As schools and health and welfare programs face deep and painful cuts in the new state budget, spending on retirement costs for state workers will increase 10 percent.
Most retirement costs are locked in by labor contracts, making them untouchable by budget negotiators.
Total state retirement costs will be nearly $5 billion in the new fiscal year beginning July 1 and could increase by “hundreds of millions of dollars” in 2010 because of the stock market crash, says the nonpartisan Legislative Analyst’s Office.
“State retirement costs may skyrocket in future years,” warns a headline in the analyst’s report on Gov. Arnold Schwarzenegger’s proposal to close a general fund budget gap estimated to be $42 billion over the next 17 months.
Unlike most areas of the state budget, the analyst said, contract law backed by court rulings enforces payments to the two big state pension funds, the California Public Employees Retirement System and the California State Teachers Retirement System.
But whether the fastest-growing retirement cost — retiree health care expected to increase 12 percent next year — has the same apparent iron-clad legal protection has not been tested in court.
“While the legal status of the state’s contributions for retiree health and dental benefits has never been litigated, efforts to alter those benefits in order to reduce contributions substantially would likely result in litigation against the state,” said the analyst.
State general fund retirement costs have doubled in the last seven years, going from $2.4 billion in fiscal 2002-03 to an estimated $4.8 billion in the fiscal year that begins in July, said the state Department of Finance.
The lion’s share is for CalPERS, increasing from $760 million to $2 billion during the period. In addition, state payments to CalPERS from non-general fund sources increased from $545 million to $1.3 billion, bringing the total next year to $3.3 billion.
State general fund payments to CalSTRS increased from $980 million to $1.25 billion during the seven-year period. Payments for state retiree health and dental programs more than doubled, going from $560 million to $1.3 billion.
The two state pension funds set aside money to pay for future obligations, creating giant investment portfolios that have lost a third of their value in the market crash. CalPERS had $174 billion in assets last week. CalSTRS had $126 billion on Dec. 31.
But the state has no fund for future retiree health care, an obligation that begins when workers retire as early as ages 50 to 55. A governor’s commission estimated last year that the state has a $48 billion unfunded liability for retiree health care.
The Schwarzenegger administration is proposing that the state begin “prefunding” retiree health care with savings gained by shifting state employees into health plans with lower costs than those currently offered by CalPERS
The proposal not only faces possible opposition from labor unions and CalPERS, but would also only generate an estimated $236 million the first year — far short of the roughly $1.2 billion a year that the commission and LAO have both said is needed
Most state workers pay part of the cost of their health coverage while on the job. The retiree health plan is more generous. The state pays 100 percent of the health care cost for the fully eligible retiree and 90 percent of the health care cost for dependents.
Adding to the potential for skyrocketing state retirement costs is the University of California retirement system, the third largest public pension system in the state. It has enjoyed a remarkable contribution “holiday” for nearly two decades.
The state, UC and employees have made no contributions to the pension fund since 1990. Retirees have been paid from a very successful investment portfolio, apparently created in part by higher contribution rates than needed in previous decades.
Last week, UC regents voted unanimously to restart contributions to the pension system. But as with health care for retired state workers, it’s a modest beginning as the state struggles with a huge budget shortfall.
The regents had wanted $228 million from the state, enough for a contribution of about 9.5 percent of the payroll. The budget proposed by Schwarzenegger contains only $20 million to restart pension contributions.
The plan approved by the regents restarts pension contributions in April 2010, the fourth quarter of next fiscal year. The employer contribution is about 4 percent of the payroll.
The $20 million from the state covers about a third of the cost for the quarter, said Paul Schwartz, a UC spokesman. He said UC will have to find an additional $40 million from other sources such as medical centers and federal contracts and grants.
Employees will contribute 2 percent of payroll — the same amount they have been required to contribute to a 401(k)-style individual investment plan, separate from pensions that guarantee retirees a monthly check.
The regular contribution that UC employees make to their 401(k)-style accounts will be redirected to the pension fund in April 2010. The regent’s plan is to increase the employee contribution to 5 percent, probably in annual increases of 1 percent.
Schwartz said the goal is to reach a contribution split similar to the CalPERS average — 5 percent from employees and 16 to 17 of payroll from the employer. That would be a big increase for the state.
To keep the UC retirement system fully funded, all contributions will have to total $1.3 billion a year, about 20 percent or more of payroll, said the Legislative Analyst. Then the contribution would have to grow annually with inflation and payroll.
CalPERS has warned its 2,000 local government member agencies that the market crash may require a contribution increase of 2 to 5 percent of payroll. If the market does not recover, the state faces a similar increase in its CalPERS contribution in July 2010.
The labor-friendly CalPERS board has the power to set employer contribution rates. But the CalSTRS board lacks that power and must rely on the Legislature to increase contribution rates when needed to keep the fund solvent.
“This usually limits the year-over-year increase in regular state contributions to CalSTRS,” said the Legislative Analyst’s report, “but the 2008-09 investment losses may be so large that state contributions to CalSTRS could rise sharply as well.”
The analyst said a state law requires “additional funding to CalSTRS if the actuarial value of its assets associated with benefit provisions in effect as of 1990 is less than the actuarial liability for those benefits.”
At a CalSTRS meeting last week, board member Beth Rogers said this might be a good time to ask the Legislature to give the CalSTRS board the power to set contribution rates.
“Why don’t you re-empower us and we take all the heat (for the contribution increase)?” Rogers said the board could argue.
“I would like to include that with all our other Hail Mary proposals,” said Tom Sheehy, a chief deputy representing Finance Director Mike Genest on the board. The remark drew a laugh from his fellow board members.
Sheehy later apologized for being blunt and asked to strike the remark from the record. But some board members said they appreciated the candor from Sheehy, a former legislative aide knowledgeable about how the Capitol works.
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 9 Feb 09