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