Biggest U.S. Investors Face the Cold, Hard Truth: Street Whispers

NEW YORK (TheStreet) -- Public pension funds, among the largest U.S. investors, are dimming their outlook for stock and bond returns for the next decade.

The Illinois Teachers Retirement System on Friday lowered its "assumed rate of return" from 8.5% to 8%, according to a fund statement. While a half-percentage-point drop may seem like small potatoes, the decision has a domino effect in the $36 billion fund. If returns are indeed lower, the state's contribution to the fund (paid by taxpayer dollars) would rise by $300 million in 2014 alone. That would likely balloon to even greater heights in following years as fewer participants pay into the system.

The group rarely alters its assumptions. In fact, it was downright generational. The last time Illinois Teachers changed its assumed rate of return was when it was revised up nearly 15 years ago during the late-'90s stock-market boom.

"Our process is very deliberate, and considerable analysis is used to develop this estimate," fund Executive Director Dick Ingram said in a statement. "It is the fiduciary duty of the board to set a rate that is realistic and will fairly distribute the cost of Illinois Teachers Retirement System benefits among several generations of taxpayers."

While it may be easy to write off Illinois given the state's poor financial history (it has a $43.8 billion deficit), the truth is that public funds across the country are slashing their assumed rates of return.

The California Public Employees' Retirement System, the nation's biggest pension fund, cut its assumed rate of return from 7.75% to 7.5% earlier this year after relying on the benchmark for two decades. The $142 billion New York State Common Fund trimmed its assumed rate from 8% to 7.5% two years ago.

A total of 45 of 126 public pension funds have reduced their investment-return expectations since the 2008 financial crisis, according to a report from the National Association of State Retirement Administrators.

There may be more to come. A 2010 report by pension consultant Callan Associates found that, while the average annual return assumption for public pension funds was 8%, the average real return was 4.5%.