NEW YORK (Reuters) - New Jersey’s treasurer said on Thursday she will increase the expected rate of return for the state’s struggling public pension system from 7 percent to 7.5 percent, then lower it again over time.

The switch to a higher assumed rate means that the state, and participating local governments in New Jersey, will for now escape the higher costs that arise when investment return assumptions are lowered.

The savings come at a fortuitous time for new New Jersey Governor Phil Murphy, who took office in January and is facing a shortfall ahead of his first budget proposal in mid-March.

The higher rate will save about $238 million for the state and more than $400 million for local governments in the near term, according to the office of Acting State Treasurer Elizabeth Maher Muoio.

Most states are lowering their expected pension return rates after years of poor investment performance and reduced contributions led to underfunding.

The nation’s biggest public pension, the California Public Employees’ Retirement System, voted in 2016 to step its rate down to 7 percent by 2020.

Investment returns that fell short of assumptions were the biggest contributor to worsening financial positions of the pension plans studied by the Pew Charitable Trusts’ public sector retirement systems project.

While Muoio is moving New Jersey’s rate up beginning in fiscal 2019, her plan will then step down the rate over the following five years, falling back to 7 percent in fiscal 2023.

After he became governor following Chris Christie’s eight-year tenure, Murphy appointed Muoio as acting treasurer.

Former Treasurer Ford Scudder had cut the pension funds’ rate of return to 7 percent from 7.65 percent in November, but Muoio said that move was too drastic and would saddle local governments with heavy additional costs.

“A gradual path to a lower rate will help mitigate the undue stress that would otherwise have been placed on local governments,” Muoio said.

New Jersey’s five main pension funds, with nearly $76 billion of assets, performed well in fiscal 2017 with a return of 13.07 percent, according to a February report from the state investment council.

That followed 2016, when the funds lost nearly 1 percent net of fees. The funds’ 20-year annualized return was 6.79 percent.

Even so, the total funded ratio was just under 49 percent, according to the Treasury’s annual report for fiscal 2016, the most current such report available. A ratio of at least 80 percent is often considered healthy.