Once again, CalPERS state worker rate is raised

State PensionsCalPERS 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.

STATE

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

Millennials and Pensions – Do They Know Public Pension Systems Need Reform?

After the midterm election results there has been a lot of talk about the young people who didn’t turn out to vote. There are around 8 million millennials, people ages 18-to-35, in California. And the conventional wisdom has been that since they helped elect President Obama twice, they’ll continue to help elect Democrats. But what about all that debt piling up on their backs?

The non-partisan Legislative Analyst’s Office predicts $340 billion in debt, deferred payments, pension costs and other liabilities will be on California’s balance sheets for years to come. Gov. Jerry Brown’s latest budget dedicates just over $10 billion to pay down this debt, barely making a dent in the problem.

The largest pension system in the state, the California Public Employee Retirement System has not reported their actuarial values of assets and liabilities for 2013 yet, but out of its four defined benefit plans, it has an unfunded liability of about $60.6 billion. In 2013, CalPERS only contributed 87.7 percent of their annual required contributions, not even making a full payment.

The states teachers’ retirement system, CalSTRS, had an unfunded liability of $70.5 billion in 2012 and $73.7 billion in 2013. In 2013, CalSTRS paid only 44.12 percent of their annual required contributions. Governor Brown worked with the Legislature to increase contributions — since they are controlled by statute — but his plan is to increase payments over the next five years and spread the costs to school districts and teachers. This will likely increase burdens on local public school budgets and impact their general fund spending priorities.

The University of California retirement system had an unfunded liability of $11.6 billion in 2012 and $13.8 billion in 2013. In 2013, they paid only 35.7 percent of their annual required contributions. This recently prompted the university regents to increase tuition on students to pay for a bloated bureaucracy and massive pension liabilities.

In total, taking the public statements of all the state systems at face value, the California defined benefit pension system had $142.7 billion in unfunded liabilities in 2012 (the figure for 2013 is not available as CalPERS has not provided the data). The aggregate funded ratio for the whole system in 2012 was 77 percent, compared to 90 percent in 2003. In 2013, the state only paid 65.6 percent of their aggregate annual required contributions.

It should be noted that if the state systems had simply paid their full contribution every year during 2003-2013, the cumulative missed contribution plus the associated returns is more than $41 billion. Instead, these missed payments have become compounding debt for which future generations will be responsible.

In 2012, Governor Brown signed a set of nominal pension reforms that capped some pension costs, though most of the changes only impacted new employees. However, CalPERS recently contravened both the spirit and the letter of the law and allowed 99 specialty pays to be counted as base pay for purposes of calculating pensions. This not only boosted the costs of the state pension fund, it also put many localities who contract with CalPERS in the unenviable position of accommodating higher costs on their employees and pensioners as these calculations put pressure on their bottom lines.

While state government retirees collect handsome guaranteed pensions, young taxpayers will foot the bill. This has particularly serious ramifications for the millennial generation, who are sinking under the weight of public debts and obligations made by people years before they were even born. Paying those debts leaves far less money to fund government services and amenities they’d like to focus on, like education, public safety, roads, water systems, parks, beaches and libraries.

More fundamental reform is needed to depoliticize pension benefits and policies, make pensions fair to government workers and accountable to taxpayers in a simple and transparent manner. Further, government employees deserve retirement accounts that they own, are portable and transferable, without the penalties associated with the current politician-controlled system. Reform also needs to eliminate unfunded liabilities on future generations.

Millennials won’t be the only losers if our elected officials do not have the courage to reform the state’s broken pension systems. The status quo may endanger our public institutions for generations to come. But reform won’t happen unless millennials get informed and engaged.

Lance Christensen directs the Pension Reform Project at Reason Foundation.

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