 87 percent in the preceding year, according to an annual study by Bloomberg Rankings. The median for all states was 75 percent.