State and local government employees in California are retiring at a record rate, apparently because of the economic downturn, cutbacks in positions and pay, and an aging workforce.
Retirement applications at CalPERS were up 21 percent during the first seven months of this fiscal year. Through January there were 16, 558 applications, compared to 13,774 during the same period last year.
“We are trending now, for this fiscal year, to far exceed last year,” said Donna Lum, assistant executive officer of the California Public Employees Retirement System, which covers half of the state and local government workers in the state.
The total number of “service” retirements (does not include disability retirements) during the fiscal year that ended last June 30 was 26,745.
In addition, more public employees are considering retirement. CalPERS received 58,532 requests for retirement estimates during the first six months of this year, an 18.6 percent increase from 49,371 during the same period last year.
Lum said the increase is believed to be due to a number of factors: the slumping economy, furloughs that cut pay, layoffs, early retirement incentives and, particularly among state workers, a long-anticipated wave as “baby boomers” reach retirement age.
The CalPERS staff, hit by furloughs three days a month and other assignments, was congratulated by the CalPERS board this week for continuing to make timely responses to the increased retirement workload, with only a few exceptions.
Retirement rates and other workforce trends could affect future pension costs.
The CalPERS board approved a policy this week that could add about $110 million to the annual state payment to CalPERS, which under board action in December already increases $200 million, going from $3.3 billion to $3.5 billion in July.
But the CalPERS chief actuary, Ron Seeling, said changing assumptions about the workforce (such as retirement, salaries and layoffs) could produce a change of more than $100 million in the final contribution rate, either up or down.
The CalPERS actuaries, in a review done every four years, are looking at the assumptions used to calculate contributions, a process expected to be completed by May before the new state rate is adopted.
Some assumptions seem tied to the condition of the economy, but it’s unclear whether that will continue in the future.
“Obviously, the number of retirements that the benefit branch is dealing with may not be indicative of the number of retirements we can expect each and every year in the future,” Seeling told the board.
He said that since a major benefit increase, SB 400, was passed a decade ago, retirement rates have been on a “roller-coaster ride,” down several years after passage of the measure, back up, then down and now up again.
“Salaries, payroll, doubled across plans for the last decade,” Seeling said. “I doubt seriously that that will be able to continue going forward.”
And then, he said, there are assumptions not tied to the economy, such as expected longevity and the mortality rate.
“There has actually been mortality improvement,” he said. “The good news is that we are living longer. The bad news is that we need more money to pay for that.”
In another project, Seeling told the board, the CalPERS actuaries are looking at “air time,” the purchase of up to five years of additional service credit to increase pension payments.
Seeling said the purchase of air time seems to be related not to salaries or the expectation of pay raises, but with plans to retire soon. He gave the example of 55-year-old employees with 25 years of service credit.
“Those that bought five years of air time to go from 20 years of service to 25 retire at twice the rate as people that are 55 with 25 years on the natural,” he said.
Seeling said the CalPERS website suggests that employees consider buying air time as they get ready to retire. He said a better suggestion might be to buy air time while young, age 28 for example, when the cost is low because investments have time to earn.
“We will probably be coming with a recommendation that we need to increase the cost of air time purchases to make that cost neutral as the statute requires,” he said.
The policy adopted by the board this week authorizes an increased annual payment by employers, 1 percent of pay, if a pension fund has a “negative cash flow,” with more spent on benefits each year than received in contributions.
A decade ago CalPERS had a surplus and a funding level of more than 100 percent. But after the historic stock market crash two years ago, the CalPERS funding level plunged to about 60 percent.
To replace the losses and avoid a rate shock, the CalPERS board adopted a plan to phase in a major contribution increase for employers over a three-year period, beginning with a $200 million increase for the state in July.
But the “miscellaneous” fund for most state workers, after 30 years, would only increase from 60 to 65 percent funded. The increased contribution of 1 percent of pay would increase the funding level to 75 percent after 30 years.
That’s still below the 80 percent level some think is the acceptable minimum. The Highway Patrol fund and some of about 40 local funds also are expected to be bolstered by a contribution increase under the new policy.
Board member Priya Mathur asked Seeling why the actuaries chose to seek a 15 percent increase in the funding level, rather than some other percentage.
“There is no magic in that,” Seeling replied. “I think that we are again trying to balance some prudent progress in funding status against making onerous contribution requirements in tough economic times.”
When there is “negative cash flow,” some of the annual investment earnings, assumed to average 7.75 percent a year, must be used to pay benefits, slowing or preventing an increase in the funding level.
One of the issues facing CalPERS is whether its investments will earn the assumed average of 7.75 percent in the years ahead. If not, employer contribution rates will have to be raised even higher.
Gov. Arnold Schwarzenegger’s pension adviser, David Crane, is among those who question whether CalPERS earnings will average 7.75 percent. It’s part of the reason the governor wants to cut costs by lowering pension benefits for new state hires.
Now after big losses in the market crash, CalPERS is taking a year-long look at managing investment risk. How much risk will be needed to earn 7.75 percent is expected to be part of the “asset liability management” review.
“This is obviously going to stir up a lot of public interest,” board president Rob Feckner said as a timeline for the review was discussed this week. “So is there any place in here, in the interests of complete transparency, where we are going to reach out to the public to get their input?”
After a staff member struggled with a reply, Joe Dear, the CalPERS chief investment officer, came to the rescue with a “Yes,” drawing a laugh from the audience.
“Good answer,” said Feckner.
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 19 Feb 10