CalPensions

Once again, CalPERS state worker rate is raised

April 14, 2016 By Ed Mendel 3 Comments

CalPERS actuaries recommend that the annual state payment for state worker pensions increase $602 million in the new fiscal year to $5.35 billion, nearly doubling the $2.7 billion paid a decade ago before the recession and a huge investment loss.

It’s the largest annual state rate increase since CalPERS was fully funded in 2007. And it’s the third year in a row that the state rate increases have grown: up $459 million in 2014, $487 million in 2015, and now $602 million for the fiscal year beginning July 1.

The annual state actuarial valuation prepared for the CalPERS board next week also shows that the debt or “unfunded liability” for state worker pensions grew to $49.6 billion as of last June 30, up from $43.3 billion the previous year.

And as the debt went up, the funding level went down. The five state worker pension plans had 69.4 percent of the projected assets needed to pay future pension obligations last June, a small decline from 72.1 percent in the previous year.

The funding level of the California Public Employees Retirement System, with 1.8 million active and retired state and local government members, has not recovered from a huge loss during the financial crisis and recession.

The entire system (state workers are less than a third of the total members) was 102 percent funded with a $260 billion investment fund in 2007. By 2009 the investment fund had dropped to about $160 billion and the funding level to 62 percent.

Now the total investment fund, which was above $300 billion at one point last year, is valued at $290 billion this week, according to the CalPERS website, and the latest reported funding level is 73 percent.

In recent years, CalPERS has phased in three rate increases for lowering the earnings forecast from 7.75 to 7.5 percent, adopting a more conservative actuarial method intended to reach full funding in 30 years, and getting new estimates that retirees will live longer.

The CalPERS board clashed with Gov. Brown last November when adopting a “risk reduction” strategy that could slowly raise rates over several decades by lowering the pension fund investment earnings forecast to an annual average of 6.5 percent.

Gov. Brown said in a news release the CalPERS risk reduction plan is “irresponsible” and based on “unrealistic” investment earnings. His administration had urged the CalPERS board to phase in the big rate increase over the next five years.

The CalPERS board president, Rob Feckner, said the go-slow decision emerged from talks with consultants, staff, stakeholders and concern about putting more strain on cities “still recovering from the financial crisis.”

The 3,000 cities and local governments in CalPERS have a wide range of pension funding levels, some low and a few with a surplus. If they are able, CalPERS has encouraged them to contribute more than the annual rate to pay down their pension debt.

Brown could have proposed a new state budget in January that gives CalPERS more than the state rate, paying down state worker debt. But legislators may have more urgent priorities and powerful unions want to bargain pay raises.

Critics contending that California public pensions are “unsustainable” often point to a large retroactive state worker pension increase, SB 400 in 1999, that contained a generous Highway Patrol formula later widely adopted for local police and firefighters.

As the stock market boomed in the late 1990s, the CalPERS investment fund, expected to pay two-thirds of future pensions, bulged with a surplus and a funding level that reached 136 percent.

So, while sharply increasing pensions, the CalPERS board also contributed to later funding problems by sharply reducing state contributions from $1.2 billion in 1997 to $159 million in 1999 and $156 million in 2000.

Much of the $602 million state worker rate increase next fiscal year is for phasing in the third and final year of a rate increase, $266.7 million, to cover a longer average life span now expected for retirees.

The “normal progression” of debt payments added $176.4 million and “investment experience” $89.5 million. Payroll growth of 6 percent in the previous year, instead of 3 percent, added $109.4 million due to new hires and other factors.

All of the $602 million rate increase, if approved by the CalPERS board next week, would be paid by state employers. Usually, only the state, not the employee, pays for increased pension costs, particularly investment shortfalls that cause most of the debt.

But Brown’s pension reform that took effect three years ago is making a small but noticeable change.

Workers hired after Jan. 1, 2013, receive lower pensions, requiring them to work several years longer to receive the same benefit as workers hired before the reform. In the list of changes resulting in the $602 million state increase next year, lower pensions for new hires are a $33 million reduction.

State workers typically pay a CalPERS rate ranging from about 6 percent of pay to 11.5 percent, depending on the job and bargaining by labor unions. The new employer rates range from 26.1 percent of pay for miscellaneous workers to 48.7 percent of pay for the Highway Patrol.

Under the pension reform, some state workers (most are excluded) are expected
to pay half of the “normal” cost, the estimated cost of the pension earned during a year by a worker, excluding debt from previous years.

Because of an increase in the normal cost, employees hired under the reform by the Legislature, California State University, and the judicial branch would get a small rate increase next year, up from 6 percent of pay to 6.75 percent.

State savings from these and other increases in worker rates must be used to pay down the pension debt. So, even though the state payment under the new CalPERS rate is $5.35 billion, the savings from higher worker rates boosts the payment to $5.462 billion.

Article is originally published on Calpensions.com

Filed Under: Top Stories Tagged With: CalPensions, CalPERS, Debt, pensions, Public Debt

Pension Reform Duo Sets Target on 2016

March 15, 2015 By John Hrabe 3 Comments

The dynamic duo of California pension reform are teaming up in 2016.

Former San Diego City Councilman Carl DeMaio and former San Jose Mayor Chuck Reed, both of whom successfully passed pension reform in their respective cities during their time in office, announced Wednesday their plans to work together on a statewide pension reform measure for the 2016 ballot. Reformers hope to take advantage of easier ballot measure qualifying rules that require the lowest number of signatures in decades.

“Without serious pension reform in California, we face a future of cuts to important services and more tax revenues diverted to unsustainable pension payments,” Reed, a Democrat, said in a press release announcing the effort.

The group points to independent numbers which show the state’s pension liabilities have increased 3,000 percent in a decade. Last November, then-State Controller John Chiang (now state treasurer) pegged the state’s total unfunded pension liability from 130 public pension systems at $198 billion, a dramatic increase from just $6.3 billion in 2003.

Redux of San Diego pension reform fight

Last year, while DeMaio was preoccupied with his campaign for Congress against Rep. Scott Peters, Reed unsuccessfully tried to qualify a similar statewide pension reform measure. However, that effort stalled during the qualification stage over a dispute with Attorney General Kamala Harris over wording for the title and summary. This time around, he’ll benefit from DeMaio’s experience as a grizzled veteran of ballot-measure shenanigans.

“We have done a lot of legal work to make sure this initiative is bulletproof,” DeMaio, a Republican, told Reuters. “Because the unions are going to throw the kitchen sink at us.”

DeMaio knows full well the extent to which organized labor will go to thwart pension reform. In 2011, he led the effort to qualify San Diego’s Comprehensive Pension Reform measure for the 2012 ballot. The CPR measure forced all new employees into a 401(k)-style plan and capped contribution levels for current employees.

Labor organizers deployed activists to block signature gatherers and frighten potential signatories with misleading claims that signing would put them at risk of identity theft. At the time, longtime San Diego political operative T.J. Zane, who now serves asexecutive director of the San Diego Republican Party, described the San Diego-Imperial Counties Labor Council’s signature-blocking efforts as “unprecedented in its scope and ferocity.”

After the measure qualified for the ballot, San Diego voters overwhelmingly passed Proposition B in June 2012 by a two-to-one margin.

Chuck Reed: Pension reform in San Jose

At the same time DeMaio was reforming pensions in San Diego, Reed, then-mayor of San Jose, was leading a similar effort in Silicon Valley. Reed’s Measure B passed by an even larger margin: 70 percent to 30 percent. The Wall Street Journal praised Reed’s efforts and described him as “that rare creature, a Democrat in a liberal bastion who is nonetheless focused on salvaging government finances while inviting the wrath of public unions and their political allies.”

Ultimately, courts effectively gutted the most important provisions of Reed’s measure.

“San Jose’s was the most far-reaching, in that it challenged the core obstacle to serious pension reform in California,” Steven Greenhut, one of the state’s leading experts on pension reform, wrote at City Journal. “But a Santa Clara County Superior Court judge gutted the reform measure, saying San Jose could cut its employees’ pay, but not their pension benefits.”

Even after the negative court rulings, Reed’s successor has begun to further distance the city from Measure B in a bid to make “peace in the city’s pension wars.”

Broad-based coalition for reform

The proposed statewide pension measure for 2016 already has received some harsh criticism as the work of two washed-up politicians.

“2 out-of-work pols @carldemaio & Chuck Reed plan to attack @CalPERS, retirees with #pension measure in 2016,” tweeted Democratic political consultant Steven Maviglio. CalPERS is the California Public Employees’ Retirement System, America’s largest public-pension system.

In anticipation of push-back from local governments, state pension funds and organized labor, Reed and DeMaio have made it a point to build a broad-based coalition that sets aside their different political parties. The coalition also will include David Grau of the Ventura County Taxpayers Association. Last year, after collecting thousands of signatures, Ventura County’s pension reform proposal was removed from the ballot, according to CalPensions.com.

“CalPERS has dedicated itself to preserving the status quo and making it difficult for anybody to reform pensions,” Reed recently said of the effort. “This is one way to take on CalPERS, and yes, CalPERS will push back.”

It’s unclear whether the proposed ballot measure will be drafted as a statute, which requires 365,880 valid signatures, or a constitutional amendment, which requires 585,407 valid signatures.

Originally published on CalWatchdog.com

Filed Under: Top Stories Tagged With: CalPensions, CalPERS, Carl DeMaio, Chuck Reed, pension, San Diego, San Jose

Brown Plan to Eliminate Retiree Health Care Debt

January 12, 2015 By Ed Mendel 1 Comment

Gov. Brown wants state workers to begin paying half the cost of their future retiree health care — a big change for workers making no payments for coverage that can pay 100 percent of the premium for a retiree and 90 percent for their dependents.

The governor also wants state workers to be given the option of a lower-cost health insurance plan with higher deductibles. The state would contribute to a tax-deferred savings account to help cover out-of-pocket costs not covered by the plan.

More funding and lower premium costs are key parts of a plan to eliminate a growing debt or “unfunded liability” for state worker retiree health care, now estimated to be $72 billion over the next 30 years.

As Brown proposed a new state budget last week, he pointed to a chart showing retiree health care debt at a crossroads. If no action is taken, the debt by 2047-48 grows to $300 billion. Under his plan, the debt by 2044-45 drops to zero.

“So these are our promises,” he said, “and if we don’t take any action you are looking at hundreds of billions of dollars that we owe. And that’s why I am going to negotiate during our upcoming collective bargaining talks for the best deal I can get for the workers and the taxpayers.”

State worker retiree health care is one of the fastest-growing costs in the state budget. Next fiscal year its cost is $1.9 billion (1.6 percent of the general fund), four times more than paid 15 years ago, $458 million (0.6 percent of the general fund).

Brown’s plan would save taxpayers money by switching from “pay-as-you-go” funding, which only pays the health insurance premiums each year, to pension-like “prefunding” that invests additional money to earn interest.

Prefunding is widely urged as a way to cut long-term costs. The No. 1 recommendation of a governor’s public employee retirement commission in 2008 was prefunding retiree health care.

The California Public Employees Retirement System expects investments to pay two-thirds of total pension costs. The governor’s retiree health care plan is expected to save nearly $200 billion over the next 50 years.

When fully phased in, Brown’s plan is estimated to cost the state $600 million a year in addition to the payment of premiums. The amount is half of the “normal” cost of future retiree health care earned by active workers during a year, excluding debt from previous years.

State workers would contribute the other half of the normal cost, bringing the total to $1.2 billion. With $1.9 billion for premiums, the total is still well short of the $5 billion a state controller’s report last month said is needed for full funding.

Brown’s finance department said its cost estimates were developed with the same actuaries used by the controller, but a different scenario. Though not included in the estimates, California State University also is expected to prefund retiree health care.

In an annual “fiscal outlook” last November, nonpartisan Legislative Analyst Mac Taylor urged the Legislature to consider using the new Proposition 2 debt payment fund to pay state worker retiree health care debt.

Brown’s proposal to have workers help pay for retiree health care follows some large cities, such as San Jose and San Francisco, and his earlier experience with the Legislature.

The governor’s first retiree health care proposal, part of a 12-point pension reform, was dropped from the final version of the pension reform, AB 340 in 2012. An Assembly analysis said unions have “shown a willingness to bargain over the issue.”

The California Highway Patrol, giving up pay raises for several years, contributes 3.9 percent of pay to the state retiree health care investment fund with a state match of 2 percent of pay. Physicians, dentists and podiatrists (bargaining unit 12) and craft and maintenance (bargaining unit 16) contribute 0.5 percent of pay with no state match.

The governor’s proposal last week does not say how much of a bite from state worker paychecks will be needed to yield a total of $600 million, half of the retiree health care normal cost.

Brown’s first proposal in the 12-point pension reform did not include prefunding state worker retiree health care. But the new plan last week has all three of the retiree health care proposals that were in the first plan.

Ten years of service is needed to be eligible for retiree health care, beginning at 50 percent coverage and increasing to 100 percent after 20 years of service. For new hires, the plan pushes back the thresholds for new hires to 15 and 25 years.

The state pays more of the health care premium for retirees (100 percent retirees, 90 percent dependents) than for active workers (80 to 85 percent workers, 80 percent dependents). For new hires, the plan prevents a higher subsidy in retirement than received on the job.

CalPERS is asked to “increase efforts to ensure” seniors eligible for Medicare are switching to lower-cost supplemental plans. For family members, the plan calls for eligibility monitoring, some lower-cost coverage, and surcharges if covered at work.

President Obama’s health care act imposes a “Cadillac tax” on full-coverage “platinum” health plans in 2018, a move to control costs by encouraging employers to move toward plans with higher deductibles and more out-of-pocket expenses.

Brown’s plan directs CalPERS to offer workers the option of a high-deductible health plan. The state would contribute to the tax-deferred Health Savings Account of employees who choose the option to “defray higher out-of-pocket expenses.”

It’s not clear whether state payments for retiree health insurance, which are based on the average of the four highest-enrolled health plans, would be reduced if large numbers of active workers, whose premiums doubled in the last 10 years, opt for lower-cost plans.

In bargaining, a standard response to a proposed cut is to ask for an offsetting increase. When the largest state worker union agreed to an increase in employee pension contributions in 2010, the agreement included a pay raise in following years.

Brown’s plan presumably benefits state workers by making their retiree health care more secure. Costs are said to be growing at an “unsustainable pace.” Worker contributions might strengthen the legal argument that retiree health care is a “vested right” protected by contract law.

Meanwhile, the contrast with other workers grows. The number of large private firms (200 or more employees) offering any level of retiree health care dropped from 66 percent in 1988 to 28 percent in 2013, a Kaiser report said. Many California teachers have no employer retiree health care.

For state workers who retire early, retiree health care can be a major benefit. With at least five years of service, state workers are eligible to retire at age 50, age 52 if hired after Brown’s pension reform took effect on Jan. 1, 2013.

“The plan preserves retiree health benefits when the private sector is scaling back, maintains health plans, and continues the state’s substantial support for employee health care,” the governor’s budget summary said last week.

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at Calpensions.com.