A second CalPERS rate hike for employers

As CalPERS phases in a big rate hike for employers to cover historic investment losses, a second increase is likely to be added because a new study found that workers are living longer, earning more pay and retiring earlier.

A CalPERS committee voted yesterday to recommend that the full board use the new study of decade-long trends among CalPERS members, the first in nearly six years, when setting contribution rates next month.

CalPERS board member Tony Oliveira, a Kings County supervisor and president of the California State Association of Counties, estimated that the new data could add 10 to 12 percent to the contribution increase for some police and firefighter pensions.

Oliveira said when the increase for the new data is added to a contribution increase already scheduled due to investment losses, he thinks the total for some local governments “could be a 40 percent increase in contributions for local safety.”

The “actuarial experience study” of member data from 1997 to 2007, delayed a year because of staff furloughs ordered in the governor’s budget policy, was presented to the benefits committee by Alan Milligan, the CalPERS interim chief actuary.

Ron Seeling, the former chief actuary, retired last month. He warned last year that CalPERS, without a turnaround in investments, could face “unsustainable” increases of 25 percent in contributions for most workers and 40 to 50 percent for police and fire.

To avoid a rate shock, the California Public Employees Retirement System used radical “smoothing” for a three-year phase in of the contribution increases needed because of major investment losses centered in the stock market crash two years ago.

The new rates reflecting the losses are scheduled to begin July 1 for the state and non-teaching school employees. Because of the time needed to prepare about 2,000 actuarial forecasts, the rate increase for local governments begins in July of next year.

Oliveira said that “locals, sooner rather than later, need to understand because even though we did everything we could to kind of soften that blow” the new data will add to their pension costs.

Last year Gov. Arnold Schwarzenegger urged CalPERS to impose a larger contribution increase that would not push investment-loss costs into the future. A big rate hike also would show the need for his proposal to cut pension benefits for new state hires.

But the policy adopted by the CalPERS board in December would increase the state contribution to $3.5 billion, an increase of about $200 million leaving CalPERS with a funding level of about 60 percent of 30-year obligations.

Getting the level of the CalPERS state funds up to 80 percent, an industry rule of thumb for an acceptable minimum, would cost an additional $1 billion. The governor’s plan in January to close a $20 billion state budget had a $200 million CalPERS increase.

Now Schwarzenegger is back this month with a Stanford student study showing a “hidden shortfall” of $500 billion for CalPERS, the California State Teachers Retirement System and the UC Retirement System, far above their stated $100 billion shortfall.

The governor said in his weekly radio address last Saturday that the pension “crisis” is the “single biggest threat to our state’s fiscal health and future.” He urged the Legislature to make pension reform its “top” priority.

“I refuse to pass this problem on to the next governor and the next Legislature,” Schwarzenegger said. “We have got to act.”

The new study of CalPERS members, the first update since 2004, looked at “recent patterns of termination, death, disability, retirement and salary increases” during the decade ending in 2007.

“The one assumption causing the biggest increase in rates for all plans is the proposed change in post-retirement mortality,” Milligan and David Lamoureux, supervising pension actuary, said in a report to the committee.

The average life expectancy of males increased by a full year, while the average for females increased 0.3 years.

At age 50, for example, the study found life expectancy for males increasing from 80.9 to 81.8 years and for females from 84.8 to 85 years. At age 65, males went from 82.9 to 83.9 years, females from 86.1 to 86.4 years.

In what might be a surprise to some, the study found that the life expectancy of police and firefighters is slightly longer than miscellaneous workers. But the difference is “not material,” and the study recommends the same mortality tables for all members.

The study found higher salary increases for members with longer time on the job. A board member representing the state Department of Personnel Administration, Greg Beatty, said that has probably changed due to budget crunches since 2007.

Lamoureux told the board that the average retirement age has dropped a little — from around 60 to 59.5 or 59 for miscellaneous workers and from about 55 to a little more than 54 for police and firefighters.

At the suggestion of board member George Diehr, the staff was directed to update a study done a half dozen years ago that looked at the reasons for retirement. He said CalPERS shouldn’t advocate a retirement age, but members should be well-informed.

“Some people, this is strictly anecdotal, will say, ‘Well, I’m going to get out before the pension goes’ or something like that,” said Diehr. “We need to assure people that’s not going to happen, and with uncertainty maybe the wiser thing is to work longer instead of retiring early.”

Board member Henry Jones said a rate increase may prompt some to blame a state pension benefit increase a decade ago, SB 400 in 1999. He asked the actuaries to comment on the impact of the benefit increase.

As expected, said Milligan, retirements increased after the benefit increase and then dropped, but remained higher than expected. He said the pattern was much the same among workers who did not receive the SB 400 benefit increase.

“We do not believe the current increase in retirement rates is attributable to SB 400,” said Milligan. “It seems to be much more something that is happening in the economy.”

The actuaries said the new demographic data would increase the state contribution for miscellaneous workers 1.4 percent of payroll. The phase in of the investment losses was expected to increase the rate to 17.5 percent in July, up from 16.9 percent this year.

For local governments the new data could boost contribution rates from 1 to 2 percent of payroll for police and firefighters. The potential increases Oliveira mentioned assumed a 2 percent increase.

In June, Milligan said, the actuaries will probably recommend increasing the cost for employees who purchase up to five years of service time to boost their pensions as allowed by AB 719 in 2003.

The employees who purchase what is often called “air time” are supposed to pay the equivalent of what the employer would pay during the period. Oliveira asked if, as he had recently read, the purchases of service time transfer risk to the employer.

“Yes, there is an investment risk, and as a result of the service purchase that risk is transferred to the employer,” Milligan said. “We are required to charge employers for the increase in the liability, which at the present time does not include the risk component. So the risk essentially is transferred to the employer without the member paying for it.”

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 21 Apr 10

12 Responses to “A second CalPERS rate hike for employers”

  1. Touch Love Says:

    There is NOTHING more important to the continued financial viability of California than a SIGNIFICANT reduction in the pension formula (not for PAST) but for FUTURE years of service for CURRENT (yes CURRENT) Civil Servants.

    Absolutely NOTHING !

  2. SAW Says:

    Contrary to what all these columnists would have the public believe, many public entities have been in the process of amending their respective pension plans for the last several years. My former entity amended its pension formulas for new hires beginning in 2005. The formula for safety workers was changed from 3% at 50 to 3% at 55. For miscellaneous workers, the 3% at 60 plan has been capped and, for new hires, reverted to the pre-1999 formula of 2% at 55.

  3. ReilleyFam Says:

    TouchLove, it might be the most important but it will NEVER happen. Your brain cant seem to understand the concept of non-repealable laws that prevent you from doing things you desire. You can want it, it might be the most important, but it wont happen – EVER. You’d get more results by focusing on what you can actually accomplish.

  4. Touch Love Says:

    Dear ReilleyFam,

    And you brain doesn’t seem to understand that with this change the taxpayers will tell you … to to put it bluntly … go F yourselves.

  5. OCO Says:

    What TOUCH lOVE said !

  6. SAW Says:

    Your tax bill probably won’t change, TL. Pension obligations take up a portion of the budget in every locality. Believe it or not, pension obligations take up a total of 2.5% of the State of California’s total budget. The principals involved in each entity will have to go to the table and work on ways to fit what they need into what they already have. A new assessment for the express purpose of paying increased pension obligations would have to go to the voters.

  7. Touch Love Says:

    Dear Saw,

    You, as a recipient of one of these extraordinary pension (a safety one, no less) likely 4-6 times greater (and that AFTER deducting the portion paid for with YOUR contributions) than that of the average Private Sector worker making the SAME pay, having the SAME number of years of service, and retiring at the SAME age …….” A new assessment for the express purpose of paying increased pension obligations …..” ………… would be the icing the cake of outrageous exploitation of taxpayers.

    A MUCH “fairer” option to address any such shortfall would be for these Private sector taxpayers to renege on any “promised” benefits in excess of what THEY receive from THEIR employers, noting that these “negotiated” pensions were agreed to by politicians bought and paid for with union money and election support, with nobody at the table truly representing the TAXPAYERS’ interests.

  8. SAW Says:

    No TL, I do not have a safety pension. The salary for my miscellaneous postion was about the same or maybe a little less than a private sector job with similar duties. My pension contributions came from my employer and myself and were a portion of salary earned for a service that I provided. Those contributions and the CalPERS investments will take care of me for nine years without a penny from you or anyone else. I was old enough when I retired, that you probably won’t have to worry about me after that. In the meantime, my pension funds are being used to feed myself so that noone else has to worry about me and to buy some of the items that are produced in the private sector. The remainder goes to federal and state income taxes. Yes, TL, I am just a tax-paying citizen like you. I am glad that I have elected representives make decisions for me. I would hate to sit at any bargaining table.

  9. OCO Says:

    Believe it or not, pension obligations take up a total of 2.5% of the State of California’s total budget
    And the CA pension-Calpers- is under fudned by $500 billion!!!

    SO THE 2.5% COSTS OF THE TOTAL BUDGET IS PURE NONENSE. You may have gotten away with that lie if the fund was fully funded, but Calpers is at 50%-57% funding-or BK within 30-40 years. Sooner for Calstrs and evey muni fund in the state.

    The City of Los Angeles is paying 20% of their budget towards pension costs-and they are STILL underfunded by hundreds of millions of dollars.

    The cost to fund a 3%@50 pension is MORE than the entire take home pay of the recepient for the entire 30 years they worked. You simply cannot fund a $5 million pension in 30 years with just a small 5% fraction of the total cost being paid in by the employee.

  10. SAW Says:

    The 2.5% comes from a public forum sponsored by CalPERS in Los Angeles on Feb. 12. I am not in the habit of telling lies.

  11. Touch Love Says:

    The 2.5% may be the % of the budget that they ARE PAYING, but is also likely 10% (or eevn less) of what the SHOULD BE paying to bring the system to full funding.

    What they SHOULD BE paying, not what they ARE PAYING is the relevant figure.

    But you knew that …. you just like to (falsely) keep the “spin” alive that these plans aren’t costly.

    You do know they are going to fail … its not if, but when. Hopefully you have saved outside of your pension.

  12. SAW Says:

    CalPERS has enough on hand to pay every annuitant now collecting for the next 20 years without taking in another cent–so don’t think I need to worry about them going broke while I’m still around. It might pain you to learn that, yes, I have saved outside of my pension.

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