SAN FRANCISCO (Reuters) - California will pay about $3.7 billion for state employees' pension in its next fiscal year, more than it now pays but less than the state set aside for retirement-related expenses in the prior fiscal year, the state's pension fund said on Wednesday.

The California Public Employees' Retirement System, best known as Calpers, is receiving $3.5 billion from the state government, down from $3.9 billion in the prior fiscal year.

The anticipated $213 million increase in the state's contribution for the next fiscal year reflects a change in the pension fund's economic assumptions and a decision by its board in March to lower the fund's assumed rate of return to 7.5 percent from 7.75 percent.

As the assumed rate of return drops, state agencies and local government employers using Calpers must pay more to the fund to manage retirement benefits for their employees.

Calpers also said contributions by government employers for non-teaching school employees would drop by $29 million to $1.2 billion for the year beginning on July 1.

Calpers will phase in higher contribution rates over two years, an approach criticized by Governor Jerry Brown in a letter on Wednesday.

Brown said interest costs under that plan would add $145.9 million to the state's expenses over the next 20 years.

"In essence, phasing in the change would be the equivalent of the state taking on a 20-year loan at 7.5 percent interest - not a prudent decision," Brown said.

Calpers Board President Rob Feckner shot back that phasing in higher contributions rates would ease retirement expenses for employers paying into the fund.

"If the Governor feels the State can make the payment in full, then I'll be happy to have someone come pick up his check today," Feckner said in a statement.

Calpers and Brown are at odds in other ways.

Brown has proposed overhauling the state's pensions system with so-called hybrid retirement plans for new public employees that would blend traditional pensions with defined-contribution retirement accounts to reduce pension expenses.

Calpers, a defender of traditional pensions, in February said Brown's pension reform plan may not significantly reduce pension costs for the state and hybrid pensions would increase investment risks for individuals covered by them.

Public pension expenses have become a hot political issue in the most populous U.S. state and Calpers' estimates on contributions for the next fiscal year follow Brown's revised estimate for the state's budget gap and a plan to tackle it.

Brown said on Monday the deficit for the next fiscal year would grow to $15.7 billion from a previously estimated $9.2 billion due to a slow economic recovery and weaker-than-expected revenue.

Brown called for deep spending cuts to health, social and welfare spending and included new revenue in his budget plan based on the assumption voters in November will approve a ballot measure that would increase the state's sales tax and raise personal income taxes on wealthy taxpayers.

If voters reject the measure, more than $5 billion in education spending would need to be cut to balance the state's books, Brown said.

The $3.7 billion that Calpers expects from the state government is equal to 4 percent of general fund spending proposed by Brown on Monday. Lawmakers face a June 15 deadline for approving a budget for the next fiscal year.

(Reporting By Jim Christie; editing by Mohammad Zargham)