Actuaries recommend a $213 million increase in annual state pension payments to CalPERS in July, bringing the total to $3.7 billion.
But $149 million would be added to the increase if the impact of a lower earnings forecast, dropped by the board in March from 7.75 percent to 7.5 percent a year, is not phased in over 20 years.
Either way, the annual state payment to CalPERS next fiscal year would still be less than the $3.9 billion payment expected two years ago when major investment losses began to push up rates from $3.3 billion.
The state CalPERS payment was cut by about $400 million when unions agreed to new contracts that increase worker pension contributions, up from 5 percent of pay to 8 percent pay for most workers. The current state contribution is 18 percent of pay.
Former Gov. Arnold Schwarzenegger used a record 100-day budget deadlock, ending in October 2010, to get the largest state worker union, SEIU Local 1000, to agree to a new contract.
Several smaller unions held out and agreed to contracts last year with the new administration of Gov. Jerry Brown. The nonpartisan Legislative Analyst’s Office said state savings will be offset by pay raises as the contracts expire in several years.
So far, state pension costs have not soared as some feared after California Public Employees Retirement System investments peaked at $260 billion in the fall of 2007, dropped to $160 billion in March 2009 and were $233 billion Monday.
Part of the reason rates have not skyrocketed is that on three occasions CalPERS adopted actuarial “smoothing” methods aimed at avoiding the big rate shocks of the past.
When CalPERS had a surplus during a high-tech stock market boom, the CalPERS board gave the state a contribution “holiday” and dropped the annual state payment to $150 million in 2000, down from $1.2 billion several years earlier.
CalPERS also sponsored SB 400 in 1999, sharply increasing pensions and starting what critics say was a statewide trend toward “unsustainable” benefits. Many of the new contracts that raise worker contributions also give new hires lower pensions.
After the stock market dipped and investment earnings expected to provide about two-thirds of pension revenue faltered, CalPERS made a series of big rate increases that brought the state payment to $2.5 billion by 2005.
Schwarzenegger, citing the soaring CalPERS rates, briefly backed legislation for a ballot measure that would have switched new state and local government hires to 401(k)-style individual investment plans.
The CalPERS board adopted a radical “smoothing” policy in 2005 that spreads gains and losses over 15 years, well beyond the three to five years used by most pension systems to smooth employer rates as volatile markets go up and down.
After the CalPERS investment fund had a 24 percent loss during fiscal 2008-09, the board adopted another smoothing plan that phased in a rate increase over three years and treated the huge one-year loss as an isolated event to be paid off over 30 years.
The third smoothing came last April after the board lowered the earnings forecast from 7.75 to 7.5 percent a year. A third of the resulting rate increase will be paid in the first year and the rest spread over 19 years, unless the state opts for full payment now.
Schwarzenegger opposed the smoothing in 2009, arguing that the state would be using “our kids’ money” to gamble that investment earnings in the future will grow faster than pension obligations.
A big rate increase (at one point the Schwarzenegger administration suggested increasing the $3.3 billion state payment to $4.5 billion) presumably would have increased public pressure for a major cost-cutting pressure reform.
A report actuaries prepared for a CalPERS board meeting next week said the state has not asked to opt out of the phased-in rate increase resulting from the lower earnings forecast, a move that would add $146 million to the $213 million increase in July.
The state budget Brown proposed in January had a $9 billion deficit that could grow by $5 billion if voters do not approve a tax increase in November. A revised budget plan expected Monday may show a larger deficit due to a recent fall off in tax receipts.
In the current fiscal year, the state is paying CalPERS $3.5 billion ($1.9 billion general fund), California State Teachers Retirement System $1.3 billion, state worker retiree health care $1.5 billion, Social Security $500 million, Medicare $240 million.
The general fund that pays for most programs is expected to spend about $87 billion and special funds that can only be spent on health, transportation and other programs an additional $34 billion.
The new state CalPERS rates recommended by actuaries are based on investment returns and other factors through the fiscal year ending last June 30, when CalPERS earned 21 percent as markets rebounded from the deep drop.
The strong returns boosted the average funding level for CalPERS state worker plans to about 70 percent of the assets needed for future obligations, up from a low of about 60 percent two years ago.
A rule of thumb is that a funding level of 80 percent is acceptable. But one of the three major credit rating agencies, Fitch, said in a pension report last year that a lower level is adequate.
“Fitch generally considers a funded ratio of 70 percent or above to be adequate and less than 60 percent to be weak,” said a report on Feb. 17, 2011, titled “Enhancing the Analysis of U.S. State and Local Government Pension Obligations.”
CalPERS is working on new ways to measure and monitor risk after the big investment losses. Part of the new focus is a calculation of how rates go up if earnings fall short of the new 7.50 percent forecast, which critics think is still too optimistic.
An annual actuarial valuation report expected in August will show, among other things, what could happen to future rates if earnings are one percent below or above the 7.50 percent forecast.
It’s a modification of “transparency” legislation obtained by Schwarzenegger in the 100-day budget deadlock, but later deemed unworkable by the Legislative Analyst’s Office.
The CalPERS actuaries recommended that the rate for non-teaching school employees drop $29 million, leaving the total little changed at $1.2 billion. Lower-than-expected pay increases more than offset the phased-in earnings forecast increase.
New CalPERS rates for local governments, which will be issued later, lag state and school rates by a year because of the time needed to make separate actuarial calculations for 2,200 plans offered by more than 1,500 agencies.
The actuaries recommend that contributions to the shrinking Legislators Retirement System, which dropped to zero in 2000 due to a surplus, be restarted in July with an employer rate of 5.4 percent of pay and an employee rate of 8 percent of pay.
An initiative that imposed term limits on legislators, Proposition 140 in 1990, prohibits public pensions for new legislators. By last fiscal year, the plan had 296 members, down from 304 the previous year.
Still eligible for the LRS: the state constitutional officers (governor, lieutenant governor, secretary of state, attorney general, treasurer, controller, superintendent of public instruction), the insurance commissioner, four elected state Board of Equalization members and four top legislative staff members.
Ed's Note: Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at http://calpensions.com/