CalPERS surprise: smaller rate hike for local plans

The rate hike next July for most of the 2,043 local public pension plans in the giant CalPERS system will be lower than expected — an increase of 1 percent of pay or less for four-fifths of them.

The rates reflect the second year of a radical “smoothing” plan that spreads rate increases from huge investment losses over a three-year period.

The CalPERS investment fund dropped 24 percent in fiscal 2008-09 when the stock market crashed. The fund peaked at $260 billion in the fall of 2007, hit bottom at $160 billion in March 2009 and was $222.5 billion early this week.

Actuaries told the CalPERS board yesterday that a 13 percent gain in investment earnings the fiscal year following the crash, 2009-10, was better than what CalPERS expects in an average year, 7.75 percent.

“Most of the plans are experiencing an increase in rate for the 2012-13 year, although the increases are less than we projected in our prior report,” said actuary Nancy Campbell.

“And I may say that overall 80 percent of the local government plans had an increase in employer rates of 1 percent or less, some zero, some less than that,” Campbell said.

The local plan rates are not expected to change much in July 2013, when they will reflect a 21.7 percent increase in earnings last fiscal year, the end of the three-year smoothing period.

The local rates are based on two-year-old investment returns because of the time needed to make actuarial calculations for the 2,043 plans. The new rates for state workers, expected in May, will have a one-year lag reflecting the big earnings last fiscal year.

The state rates are not expected to change much next July. The nonpartisan Legislative’s Analyst Office estimated last month that the state payment to CalPERS, $3.6 billion this year, will increase to $3.8 billion by fiscal 2016-17.

The new rates set by the actuaries for the local plans drew praise from several California Public Employees Retirement System board members.

“I’m pleasantly surprised,” said board member J.J. Jelincic. “All the great fear we have heard about how much rates are going up and how we are destroying Western civilization — 75 percent of all the plans the rate change is plus or minus 1 percent. It would suggest that maybe it’s not as forsaken out there as some people would like to project.”

Member Tony Oliveira, a former Kings County supervisor leaving the board this month, thanked the actuaries and the board for their “courage” in adopting the smoothing plan despite criticism.

He said jobs were saved. As the economic downturn forced cuts in local government budgets, particularly hitting counties who lost state aid for social services, spreading out pension rate hikes allowed time to plan and phase in reductions.

“Because you helped us gain a little more time no one lost a job,” Oliveira said when Kings County cut about 11 or 12 percent of its staff positions. “We did it through attrition.”

The average funded status of the local CalPERS plans is still low. It was 89.6 percent in June 30, 2008, dropping after the stock market crash to 61 percent in June, 2009, and then increasing to 65.8 percent in June 30, 2010.

Actuaries estimated that the big earnings gain last fiscal year adds 7 to 8 percent, which would push the funded status as of last June 30 to about 73 or 74 percent. But with the stock market in turmoil, the funding level has probably dropped since then.

The CalPERS board may revisit a controversy in March, when actuaries are scheduled to make a recommendation about the investment earnings forecast, now 7.75 percent, which critics say is too optimistic.

The actuaries recommended early this year that CalPERS lower the forecast to 7.5 percent, which would increase rates. The CalPERS board decided to leave the forecast unchanged.

Critics contend that the earnings forecast used to offset or “discount” future pension obligations is too optimistic and conceals massive long-term debt.

A leading critic, Joe Nation of the Stanford Institute for Economic Policy Research, issued a new report yesterday contending that the long-term debt or “unfunded liability” of the three state pension funds is $500 billion, far greater than reported.

The governor’s budget proposal last May estimated a total unfunded liability of $118 billion for the three state plans: CalPERS $48.6 billion, California State Teachers Retirement System $56 billion and UC Retirement $12.9 billion.

A CalPERS news release said earnings from the pension fund‘s “highly diversified” investments are historically higher than assumed in the Stanford report, which is based on low earnings that “artificially magnify unfunded liabilities.”

When viewed as an average, the rate increase next July tor the 2,043 local CalPERS plans is minimal.

The average employer contribution for miscellaneous plans covering most workers increases from 14.6 percent of pay to 14.9 percent. For the public safety plans covering police and firefighters the increase is from 31.1 percent of pay to 31.2 percent.

Board member George Diehr asked about the “extremes,” 122 plans with a rate increase of more than 5 percent of pay and 41 plans with a rate decrease of more than 5 percent of pay.

Alan Milligan, the CalPERS chief actuary, said the plans where the rate increase is volatile, despite smoothing, tend to be plans with a small number of members. In a small plan, rates can change significantly with the gain or loss of just a few members.

In addition, he said, some of the plans make extra contributions to pay off their “side funds.” When smaller plans with varying assets were placed in a pool to spread risk and avoid rate shock, side funds were created to even out contributions to the pool.

“Anecdotally, it seems like the bulk of the significant reductions are probably due to extra payments being made by employers,” Milligan said.

Board member Henry Jones said he agreed with Oliveira’s praise for the three-year smoothing. He also asked about another part of the smoothing plan that allowed the losses to go well beyond the usual “corridor” limiting the spreading of gains and losses.

Milligan said he expected that the rate increase for the last year of the three-year smoothing, beginning in July 2013, “will not be very difficult for employers at all.” But he said the “remaining unrecognized loss within the original corridor” must still be covered.

He said annual actuarial reports to the local plans will try to show the rates they can expect for the next four years, including examples of what might happen if investment earnings fall short of the 7.75 percent forecast.

“We are trying hard to give employers the information they need so they can manage their budgets,” Milligan said.

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 14 Dec 11

24 Responses to “CalPERS surprise: smaller rate hike for local plans”

  1. jskdn Says:

    Ed- What would the $222.5 billion in assets the fund had early this week require in contribution rates to fully meet the CalPers’ pension obligations if that value weren’t treated to “radical smoothing” calculations and instead used the current assets value and the assumed 7.75% rate of return? How much short is that amount to what would completely fund already existing obligations at that CalPers’ assumed rate of return? Shouldn’t the citizens and taxpayers of this state be privy to that sort of information given that pension policy is something currently on the political table?

  2. Rex The Wonder Dog! Says:

    He also asked about another part of the smoothing plan that allowed the losses to go well beyond the usual “corridor” limiting the spreading of gains and losses.

    In the real world the accounting board would never go along with such a fraud, and that is indeed a fraud.

    When the next meltdown comes don’t be surprised to try to see CalTURDS “smooth” their losses over 50-100-200 years.

  3. john moore Says:

    If a city can handle ‘the truth” about the financial condition of its CalPERS pension plan(2%@55 and 3%@50), it should send CalPERS a “Notice of Intent To Terminate.” Thereafter Calpers will finally tell your city the true condition of the plans—the cost to terminate—and be ready for a number 15-20% higher than the city was led to believe by its’ annual status reports. How do I know that? Because we did it. Our deficit, including the “good” numbers just announced by CalPERS indicates a deficit of about 38%(If the plan should have $100,000,000, it will have about $62,000,000 and it will cost $38,000,000 plus 7% to get out).(I am ignoring Calpers insane arbitrary doubling of that sum; it would never stand up in a republic).The $38,000,000 compounds annually(grows) at the investment rate of 7.75%. So the so-called “excellent” returns on the assets in the plan need to be reduced by the 7,75% not earned on the deficit. Your nose should tell you where the plans are going. ,Pwew.

  4. SkippingDog Says:

    If you leave the plan, john moore, you have to provide all of the future risk premiums now. That’s not evil, underhanded, or unconstitutional.

    As we’ve previously discussed, it’s really nothing more than a due on sale clause. It prevents places like Pacific Grove from exiting the retirement system and shifting their risk obligations to other members.

  5. john moore Says:

    Skipping: The termination fund now stands at almost double that required for previously terminated plans. That shows the risks as they truly exist and have existed . And that is after the worst Calpers decade in history. Stick to facts, not blather.

  6. Captain Says:

    “CalPERS surprise: smaller rate hike for local plans”

    – the only surprise is that CalPERS considers this a surprise.

    “Actuaries told the CalPERS board yesterday that a 13 percent gain in investment earnings the fiscal year following the crash, 2009-10, was better than what CalPERS expects in an average year, 7.75 percent (I HOPE THAT’S NOT THE SURPRISE).

    “Most of the plans are experiencing an increase in rate for the 2012-13 year, although the increases are less than we projected in our prior report,” said actuary Nancy Campbell.”

    While that may be true the cost is still increasing.

    “The local plan rates are not expected to change much in July 2013, when they will reflect a 21.7 percent increase in earnings last fiscal year, the end of the three-year smoothing period.”

    Huh, the rates won’t change much even with the 21.7 percent return? That’s scary! OK, but what about the current FY2011-12? The 237.5 Billion in assets as of July 1, 2011 are now 222.5 Billion in assets, or a loss of 15 billion (about 6.5%). When factoring in the unrealized expected investment gains of the first 5.5 months of this FY, on a prorated basis, the CalPERS loss grows to about 21.5 Billion (or a loss of 10.5%).

    BTW, the 21.7 percent return was based on the 201.1 billion in assets from the previous year. 201.1 Billion TIMES 21.7 percent equals 244.7 Billion. Why were the FY ending assets only 237.5 Billion? Is this an indication that accelerated retirements at the new retirement pension formulas, many of which were retroactive, are draining funds faster than increased investment returns and higher employee contributions can keep up with? Is this what CalPERS was referring to when they mentioned changing future employees to a defined contribution plan would have an adverse impact on the soundness of the current CalPERS plan? And wasn’t that comment what prompted Governor Brown to claim if that’s the case what we have here is a PONZI SCHEME?

    “The new rates set by the actuaries for the local plans drew praise from several California Public Employees Retirement System board members.

    “I’m pleasantly surprised,” said board member J.J. Jelincic. “All the great fear we have heard about how much rates are going up and how we are destroying Western civilization — 75 percent of all the plans the rate change is plus or minus 1 percent. It would suggest that maybe it’s not as forsaken out there as some people would like to project.””

    Nice to see this less than honest group of CalPERS Board members are busy “back slapping” and “high fiveing” each other for deferring debt, misleading the public, lying to the public, and fighting for their right to receive: free trips, elaborate dinners, and 200 dollar bottles of wine from investment advisors that want CalPERS business.

    “The average funded status of the local CalPERS plans is still low. It was 89.6 percent in June 30, 2008, dropping after the stock market crash to 61 percent in June, 2009, and then increasing to 65.8 percent in June 30, 2010.

    Actuaries estimated that the big earnings gain last fiscal year adds 7 to 8 percent, which would push the funded status as of last June 30 to about 73 or 74 percent. But with the stock market in turmoil, the funding level has probably dropped since then.”

    Those numbers are beyond LOW. Unfortunately those numbers are now grossly overstated given CalPERS performance over the past 5.5 months. Those gains have been completely eliminated and then some. Because of the “CalPERS Lag” we are only two years away from, barring an improbable last 6.5 months of this FY, seeing costs increase significantly in July 2014. And that assumes the CalPERS B.O.D. doesn’t do the right thing by reducing the expected rate of return to 7.25%, which would increase the current cost of payroll for public safety by 8%, and 4% for miscellaneous employees, and still be optimistic based on returns over the last 10 years. The CalPERS B.O.D.’s argument will be that cities can’t afford the increased cost so they will leave the discount rate at 7.75%. My argument is that cities already can’t afford the outrageous pensions that are paying retirees millions during retirement and deferring debt by inflating projected rates of returns is what is killing state finances and perpetuating the PONZI SCHEME of which CalPERS is complicit.

    “The average employer contribution for … the public safety plans covering police and firefighters the increase is from 31.1 percent of pay to 31.2 percent.”

    Wow, that sounds good – until you consider the additional costs that will be assessed from the current years CalPERS deficit, the eventual reduction of the CalPERS assumed rate of return and all those additional costs, and then you consider that the NORMAL cost for the CalPERS basic 3@50 plan is “only” 16 percent of payroll for the employer, it looks like we are paying twice, TWO TIMES, the normal cost already. I guess that’s a different way to point out a one-tenth of one percent increase. If we go back ten years or so, we would see that CalPERS was projecting zero costs for local governments for a decade and a DOW of 25,000 as justification for a pension plans that we can’t afford. And now CalPERS wants everyone to believe we can trust their ridiculous projections.

    The pension cost per employee has increased from 16K per 100K of payroll to over 31K per 100 thousand dollars of payroll in just the past 6 years. So, the fact that this articles quotes from CalPERS employee’s sugar coats what’s happening now does little to change the facts

    I trust the outgoing Chief Actuary that said, in his opinion, The CalPERS pension system is unsustainable.

    The CalPERS projections:

    -Zero cost to cities for ten years (until 2009)
    -Dow of 25,000 by 2009

    In 2005 CalPERS changed their smoothing policy from 3 to 15 years because the writing was already on the wall.

    In 2009, or 2010, they increased their smoothing policy to 30 years (amortization), while expanding their corridor to allow for more smoothing by amortizing most of the 2007-09 market losses over 30 years.

    CalPERS continues to claim average pensions are 30K, even though they know the numbers don’t reflect the current reality of career employees/ retirees that are retiring under the enhanced pension formulas and accelerated compensation (past ten years).

    As long as CalPERS wants to make disingenuous claims I’ll be happy to call them out on their BS.

  7. Captain Says:

    “SkippingDog Says:
    December 15, 2011 at 12:01 am

    If you leave the plan, john moore, you have to provide all of the future risk premiums now. That’s not evil, underhanded, or unconstitutional.

    As we’ve previously discussed, it’s really nothing more than a due on sale clause. It prevents places like Pacific Grove from exiting the retirement system and shifting their risk obligations to other members.”

    I agree with you skipping dog. CalPERS new policy to discount pension obligations for seperating cities, at 3.8%, adds significant cost that almost makes it impossible to leave (hence “The Hotel California” reference . I think it’s telling that this new policy was born from the original Stanford study that was using a risk-free rate of 4%. I understand the CalPERS rationale – but the selective use of the numbers is hypocritical, IMO.

  8. Captain Says:

    “john moore Says:
    December 15, 2011 at 12:20 am

    Skipping: The termination fund now stands at almost double that required for previously terminated plans. That shows the risks as they truly exist and have existed . And that is after the worst Calpers decade in history. Stick to facts, not blather.”

    CalPERS want’s it both ways – and that is NOT right.

  9. SkippingDog Says:

    john moore – The termination fund reflects the individual obligations of the contracting agencies at the time they terminated their contracts with CalPERS. Obviously, if PG had terminated its contract two decades ago the accrued obligations and attendant risks would have been lower than they now are.

    It’s not blather to suggest that an entity intent on taking its money and going home must leave enough on the table to fully cover the obligations it has made. If it isn’t going to continue to participate in both the ups and downs of the investment market, the agency can’t take advantage of future investment earnings to pay its obligations. That means the obligations all come due now.

    That’s also the fallacy of demanding that CalPERS and the other pension funds use current market value to determine their long-term actuarial liabilities. Sometimes the current value of assets will be far in excess of the fund’s obligations. Other times, such as during our current economic downturn, the current value of assets won’t cover all future liabilities, so the agency will have to commit more current funds that could be better used elsewhere if people like yourself demonstrated investment patience.

  10. SkippingDog Says:

    Captain – There’s nothing at all wrong with making a participant pay their full obligations before they leave the table, if that is their intent. The continuing participants will be the recipients of investment gains and losses, but usually gains, that are unavailable to those who’ve quit the plan.

    It seems to be far less an example of CalPERS wanting it both ways than of Pacific Grove wanting to take advantage of contribution rates that reflect a long term commitment to the system, even though those rates would not be sufficient to cover all of PG’s current and future obligations with the absolute certainty necessary in a pension system.

  11. Captain Says:

    “Captain – There’s nothing at all wrong with making a participant pay their full obligations before they leave the table, if that is their intent.”

    Skip,

    It isn’t their intent – It is a new CalPERS policy – the “HOTEL CALIFORNIA” POLICY. My point is, actually I made several points if you go back a few posts, that CalPERS is Hypocritical when it comes to applying the risk-free discount rate. Can’t you see that?.

  12. jskdn Says:

    John Moore- Can you make the CalPers estimate of the cost to terminate to your city public so that taxpayers can use it to better understand the potential obligations they might face?

  13. Rex The Wonder Dog! Says:

    Cap, Skippy will never take off his rose colored glasses, he has the gov employee entitlement mentality- and we all know these folks live on another planet.

  14. Captain Says:

    “SkippingDog Says:
    December 15, 2011 at 4:09 am
    Captain – There’s nothing at all wrong with making a participant pay their full obligations before they leave the table, if that is their intent.”

    Skip,

    Can we apply that same logic to public employees that want to retire, if that is their intent? That is, using the logic you want to apply to cities/taxpayers, shouldn’t employee pension payouts be fully funded at a risk-free rate? Or at least a reasonable and responsible discount rate?

    I’m not really expecting you to answer – I’m really just trying to point out the hypocrisy is this one-lane road where the entire burden is heading in the direction of the taxpayers.

  15. Ted Steele, Dean of Students Says:

    LOL– I don’t think Skip has an entitlement mentality at all— he just wants what he bargained for, was promised and worked for—- hmmmm….lol…..sounds like a contract! (lol…but what would I know? I couldn’t be an attorney, judge or legal professional….lol)

  16. Rex The Wonder Dog! Says:

    Teddy, Skip didn’t bargain” for anything, neither did you, you GED Wonder :)

    All you clowns have an “entitlement mentality”.

    As for a risk free rate-it SHOULD BE USED!

    If the fund returns more return then the excess should go right into the fund and allow it to get as high a funding rate as it can. If the fund ever hit a 200% funded level then there could be adjustments made, but when CalTURDS is going to be broke in 20 years using a 7.75% discount rate it is a joke-like you Teddy, Dean Of Dorks.

  17. Rex The Wonder Dog! Says:

    Hey where did Sawz go??????

    Sawz fingers must be tired from posting a billion comments on the Sac Bees website……

  18. Ted Steele, Dean of Students Says:

    LOL— poor poodle!

  19. Rex The Wonder Dog! Says:

    Teddy where did your girlfriend run off to?????

    Tell sawz to come back and chat :)

  20. Ted Steele, Dean of Students Says:

    Classic! All the poodle has is junior high name calling! LOL You go girl!

  21. Rex The Wonder Dog! Says:

    Teddy, you should try Junior Coolege, maybe High School, you are so uneducated :P

  22. Ted Steele, Dean of Students Says:

    The Poodle! Bwahahaha— oh man what a dolt!

  23. Rex The Wonder Dog! Says:

    Teddy, maybe we should start you at Junior High instead of community college : You GED Wonder.

  24. Ted Steele, Dean of Students Says:

    Poor Poodle! Like a child! Lol

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