Archive for May, 2009

Judges retirement: a costly unfunded plan

May 31, 2009

Decisions made decades ago about the Judges Retirement System saved money then by pushing costs into the future.

Now the future has arrived, and the state must spend more on judges’ pensions as an historic state budget crisis forces cuts in everything from schools to state parks.

Most retirement systems have an investment fund that helps pay for future pension obligations.

But judges who took office before Nov. 9, 1994, are in an unusual pay-as-you-go retirement system with few investments. The employer-employee contributions to the system are relatively small, given the level of the benefits.

So most of the money for pension payments to retirees has to come out of the state general fund, reducing the money available for other programs.

The system’s pension payments are expected to increase from $193 million during the current fiscal year to about $254 million in fiscal 2016-17, an actuarial report said this month.

For the professionals at the California Public Employees Retirement System, who administer the judges plan, the decision by lawmakers to not create an investment plan looks like an expensive failure.

The actuaries who calculate future pension obligations said the judges system owes an estimated $2.9 billion in benefit payments in the years ahead, backed by current assets of $19.3 million.

The CalPERS board president, Rob Feckner, said in a letter to Gov. Arnold Schwarzenegger earlier this month that the shortfall is “a serious matter” that should be corrected by “pre-funding” future payments.

“As an example of this funding deficiency, in the past, the system has been out of funds before the end of the fiscal year, resulting in the delay of benefit payments to members and beneficiaries,” Feckner wrote.

The judges system is a “closed” plan with a dwindling number of members. Judges taking office after Nov. 9, 1994, are in a separate retirement plan, the conventionally funded Judges Retirement System II.

The closed judges system had 610 active members and 1,740 retirees and others receiving pension payments as of June 30, 2008. As the judges retire, contributions to the system will continue to drop.

The current contribution rates are 8 percent of pay from the state and 8 percent from the judges. The contributions are expected to total nearly $13 million in the fiscal year beginning July 1, far short of the $205 million in pension payments next year.

As the judges retire, the actuaries report, total contributions are expected to drop to less than $500,000 in fiscal year 2018, when pension payments are expected to reach $252 million.

The actuarial report shows that the state general fund gave $150 million to the judges retirement system two years ago. The payment from the general fund will continue to grow.

The tendency of lawmakers to duck or delay financial obligations (Schwarzenegger once called it “kicking the can down the alley”) is not a new thing at the Capitol.

A Senate committee analysis of the bill that created the second judges retirement system, SB 65 by former Sen. Dan McCorquodale, D-San Jose in 1994, says the nonpartisan Legislative Analyst recommended making the first system actuarially sound in 1966.

Nothing was done.

The committee analysis said the first “stopgap” general fund payment to the judges retirement system was $300,000 in 1967. The general fund payment reached $28 million by 1990.

The payment jumped to $48 million two years later, providing most of the money for $74 million in pension and survivor benefits payments made in fiscal 1992-93. The unfunded liability in 1994 was estimated to be $1.6 billion.

A McCorquodale bill creating a less expensive second retirement tier for judges was vetoed by former Gov. Pete Wilson in 1992. Judicial groups said the plan did not properly balance cost cutting with the need for a high-quality judiciary.

Former Chief Justice Malcolm Lucas appointed a Select Committee on Judicial Retirement that surveyed 600 California attorneys. Among 18 factors for becoming a judge, the retirement system ranked third after public service and intellectual stimulation.

“With all the pushes and pulls we faced — attracting experienced lawyers, saving the state money, keeping judges on the bench — we believe this plan is the best possible compromise,” the select committee chairman, former Legislative Analyst Alan Post, said in a news release in 1993.

“It includes the policy elements of other public retirement plans, but makes the case for the justifiable exception of a higher-cost plan for judges,” said Post.

The second judges system created by SB 65 has the same main benefit as the first: a maximum of 75 percent of the salary of the last judicial post held, which is 3.75 percent of the final salary for each year served capped at 20 years.

One of the differences is that the maximum is available at age 60 in the first system, but not until age 65 in the second. In addition, retirees in the first system get an increase when the salary of their old judicial post is increased.

The new system offers the option of a “defined contribution” or lump sum payment on retirement, an alternative to the guaranteed monthly payment of the conventional pension system.

On June 30 of last year, the new system had assets valued at $335 million and was 91 percent funded. There were 978 active members and only 15 retirees were receiving payments.

Judges make the same contribution in both systems, 8 percent of pay. The state contribution, fixed at 8 percent in the first system, is set by actuaries in the second system and will increase on July 1 from 20.227 percent to 20.358 percent of pay.

The select committee recommended that the lawmakers adopt a “strategy for the liquidation of the unfunded liability,” presumably an investment fund. But the bill that created the second system did not liquidate the problem in the first system.

To the contrary, the bill in 1994 repealed a deadline, set several years earlier, requiring that the first system be fully funded by 2002. The committee analysis said meeting the deadline would require “annual appropriations of more than $100 million between now and 2002.”

Once again, the lawmakers opted for a pay later plan.

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at Posted 31 May 09

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