CalPERS: smoothing costs, not cutting benefits

The CalPERS board is moving to prevent the stock market crash from forcing a sharp increase in state and local government payments to public employee pension systems.

A new rate-smoothing plan received preliminary approval Wednesday (May 13) on a split vote, 6 to 4, as some opponents pushed for a look at benefit reductions and others worried about delaying contributions.

State Treasurer Bill Lockyer’s representative said CalPERS should consider cost-cutting reforms such as boosting retirement ages and increasing employee contributions. (See Steve Coony’s remarks in the comments section.)

A representative of state Controller John Chiang agreed, saying the comments of the treasurer’s office are “one big component of what we have to look at” but there are “other things related to possible reform.”

The debate touched on a key issue for public employee retirement systems: Will monthly pension payments guaranteed for life, now increasingly rare in the private sector, eat up too much of government budgets and trigger a public backlash?

The board approved a first reading of a “smoothing” proposal that would avoid a major rate shock by phasing in the impact of the stock market crash over three years.

The motion by member Priya Mathur said the reforms mentioned by the treasurer’s office are a separate issue that could be considered by the board “at some point in the future.”

In other action, the board unanimously approved a $262 million annual pension contribution increase for the state beginning July 1, bringing the state’s total payment to CalPERS to $3.3 billion next fiscal year.

The board of the California Public Employees Retirement System also added $115 million to the annual pension payment by schools for non-teaching employees on July 1, bringing the total to more than $1 billion.

Nearly all of the $262 million state contribution increase is the result of a larger payroll, boosted by higher salaries and the growing number of employees in the fiscal year that ended last June 30.

Because of a lag in calculating contributions, the impact of the stock market crash last fall does not hit the rates for the state and schools until July of next year. The rates for 2,000 local government retirement plans in CalPERS are not hit until July 2011.

Giving employers advance warning, CalPERS said last October that after the lag crash-driven rates could jump 2 to 5 percent of payroll, if for example investment losses were 20 percent during the current fiscal year that ends June 30.

How much of an increase is that? The actuaries have provided no dollar figures.

But the state’s contribution to CalPERS for the largest group of employees, “miscellaneous,” will be $1.7 billion of the total $3.3 billion state contribution next year, about 17 percent of payroll.

The state contribution for groups with more generous pensions are higher. For the California Highway Patrol it’s 28 percent of payroll or $192 million next year. Another indicator: the $262 million increase in July is said to be less than 0.4 percent of payroll.

So, whatever the dollar amount, a rate increase of 2 to 5 percent of payroll (or much higher if the investment loss this fiscal year is more than 20 percent) would be a shock for governments struggling to balance budgets during a deep recession.

What the split vote of the CalPERS board approved is a modification of a rate “smoothing” plan adopted in 2005 that would allow a broader gap between the actuarial and market value of assets and change the amortization period for paying debt.

Instead of an increase of 2 to 5 percent of payroll, the new plan would result in an increase of 0.4 percent to 0.9 percent, if the investment loss is 20 percent this fiscal year. If the loss is 30 percent, the increase would be much higher, 1.6 to 4 percent.

“It is important to note that unless the investment markets recover, delaying increases in contribution rates only means that more money will have to be collected in the future,” said the proposal from CalPERS actuaries Ron Seeling and David Lamoureux.

Some board members were concerned by a chart showing that the new plan, after several years of lower rates, could result in higher rates for decades (if a 25 percent loss this year is followed afterward by the CalPERS assumed annual return of 7.75 percent).

A Lockyer aide, Steve Coony, said the treasurer’s office is not ready to support contribution delays that move rates to a “high plateau” later. He said CalPERS has an opportunity to seek “lasting benefit” for the system, not just ride out the economic storm for a few years.

Coony said the downturn could have a long-term effect on government through real estate values, property taxes and other factors. “One of the things we have to consider is the possibility that we will have much smaller payrolls,” he said.

At a board meeting in July, he said, the CalPERS board could discuss issues such as appropriate retirement ages, as people live longer, and the mix of employer-employee pension contributions.

Coony said the retirement system could be matched to the needs of employees “who are going to be here 20 years from now and hopefully have a retirement system, and not succumb to political opposition to a defined benefit system.”

A “defined benefit” is a monthly pension payment for life. To control costs, some advocate a “defined contribution” 401(k)-style individual investment plan, increasingly common in the private sector.

“I agree with the treasurer office’s comment,” said an aide to Controller Chiang, Terry McGuire. He raised other issues, including the potential for another year in which the stock market drops 25 to 30 percent.

The split vote on the new smoothing policy did not seem to follow party or ideological lines. The treasurer and controller, whose representatives voted “no,” are both Democrats.

One of the “no” votes came from George Diehr, elected by state employees. He was concerned that delaying contributions might affect the financial health of the retirement system.

Another “no” came from Greg Beatty, representing Dave Gilb, personnel administration director for the Republican Schwarzenegger administration.

Like Diehr, Beatty had “fiduciary” concerns about delaying contributions as well as well as reservations about ignoring an admonition by the governor’s pension commission to avoid “smoothing” rates for short-term gain.

Among the six “yes” votes were two Schwarzenegger appointees, Pat Clarey, and Tony Oliveira, a Kings County supervisor and vice president of the California State Association of Counties.

Without the new smoothing plan, said Oliveira, “In my county we have to do away with about 12 percent of all positions to pay for the employer contributions that will hit us in 2011.”

The board president, Rob Feckner, did not vote. Absent were Louis Moret, appointed by Democratic legislative leaders, and Dan Dunmoyer, recently appointed by Schwarzenegger.

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 14 May 09

8 Responses to “CalPERS: smoothing costs, not cutting benefits”

  1. bull Says:

    The disparity between Public Sector and Private Sector Pensions has grown enormously in recent years. Given the MUCH MUCH higher benefits in the Public Sector, EVERYONE “knows” that …. with Private Sector workers paying for (via their TAXES) the largest share of Public Sector pensions ….. that this situation is both unfair as well as financially unsustainable.

    The NEED to do something (i.e., REDUCE benefits for CURRENT as well as new employees) has been clear for som time. If the Calipers Board will not do NOW, in the worst or the worst economic envoronment, WHEN WILL THEY ?

    Deferring contributions is the cowards awnser. If you don’t have the “stomach” for te political/union fallout to address NECESSARY issues, move on and let those with more backbone take your place.

  2. Steve Coony Says:

    Neither I nor Treasurer Bill Lockyer are advocating increased employee contributions to pension plans, but we are saying that it matters a lot to California’s public workers when employer rates go up. Big increases in state and local employer costs will inevitably turn up the heat to increase the amount of the pension contribution now deducted from the paychecks of California public workers. Those deductions are currently limited by statutes and collective bargaining agreements, but they are subject to change. The more direct and immediate impact of higher employer rates on public workers is the reduction in the amount of money available to pay employee compensation (not to mention the good jobs and important services they provide for Californians). With state and local budgets already under enormous pressure from the global recession, and with a long wait in store for California government before economic recovery helps replenish their hard-hit revenues, big pension rate hikes can only mean fewer jobs and skimpier paychecks.

    That’s why we think that before we get locked in to employer rates we may have to live with for decades to come, we ought to make very sure that the system and benefits, for which we are requiring employers and workers — and taxpayers — to ante up, are a good fit for the next couple of generations of workers who will ultimately use those benefits. And we should be sure that neither employers nor workers pay more than what is necessary to get the system workers need and want. For example, Californians are living and working longer these days, and small changes in retirement age eligibility for future workers can have a surprisingly healthy impact on the total cost of the pension plans, starting as soon as adopted.

    We strongly support our defined benefit pension plans: They provide a decent retirement income for workers after a lifetime of service, and they are funded through a smart and cost-effective combination of employer and employee contributions and investment income. Plans like these ought to be available to every working American. But retirement plans which span and service multiple generations of workers and retirees need to be reviewed from time to time to make sure the benefits stay relevant to the people they serve and the kinds of jobs they do.

    Now is the time to begin that discussion for California’s public pension plans so that we are in a strong position to help lead the upcoming national discussion on retirement security.

  3. bull Says:

    Dear Steve Coony: Nonsense ! There is simply NO REASON for CURRENT Public Sector workers to continue to accrue (FUTURE year of service) benefits based on a continuation of the CURRENT (excessively rich) benefit formulas when the Vast majority of Private Sector workers have no pensions benefits even REMOTELY comparable in breadth or richness, yet are FORCED (via their TAXES) to PAY FOR the bulk of the Public Sectors’ benefits.

    Public Sector benefits (for FUTURE years of service) need to be reduced for CURRENT …. not just new employees.

  4. Jeff Says:

    Steve Coony wrote:

    ” And we should be sure that neither employers nor workers pay more than what is necessary to get the system workers need and want.”

    I notice you didn’t mention taxpayers even thought the employer and workers in question get their money from them. But that aside, the problem is there is no way to know for sure what’s the right amount to pay in to meet future obligations. Certainly the recent events are ample evidence of that. Furthermore, just like in this case, the political path of least resistance will always be to underestimate costs. That’s why defined benefit pensions are wrong. The perverse incentives are unavoidable and inevitably lead to borrowing from the future. Defined benefit systems are dependent the ability to stick someone else with the responsibility to pay up if the return assumptions turn out wrong.

    Defined pension contributions are the way to go. Costs are in the present and can’t be avoided or hidden. Of course the monumental mistake in the private sector was an individual accounts system that is inefficient, requires decisions most people are ill equipped to make and results in vastly varying returns. People need to be part of large, professionally managed pension systems where risks are shared and returns are smoothed to avoid the random luck of market timing. Furthermore large perpetual pension investment portfolios would need to be managed for the kind of long-term horizon that has been so lacking in our capital markets, which has proven incredibly costly.

    This system ought to be universal. And it shouldn’t be employer dependent. It should follow you wherever you work. The tax consequences should not be different from citizen to citizen. No more carve outs for special interests. And what people get from their contribution would be a result of how our economy does. That ties everyone to long-term performance of the economy, a good incentive to have in a Democracy.

    Government employees should not be a privileged economic class. Their compensation ought to track the private sector. Government unions should be banned. Labor trusts that operate in monopolies are simply an unworkable construct. Add in the vast political power that they has come to bear and it’s simply a corrupt system.

  5. Bull Says:

    Jeff ……… You said all of the PERFECTLY !

    And let me add …… To avoid all the self-dealing, legislators at ALL levels of government should have term limits and NEVER participate in Civil Service pension plans.

  6. Leonard Says:

    You know what enhances anyone’s argument? All CAPS and ellipses… If it works for Junior High love letters clearly it should work for thoughtful discourse on public pension plans.

    There is no less sophisticated and ignorant an idea than the one that states that because someone else does not have a benefit, no one should have it. Realistically isn’t that the sort of rationalization employed by most socialist countries?

  7. bull Says:

    Please tell me Mr. Leonard ….. which office/branch of this Civil Service Gravy Train do you work for ?

    Clearly you wish the status quo to continue (self interest perhaps?).

    It is not just that Group A does not have what Group B has …….. its that while Group A does not have what group B has, Group A is also forced to pay for what Group B gets.

    In case you couldn’t figure it out B=Civil Servants and A =Everyone else.

  8. Leonard Says:

    I feel your response would have been more effective if you’d capitalized EVERYONE ELSE…

    But that is just ONE man’s opinion……………..

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