The CalPERS board yesterday raised the annual state payment for state worker pensions $213 million to a total of $3.7 billion, rejecting Gov. Brown’s request for a bigger increase to avoid a “loan” costing “$145.9 million over the next 20 years.”
Unions asked the board to spread out higher pension costs mainly caused by a lower investment earnings forecast. Paying part of the new rate over two decades, instead of the full amount now, makes an extra $149 million available for worker pay and other programs next fiscal year.
Although the amount of money may be relatively small, compared to the $16 billion state budget deficit revealed this week, the issue is the big one facing public pensions.
Like former Gov. Arnold Schwarzenegger, who also unsuccessfully urged CalPERS to adopt higher state rates, Brown is asking the Legislature to enact cost-cutting pension reforms.
Painful increases in annual employer pension costs might increase public pressure for pension reform. But paying more now to avoid higher costs later also reflects the view that pensions are seriously underfunded.
Most pension funds expect to get about two-thirds of their revenue from investment earnings, not annual employer or employee contributions, and critics say the earnings forecasts are too optimistic.
Alarm grew when a deep economic recession, and a stock market crash in 2008, punched a big hole in pension investment funds. The CalPERS investment portfolio, still well below its peak of $260 million in 2007, was valued at $229.4 billion Tuesday.
CalPERS state worker plans were on average 70 percent funded last June 30 with an “unfunded liability” of $38.5 billion. That’s the shortfall in projected assets needed to pay for pensions over the next 30 years.
The state has a much larger debt for retiree health care promised current state workers over the next 30 years — $62 billion according to an actuarial report done for state Controller John Chiang.
There is no dispute about whether strong investment returns will help close the retiree health care funding gap. Legislation by former Assemblyman Dave Elder, D-Long Beach, created a retiree health care fund two decades ago.
But lawmakers chose not to put money in the fund. Now state worker retiree health care is a pay-as-you-go plan, up more than 60 percent in the last five years and costing the state general fund about $1.5 billion in the current fiscal year ending June 30.
Pension and other retirement costs are still a relatively small part of the current state budget, which is expected to spend $87 billion from the general fund and $34 billion from special funds for health, transportation and other programs.
The state is paying CalPERS $3.5 billion ($1.9 billion general fund), retiree health care $1.5 billion, California State Teachers Retirement System $1.3 billion, Social Security $500 million and Medicare $240 million.
In contrast, cities spend most of their budget on personnel, not on a range of programs like the state, and some cities are already overwhelmed. San Jose spends 20 percent of its general fund on retirement, an argument for a pension reform on its June ballot.
The state could have a much bigger pension problem if CalSTRS was properly funded, not to mention retiree health. Officials estimate that CalSTRS needs an additional $3.25 billion a year to be fully funded in 30 years.
Unlike the California Public Employees Retirement System and most public pensions, CalSTRS lacks the power to set annual contribution rates that must be paid by employers, needing legislation instead.
CalSTRS, about 69 percent funded, has been seeking a rate increase for five years. It’s offered legislators a half dozen scenarios that begin to phase in a rate increase in 2016, only one of which is projected to get CalSTRS to 100 percent funding.
The power of CalPERS to give the governor and the Legislature an annual bill that must be paid can be a friction point. In the dispute over paying off part of the new rate increase over 20 years, board members said they were giving lawmakers an option.
“We voted for the phase-in option to make things less painful for all employers during these difficult economic times,“ said Rob Feckner, the CalPERS board president. “If the Governor feels the state can make the payment in full, then I’ll be happy to have someone come pick up his check today.”
The revised budget proposed by Brown has full funding for the CalPERS rate increase. But as the Democratic-controlled Legislature struggles to close much of the $16 billion deficit, there will be pressure to spend the $149 million on other needs.
Neal Johnson of SEIU Local 1000, the largest state worker union, urged the CalPERS board to give the Legislature the option of phasing in part of the rate increase. He referred to a Brown proposal for a 5 percent pay cut through a work schedule change.
“The 95,000 members we represent, including employees in your own organization as well as the other 120,000 or so state employees, are being asked to take another compensation cut,” Johnson said. “Yet here is another block of money that would be foreclosed on.”
On a 9-to-2 vote the board adopted a plan to pay a third of the rate increase in the new fiscal year and pay off the rest over the following 19 years. Without the phase in, said CalPERS, the $213 million rate increase next year would be $149 million higher.
Brown said in a letter to the CalPERS board yesterday that his Department of Finance estimates that as part of the rate increase is paid off over 20 years, interest payments will add $145.9 million to the total cost.
“In essence, phasing in the change would be the equivalent of the state taking a 20-year loan at 7.5 percent interest — not a prudent decision,” the governor said.
Most of the rate increase is due to a CalPERS board decision in March that lowered the earnings forecast from 7.75 to 7.5 percent a year. The earnings forecast is a key part of the calculation of money expected to be available to pay future pensions.
The action yesterday was the third time in recent years that the CalPERS board has eased employer rate shock by delaying payments. An actuarial “smoothing” policy adopted in 2005 spreads gains and losses over 15 years.
After the investment fund lost 24 percent during the fiscal year that included a stock market crash in 2008, CalPERS phased in a rate increase over three years and treated the huge one-year loss as an isolated event to be paid off over 30 years.
“Your vote today to institute a phase-in period reinforces the same practice of prior years — to not pay our pension bills when due,” Brown told the board.
In closing his brief letter, the governor said: “Given the outlook for long-term investment performance, the system may well choose to lower its return assumption again in the near term. Whether CalPERS implements a phase in or not, it is my intent that the state fully pay for the change in investment return assumption this year.”
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 17 May 12
Calpensions 
May 17, 2012 at 1:56 pm
I have to agre with the board on this one—–smooth it out,,,,,,,,,,,,I think though that the 2/3 figure is light…it is closer to 75%….. Ted
May 17, 2012 at 6:10 pm
The idea that the Union’s politically-motivated and self-interested desires to lower to APPROPRIATE increase to:
(a) make money available for raises, and
(b) lessen the VERY MUCH NEEDED and appropriate pressure for pension reform
is even CONSIDERED by the Board of a Pension Plan whose fiduciary obligations should be limited to accurate Plan administration and safe-keeping / appropriate investing of Plan assets ….. is ABSURD !
The FOX is clearly running the hen-house.
May 17, 2012 at 8:54 pm
Presumably PERS thinks a delay will be more easily paid for when the economy turns around. Not necessarily a bad idea as long as it’s a one-time event. Kind of takes the place of a rainy day fund. But, it does take the pressure off the inevitable reform. For reference, the global historical period of a financially driven crisis is 7 years, which means we have about 3 more until a full recovery is achieved. But I’m afraid we’ll never get there given the fact that so much public debt has to paid back for the rest of our lives. I think everyone would be wise to assume a permanent decrease in our standard of living.
May 17, 2012 at 9:09 pm
Gary– “for the rest of our lives”?
May 17, 2012 at 10:57 pm
Ted …. now that varies quite a bid ….. doesn’t it ?
May 17, 2012 at 11:00 pm
Gery apparently doesn’t seem to understand that we are only here once. A permanent decrease in our standard of living? Oh dear! We should all count ourselves fortunate that we live in this country–paying on the debt, through taxes, is the least of negative things that would affect you, in another country.
May 18, 2012 at 1:46 pm
LOL– good point seesaw!
May 18, 2012 at 2:56 pm
Taxpayers …. you are being suckered by the Public Sector Unions AND the legislators (bought with their campaign contributions).
STOP funding these grossly excessive Plans and DEMAND that the pensions for CURRENT (Not just new) workers be reduced to a level (expressed as a % of final pay) no greater than what the average Private Sector taxpayer gets in retirement benefits. It would take AT LEAST a 50% reduction to get there.
Are they “special” and deserving of greater pensions and better benefits that you, on YOUR dime ?
May 18, 2012 at 6:35 pm
Tiny Lovey–
On behalf off all taxpayers we thank you for the annoucement….although I’m not sure exactly how many taxpayers actually read your proclamation.
May 18, 2012 at 6:46 pm
Ted, In the November elections, you may find a great many more people that you think have wised you to this ripoff,
There will be few if any tax increases, and the initiatives in CA will easily pass. Sure there will be a CoOurt fight. It’s part of the price that needs to be dealt with to end this thevery.
And in the end-game, the cost of the litigation will make the Plan cuts even greatrer as less money will be aailable to support all services.
May 18, 2012 at 11:46 pm
Doesnt matter how much or how little money the state has they will ALWAYS be in the red because ILLEGALS are more important than CITIZENS!!!!
May 19, 2012 at 12:19 am
Tough Love Says: “Ted, In the November elections, you may find a great many more people that you think have wised you to this ripoff,
There will be few if any tax increases, and the initiatives in CA will easily pass. Sure there will be a CoOurt fight. It’s part of the price that needs to be dealt with to end this thevery.
And in the end-game, the cost of the litigation will make the Plan cuts even greatrer as less money will be aailable to support all services.”
TL, I couldn’t agree more. Enough is a enough!
On a side note, CalPERS fiscal year began July 1, 2011, with assets of 239.5 billion. As of yesterdays market close CalPERS assets are 227.6 billion. 43 days to go before CalPERS posts another significant loss. 1 year and 43 days before the state sees another rate increase on top of the already scheduled rate increases. 2 years and 43 days to go before the counties, cities, and special districts see another significant rate increase on top of all the other already scheduled and deferred significant rate increases.
CalPERS can forget about the new 7.5% discount rate. They need to earn 13% just to wrap a tourniquet around the gaping wound.
““We voted for the phase-in option to make things less painful for all employers during these difficult economic times,“ said Rob Feckner, the CalPERS board president. “If the Governor feels the state can make the payment in full, then I’ll be happy to have someone come pick up his check today.””
– the CalPERS Board president ignores the governor’s point and comes across like an arrogant jerk! Jerry Brown has zero control of this mess.
May 19, 2012 at 12:34 am
gery katona Says:”Presumably PERS thinks a delay will be more easily paid for when the economy turns around. Not necessarily a bad idea as long as it’s a one-time event.”
gery, this is hardly a one time event. Nobody, and by that I mean no other pension fund I’m aware of, defers debt as much as CalPERS. Both their smoothing policy and 30 year amortization policy are industry outliers. The layers of debt are stacked so high even calPers doesn’t know what’s on the other side their own version the “Great Wall” of debt. We do know, however, that CalPERS is taking on increased risk to try an recover from their own doing. In other words, they are gambling with taxpayers money.
CalPERS is run by the unions – for the unions, and they know every dollar lost can always be billed to the taxpayers.
May 19, 2012 at 4:58 am
Collective bargaining is between the rank and file and the managment, Captain. There is no collective bargaining going on between CalPERS and the unions. If you want to persist in believing that “fairy tale”, so be it. I suppose CalPERS was also responsible for the troubles of JPMorgan Chase too, and for the whole world’s financial collapse in 2008–sure enough, that was all CalPERS’s fault. Three of the 13 CalPERS Board members are union connected, outside of their Board duties–so that makes the whole CalPERS Board union controlled–for sure.
May 21, 2012 at 3:44 am
well said Seesaw—- Cap and lovey—- your doom and gloom is dull……230bil going strong——
May 21, 2012 at 5:38 am
Ted, $230 Billion … and still 40% underfunded.
May 22, 2012 at 4:01 am
Lovey– Gee I had no idea……….lol——-remember it’s only underfunded in the strict sense that if everyone retired all at once—- won’t happen———nite
May 22, 2012 at 2:07 pm
No Ted, It’s underfunded TODAY by the 40% …… under the currently assumed retirement patterns.
May 22, 2012 at 6:47 pm
wrong. Sorry. The whole term underfunded is a concept that relates to the scenario if all had to be paid today what it would take. All don’t. There is 230 bil in the fund. It will take decades to deplete it all the while new contributions come in, new lower tiers are added, and in time the investment pool earns.
This aint my first rodeo.
May 22, 2012 at 8:25 pm
No Ted, the calculation is EXACTLY as follows:
Actuarially smoothed Plan assets divided by the discounted value (using the assumed earnings rate on asset investments) of Plan liabilities where those Plan liabilities are the assumed future cash outflows … incorporating the assumed amount and timing of of those cash outflows.
The shortfall is about 40% … with no assumption that that would only be true if all retired today.
Bottom line … yes, the Plan won’t run out of funds soon, but barring a miracle, it is almost certain to do, so leaving Plan members with a Plan with no assets …… and at the mercy of taxpayers to pay benefits on a pay-as-you-go-basis from annual revenue.
I’ve got a bridge to sell you if you believe Taxpayers will go for that.
But not to worry … the old fogies like you (that won’t materially compromise) will keep taking their fully promised (excessive and underfunded) pensions helping to run the assets to zero, leaving your younger, shorter service “brothers” in a lurch.
August 14, 2012 at 9:30 pm
Cost of DB versus DC Retirement
August 14, 2012 at 9:33 pm
Cost of DB versus DC Retirement