CalPERS softens hit on local governments

The CalPERS board approved a plan to ease rate hikes for local governments and schools, a first move to repair a big hole punched in pension funds by the stock market crash.

But the board delayed a decision on a state rate hike until September after Gov. Arnold Schwarzenegger, calling for cost-cutting pension reform, said the plan would shift costs to future generations.

A Long Beach official, Lori Ann Farrell, told the CalPERS board that without the rate “smoothing” plan adopted Wednesday (June 17) her deficit-ridden city’s annual pension payment would jump from $80 million to $120 million in three years.

An official from Pittsburg, Marc Fox, pleaded for a doubling of early rate relief offered by the plan. He said his small San Francisco Bay Area city, upriver from bankrupt Vallejo, will need layoffs to make pension payments, possibly police and firefighters.

The major impact of the “smoothing” plan, at least in the early years, can be seen in an estimate made by the Schwarzenegger administration in a letter sent to the CalPERS board.

In the fiscal year beginning July 2010, a projected state rate increase of $879 million, up from an annual payment of $3.3 billion, would be reduced by smoothing to about $30 million. In 2011, the rate increase would be $464 million.

Schwarzenegger said that delaying a pension contribution increase would be “using our kids’ money” to gamble that investment earnings in the future will grow faster than pension obligations

“Our pension system needs reform,” the governor said, “and without meaningful and sustainable pension reforms that reduce future costs, the state should decline to participate in any effort to shift more costs to our children.”

The governor’s statement prompted the CalPERS chief actuary, Ron Seeling, to meet with the administration’s departments of Finance and Personnel Administration the evening before the board meeting to explain the “smoothing” plan.

“It has become abundantly clear that I have done an inadequate job of explaining to the state employer what our proposal really meant,” Seeling told the CalPERS board Wednesday.

Seeling said a “three-year phase in” of higher contribution rates is followed by a “fixed 30-year amortization” to pay off the losses from the “unique” event of the historic stock market crash.

“Somehow we have gotten the misimpression that the proposal was to defer cost into the future,” he said. “Nothing could be further from the truth.”

Seeling displayed a chart showing that contribution rates under the “smoothing” plan would be lower than the current method for several years, then are higher than the current method for three decades.

He said the “misimpression” was that the higher rate for three decades would be paying for the three years of low rates at the beginning. In fact, he said, the higher rate pays for the stock market losses.

“My recommendation has been from the beginning do not rely on future investment income to recapture that amount,” Seeling said of the losses. “Pay for it — pay for it as a fixed amortization over the next 33 years.”

The California Public Employees Retirement System, the nation’s biggest public pension fund, has had enormous losses. Investments, valued at $260 billion in the fall of 2007, fell to $165 billion last February before climbing to $182 billion this week.

There is a lag before losses are reflected in contribution rates. A $262 million increase in state rates beginning next month, boosting the total payment to $3.3 billion, is based on investments during the fiscal year that ended last June.

State rates will not reflect the stock market crash last fall until July of next year. There is a two-year lag for the 2,000 local retirement systems in CalPERS, whose rates will not reflect the crash until July 2011.

Seeling said the annual actuarial reports that CalPERS will send to local systems between July and October will include an estimate, nearly two years in advance, of the rate increase expected for 2011 under the new smoothing plan.

The CalPERS board approved the smoothing plan for local governments and non-teaching school employees on a split vote. The governor’s Personnel Administration director, Dave Gilb, abstained.

Dan Dunmoyer, a former Schwarzenegger deputy chief of staff who is now an insurance executive, cast the lone “no” vote. The nine “ayes” included representatives of state Treasurer Bill Lockyer and Controller John Chiang, who were opposed last month. (See Calpensions 14 May 09 “CalPERS: smoothing costs, not cutting benefits”)

The CalPERS board voted unanimously to delay action on the smoothing proposal for state rates until September, giving the Schwarzenegger administration more time to study the smoothing plan.

Gilb thanked Seeling for meeting with the administration the previous evening to explain the smoothing plan.

“Last night you presented a couple of other options that perhaps we hadn’t thought about,” Gilb told Seeling during the board meeting. “The state, believe it or not, is still interested in perhaps paying this payment down a little earlier.”

“Whether we accept a 20-year amortization or a 30-year amortization and whatever that means, I think that is a policy decision we want to put before the Department of Finance and the governor,” he said.

Dunmoyer asked Seeling if local government retirement systems would have the option of paying off their debt faster than required under the smoothing plan. Seeling said early payments are accepted under a long-standing CalPERS policy.

Dunmoyer also asked what would happen if the stock market remains stagnant for years to come, an “L-shaped” recovery. The CalPERS actuarial forecasts assume annual average earnings of 7.75 percent, which some think are too optimistic.

Seeling displayed several charts showing a few of the hundreds of computerized what-if scenarios run by CalPERS actuaries. He said the three-decade rates under the smoothing plan are “not much more painful” than the current method.

In addition, he said, the smoothing plan has the advantage of being “more likely to produce a higher funded status” than the current method. He said one optimistic scenario with strong investment returns shows rates could drop to “zero” in a decade or two.

“The bottom line is the proposed method is a better idea than the current method to deal with this anomaly (market crash),” said Seeling. “That’s all I can tell you. That’s my best advice to the board.”

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 18 Jun 09

3 Responses to “CalPERS softens hit on local governments”

  1. Jonny be good Says:

    “In fact, he said, the higher rate pays for the stock market losses.”

    Why not make the plan participants pick up a major portion of this loss. Participants of 401Ks have had to pick up all of their losses.

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