The CalPERS board yesterday approved a plan that avoids a $1.2 billion increase in pension payments sought by the Schwarzenegger administration, which opponents suggested was an attempt to boost support for a pension reform initiative.
But the rate “smoothing” plan to begin replacing huge stock market-crash losses with a more manageable $200 million increase next year would leave CalPERS with an unusually low “funded ratio” after 30 years.
So CalPERS actuaries were directed to return with a plan in February for an additional small contribution increase that would improve the funding for the state and about 100 local government pension plans with similar cash-flow problems.
Some think Gov. Arnold Schwarzenegger may further dramatize the problem by proposing a new state budget next month that, for the first time, begins prefunding health care promised retired state workers, an estimated $48 billion over the next 30 years.
The state budget, in the red most of this decade, is estimated by the nonpartisan Legislative Analyst to have a $21 billion shortfall during the next 18 months, despite deep spending cuts this year and tax increases originally expected to yield $12 billion.
The opposition likely in a Democratic-controlled Legislature to a big voluntary pension payment proposed by a Republican governor in his last year in office was expressed by CalPERS board member, Tony Oliveira, a Schwarzenegger appointee.
Oliveira, a Kings County supervisor and incoming president of the California State Association of Counties, said the state has “borrowed or taken or just not funded” local government resources and programs to help cover past deficits.
“I can’t speak strongly enough how I am against this,” Oliveira said of the $1.2 billion contribution increase backed by the administration.
The president of a group that is trying to put an initiative on the ballot that would cut pension benefits for new state and local government hires said the reform would save enough to offset an increase in the state pension payment.
“Your staff is completing an analysis of the pension savings that I think you should look at before you go into a smoothing policy,” Marcia Fritz, president of the California Foundation for Fiscal Responsibility, told the CalPERS board.
She said Texas, a “non-union” state, has cut pension benefits and New York, a state with strong public employee unions, has cut pension befits for new hires. Many other states, she said, have suspended cost-of-living increases for retirees.
“Pension reform needs to happen, and it needs to happen now,” said Fritz. “Other states are doing it. We are the only one that’s not looking at the other side of the equation.”
Fritz said she thinks the vote to approve the smoothing methodology violated the legal “fiduciary” obligation of the CalPERS board to protect retirees because the funded ratio will be too low.
The CalPERS board, which has the power to set contribution rates, approved similar smoothing in June for the 2,000 local governments and schools districts served by the giant system. The state asked for more time to consider a larger contribution increase.
The lone “no” vote yesterday (Dec. 16) on the 13-member CalPERS board, Greg Beatty, representing Schwarzenegger’s personnel department, asked the CalPERS attorney if the fiduciary obligation was being violated.
“I think that question depends in part on the motivation,” replied Peter Mixon, the CalPERS general counsel. “There is a duty of loyalty as part of fiduciary duties, and the duty of loyalty extends to the members and beneficiaries of the system.
“So if the motivation of that action is to benefit the state as employer, as opposed to the members and beneficiaries of the system, then I think clearly fiduciary duty issues are raised.”
Beatty said the “primary reason” for the administration push for a bigger contribution “has nothing to do with the state’s ‘motivation,’’ but instead the need for a better funded ratio.
A decade ago when CalPERS sponsored a major benefit increase, SB 400 in 1999, the system had a surplus in a booming stock market and a funded ratio well above 100 percent.
After the stock market crash last year, the largest CalPERS state worker fund, for employees in the general classification “miscellaneous,” has a funded ratio of 60.8 percent.
The smoothing plan adopted (see agenda item 15) by the CalPERS board, which will phase in the impact of the market crash over three years, would increase the state contribution from the current $3.3 billion to $3.5 billion next July.
After 30 years, assuming investments annually earn 7.75 percent (which critics think is overly optimistic), the smoothing plan would increase the miscellaneous funded ratio to 64.9 percent.
The alternative advocated by the administration would increase the state contribution from $3.3 billion to $4.5 billion next year and, after 30 years, increase the miscellaneous funded ratio to 81.8 percent.
Some think the funded ratio for public pension funds should not drop below 80 percent. But, for example, the funded ratio of the California State Teachers Retirement System was about 30 percent during the 1970s.
The booming stock market of the 1990s helped push CalSTRS funding above 100 percent briefly, before falling in the early part of this decade and plunging after the crash last fall.
CalSTRS, unlike CalPERS, cannot set its own contribution rates and has urged the Legislature, when the funded ratio fell to only 87 percent, to come up with a plan to restore full funding.
“There is nothing wrong with being 65 percent funded,” Ron Seeling, the CalPERS chief actuary told his board yesterday. “But it makes me a little bit uneasy, and I’m sure it makes you a little uneasy that after 30 years you have only improved your funding status by 5 percent.”
Seeling said he will return Feb. 10 with a proposal for an additional contribution increase for the state, and about 100 of the 2,000 local plans in CalPERS, because benefit payments in those funds are well above contribution totals, cutting into earnings.
Next fiscal year the state miscellaneous fund is expected to pay $3.8 billion in benefits and receive $2.3 billion in employer-employee contributions, using $1.5 billion in investment returns to pay all the benefits.
Seeling said there is “no danger whatsoever of not being able to pay benefits — please don’t misunderstand me,” but “cash flow” in the funds should be improved.
Fritz said she serves on a Governmental Accounting Standards Board task force that may issue a rule next July requiring public pension funds to value their assets on a market cycle of five to six years, rather than over a 30-year amortization period.
If that happens, she said, the “easy payment plan” approved by the CalPERS board will result in increased liabilities and a lower bond rating. The big fund has already lost its top bond rating.
Moody’s lowered the bond rating of CalPERS and CalSTRS last week from “Aaa” three notches to “Aa3,” saying market losses during the last two fiscal years will “exacerbate long-term projected actuarial funding shortfalls,” the Wall Street Journal reported.
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 17 Dec 09