Calpensions

As CalPERS phases in a big rate hike for employers to cover historic investment losses, a second increase is likely to be added because a new study found that workers are living longer, earning more pay and retiring earlier.

A CalPERS committee voted yesterday to recommend that the full board use the new study of decade-long trends among CalPERS members, the first in nearly six years, when setting contribution rates next month.

CalPERS board member Tony Oliveira, a Kings County supervisor and president of the California State Association of Counties, estimated that the new data could add 10 to 12 percent to the contribution increase for some police and firefighter pensions.

Oliveira said when the increase for the new data is added to a contribution increase already scheduled due to investment losses, he thinks the total for some local governments “could be a 40 percent increase in contributions for local safety.”

The “actuarial experience study” of member data from 1997 to 2007, delayed a year because of staff furloughs ordered in the governor’s budget policy, was presented to the benefits committee by Alan Milligan, the CalPERS interim chief actuary.

Ron Seeling, the former chief actuary, retired last month. He warned last year that CalPERS, without a turnaround in investments, could face “unsustainable” increases of 25 percent in contributions for most workers and 40 to 50 percent for police and fire.

To avoid a rate shock, the California Public Employees Retirement System used radical “smoothing” for a three-year phase in of the contribution increases needed because of major investment losses centered in the stock market crash two years ago.

The new rates reflecting the losses are scheduled to begin July 1 for the state and non-teaching school employees. Because of the time needed to prepare about 2,000 actuarial forecasts, the rate increase for local governments begins in July of next year.

Oliveira said that “locals, sooner rather than later, need to understand because even though we did everything we could to kind of soften that blow” the new data will add to their pension costs.

Last year Gov. Arnold Schwarzenegger urged CalPERS to impose a larger contribution increase that would not push investment-loss costs into the future. A big rate hike also would show the need for his proposal to cut pension benefits for new state hires.

But the policy adopted by the CalPERS board in December would increase the state contribution to $3.5 billion, an increase of about $200 million leaving CalPERS with a funding level of about 60 percent of 30-year obligations.

Getting the level of the CalPERS state funds up to 80 percent, an industry rule of thumb for an acceptable minimum, would cost an additional $1 billion. The governor’s plan in January to close a $20 billion state budget had a $200 million CalPERS increase.

Now Schwarzenegger is back this month with a Stanford student study showing a “hidden shortfall” of $500 billion for CalPERS, the California State Teachers Retirement System and the UC Retirement System, far above their stated $100 billion shortfall.

The governor said in his weekly radio address last Saturday that the pension “crisis” is the “single biggest threat to our state’s fiscal health and future.” He urged the Legislature to make pension reform its “top” priority.

“I refuse to pass this problem on to the next governor and the next Legislature,” Schwarzenegger said. “We have got to act.”

The new study of CalPERS members, the first update since 2004, looked at “recent patterns of termination, death, disability, retirement and salary increases” during the decade ending in 2007.

“The one assumption causing the biggest increase in rates for all plans is the proposed change in post-retirement mortality,” Milligan and David Lamoureux, supervising pension actuary, said in a report to the committee.

The average life expectancy of males increased by a full year, while the average for females increased 0.3 years.

At age 50, for example, the study found life expectancy for males increasing from 80.9 to 81.8 years and for females from 84.8 to 85 years. At age 65, males went from 82.9 to 83.9 years, females from 86.1 to 86.4 years.

In what might be a surprise to some, the study found that the life expectancy of police and firefighters is slightly longer than miscellaneous workers. But the difference is “not material,” and the study recommends the same mortality tables for all members.

The study found higher salary increases for members with longer time on the job. A board member representing the state Department of Personnel Administration, Greg Beatty, said that has probably changed due to budget crunches since 2007.

Lamoureux told the board that the average retirement age has dropped a little — from around 60 to 59.5 or 59 for miscellaneous workers and from about 55 to a little more than 54 for police and firefighters.

At the suggestion of board member George Diehr, the staff was directed to update a study done a half dozen years ago that looked at the reasons for retirement. He said CalPERS shouldn’t advocate a retirement age, but members should be well-informed.

“Some people, this is strictly anecdotal, will say, ‘Well, I’m going to get out before the pension goes’ or something like that,” said Diehr. “We need to assure people that’s not going to happen, and with uncertainty maybe the wiser thing is to work longer instead of retiring early.”

Board member Henry Jones said a rate increase may prompt some to blame a state pension benefit increase a decade ago, SB 400 in 1999. He asked the actuaries to comment on the impact of the benefit increase.

As expected, said Milligan, retirements increased after the benefit increase and then dropped, but remained higher than expected. He said the pattern was much the same among workers who did not receive the SB 400 benefit increase.

“We do not believe the current increase in retirement rates is attributable to SB 400,” said Milligan. “It seems to be much more something that is happening in the economy.”

The actuaries said the new demographic data would increase the state contribution for miscellaneous workers 1.4 percent of payroll. The phase in of the investment losses was expected to increase the rate to 17.5 percent in July, up from 16.9 percent this year.

For local governments the new data could boost contribution rates from 1 to 2 percent of payroll for police and firefighters. The potential increases Oliveira mentioned assumed a 2 percent increase.

In June, Milligan said, the actuaries will probably recommend increasing the cost for employees who purchase up to five years of service time to boost their pensions as allowed by AB 719 in 2003.

The employees who purchase what is often called “air time” are supposed to pay the equivalent of what the employer would pay during the period. Oliveira asked if, as he had recently read, the purchases of service time transfer risk to the employer.

“Yes, there is an investment risk, and as a result of the service purchase that risk is transferred to the employer,” Milligan said. “We are required to charge employers for the increase in the liability, which at the present time does not include the risk component. So the risk essentially is transferred to the employer without the member paying for it.”

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at https://calpensions.com/ Posted 21 Apr 10

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