CalPERS, CalSTRS funding levels plunge

A decade ago, when the stock market was booming, the funding levels of CalPERS and CalSTRS were both over 100 percent, a projection that assets would be more than enough to meet pension costs in the decades ahead.

Now the funding levels of the nation’s two largest public pension funds have dropped below what some regard as the acceptable minimum, 80 percent, and for different reasons are not likely to bounce back anytime soon.

One of the triggers of San Diego’s well-publicized pension problems was an agreement that if the funding level fell to 82.5 percent, the city would have to make a big balloon payment.

Reflecting heavy losses in the historic stock market crash and other investments, a new report says the funding level of the California State Teachers Retirement System dropped to 77 percent last June — 58 percent without “smoothing” that spreads out losses.

The powerful California Public Employees Retirement System board, avoiding a $1 billion rate shock, approved a plan last month expected to boost the level in the fund covering most state workers, now about 60 percent, to just 65 percent after 30 years.

So, is there cause for alarm in the ominous-sounding new projections that assets will fall far below pension costs in the future?

Retirees getting monthly checks from the big systems, and current workers entitled to pensions in the future, should lose no sleep. Their benefits, if not ironclad, are about as legally secure as anything can be.

When funding for public pensions, which get most of their revenue from investment earnings, falls short the burden of closing the gap is on the government employer, not retirees or workers with vested pension rights.

The issue is whether growing pension costs will eat up too much of state and local government budgets, taking money from education, health, social services and other programs — maybe even leading to bankruptcies like the city of Vallejo.

Gov. Arnold Schwarzenegger and a reform group that hopes to put an initiative on the November ballot are among those who think current pension amounts are “unsustainable” and should be reduced for new hires in state and local government.

How the two big pension funds have reacted to their plunging funding levels is a sharp contrast.

Nearly all California public pension boards can set the annual pension payment made by government employers. It’s a sweeping power for the pension boards mainly made up of elected officials and employee representatives.

As state and local governments struggle to balance budgets, they can’t cut pension payments unless the pension board approves. And they must raise pension payments if told to do so by the pension boards, who have a legal “fiduciary” duty to protect retirees.

An exception is CalSTRS, which has no power over the public purse. The big system is a crucial source of income for retired teachers, who unlike many other government workers do not receive Social Security in addition to their pensions.

But CalSTRS needs legislation to set its contribution rates — currently 8 percent of pay for teachers, 8.25 percent for school districts and other employers, and 2 percent for the state.

The CalSTRS board has talked about pushing legislation allowing the board to set contribution rates, like other pension funds. But even in good times, getting legislators to give up more power over the state budget would be difficult.

All that’s left is a long-term strategy to persuade the Legislature to raise contribution rates. CalSTRS was pursuing a rate increase last year, when the funding level dropped to 87 percent by June 2008.

A report prepared for a CalSTRS board meeting next week contains the new projection that the funding level fell to 77 percent by June 2009 — 58 percent if the losses are not spread over a three-year period used to “smooth” swings in the value of assets.

A graph in the report shows that the state has tolerated very low funding levels in the past. The CalSTRS funding level was 29 percent in the early 1970s, rose to 110 percent in 2000 and will drop to 13 percent by 2040 under current assumptions.

Fully funding CalSTRS in 30 years would require investment earnings averaging more than 20 percent during the next five years or a contribution increase of 14 percent of payroll, a big jump in the current contributions totaling more than 18 percent.

What happens if nothing is done? The report said an actuary, Milliman, projects that CalSTRS investment assets will be “depleted” by 2045.

“At that time, the state, as the plan sponsor, would be obligated to fund benefits on a pay-as-you-go basis, similar to the approach by which benefits were funded in the early years of CalSTRS,” said the report.

But it’s pay now, or pay even more later. The report said that delaying contribution “increases by as many as 15 years can increase the required rate by almost 60 percent.”

Pushing debt into the future was a concern raised by the Schwarzenegger administration as CalPERS prepared to use a radical “smoothing” method with a three-year phase in to limit the state contribution increase after the market crash.

At the administration’s request, CalPERS calculated that bringing the funding level for most state workers, now about 60 percent, up to 82 percent after 30 years would require the current annual payment of $3.3 billion to jump to $4.5 billion next year.

To avoid a rate shock, the CalPERS board last month approved a new rate of $3.5 billion, a $200 million increase, expected to boost the funding level for most state workers (the “miscellaneous” classification) to 65 percent after 30 years.

The state has the option of voluntarily making a larger contribution. But the new budget proposed by the governor this month would only make the $200 million increase required by the CalPERS board.

The governor’s proposal spends $6.1 billion on retirement costs in the new fiscal year beginning in July: CalPERS $3.5 billion, CalSTRS $1.2 billion, retiree health $1.4 billion.

Schwarzenegger said in a letter to CalPERS last June that delaying a pension contribution increase would be “using our kids’ money” to gamble that investment earnings in the future will grow faster than pension obligations.

But the state has a huge budget shortfall, $20 billion over the next 17 months. The governor’s alternative if a long-shot bid to get $6.9 billion in federal money fails is a list of cuts that includes eliminating some major health and welfare programs.

Arguably, the CalPERS board acted responsibly by letting the funding level fall, avoiding even deeper state budget cuts. There have been no suggestions that the CalPERS board did not fulfill its fiduciary duty to protect retirees.

But it’s something pension board members have to keep in mind.

In San Diego, several class-action suits were filed in 2003 after the public learned of agreements in which the city raised pension benefits and the pension board cut the city’s pension payment, deliberately underfunding the system.

The suits alleged, among other things, that the pension board breached its fiduciary duties. Under a settlement, the city agreed to make the full pension payments called for by actuarial forecasts.

The annual report of the San Diego City Employees Retirement System last month said that the funding level was 67 percent in 2003, 66 percent in 2004 and by June of 2008 had climbed to 78 percent.

This week, the state Supreme Court tossed conflict-of-interest charges against five of six former San Diego pension board members, saying their votes benefited a broad group. The uncleared board member, Ron Saathoff, received a unique pension benefit.

“We express no opinion as to whether the Lexin defendants breached their fiduciary duties here, nor whether they might otherwise have been subject to civil liability for their actions,” said the court ruling in the suit named after defendant Cathy Lexin.

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/ Posted 29 Jan 10

8 Responses to “CalPERS, CalSTRS funding levels plunge”

  1. Dr. Mark H. Shapiro Says:

    June 2009 figures are OLD NEWS, both CalPERS and CalSTRS investments have recovered significantly since then.

  2. desperado Says:

    Once again they leave out the facts about why this current crises exists..Years ago when cal-pers was making way more money than needed to fully fund the retirements of all the members the state repeatedly borrowed money to pay it’s bills then passed bills in the legislature saying they didn’t have to pay the money back. They also sued the cal-pers system claiming that if there was excess funding (due to the very well run investments) that they had obviously been paying in too much.(the amount was set contractually) They found friendly judges and ignored the argument that future earnings might not be as good and got an award for a huge refund of payments and lower fees overall. Now the very things that cal-pers argued were the reason for the fee structure at that time have occurred and the state is blaming the cal-pers system and the employees once again. Keep in mind that unlike private pension funds where the employer must fully fund the pensions as he goes the state does not. Choosing instead to defer funding an employees pension fully until he or she retires, costing the state significantly more than if they had paid up front like everyone else. The states arguement for delaying payment is that they pay with dollars that are worth less, however they can’t make up the difference in income that would be generated had that money been available for investment by cal-pers like it was before the big suit. It’s the states own fiscal irresponsibility that brought this on and not the fault of the workers. Why would you want to punish them. Clean house in the governors office and the legislature and bring some new blood in with amandate to not pass on the cost of everything to our kids and grandkids.. Pay as you go, like everyone else

  3. Kurt Hahn Says:

    LONG TERM UNFUNDED LIABILITY RAISES CONCERNS MORE ATTENTION TO INVESTMENTS WARRANTED TWO TIER PROGRAM MAY BE NECESSARY

    Employee unions and retirees groups should have and need to in the future pay far more attention to investments. The fact the former board members and retired management collected large fees to steering questionable investments to CalPERS contributed to the current funding stortfall and detracts from CalPERS reputation as having a thoroughly professional management.

    The prospect of a two tier benefit program for State and local new hires while not appealing may be now a necessity and something that unions and retirees groups may have to support to avoid massive layoffs. The current recession probably will last longer than most expect and there is a limit on how much State & local governments for example can cut back.

  4. pacificapatriot Says:

    Sorry, but the benefits are too high and can’t be sustained.
    It’s CalPers own doing that the lid on all this was removed in 1999 and we find ourselves facing ruin today.
    Politicians won’t step on their contributors toes, it’ll have to be by initiative. That’s unfortunate, but it illustrates the corrupt nature of our system

  5. Kathleen Saylor Says:

    I am hopeful things will work out.

  6. Larry Says:

    I’ll support the initiative to adjust the PERS pension payments to the equivalent social security payment scheme of the private worker. The true public servant here is the taxpayer. Get off your high horses fat government workers.

  7. Lowell Says:

    In the many years I worked under the system, whenever the investment returns were high the State’s contributions would be reduced as in the 1990s. It the State had paid in at the normal rate we would not be in the situation we are in now. That extra money would have earned more income building up the retirement fund to stave off the down turns in the market.

  8. Kurt Hahn Says:

    Lowell is right when political pressure was applied and CalPERS declared an employer contribution holiday and later went a little overboard with a leveling policy for contributions so both contributed to the problem, Unions and retirees who fought efforts to raid CalPERS fund were correct however they should have fought equally hard against contribution holidays and unsound leveling. Now all will have to work together for something no one likes and that is a sustainable system that likely will include two tiers without 3% at 30 , full employee paid employee share and higher retirement ages

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