The state payment to CalPERS for this fiscal year was cut by $200 million yesterday, reflecting a savings for the deficit-ridden state from agreements by state workers to pay more toward their pensions.
The CalPERS board approved the lower rate after unions representing two-thirds of the state workforce agreed to new contracts boosting worker contributions an additional 2 to 5 percent of pay, allowing a similar reduction in the state payment.
CalPERS expected the original rate set for the fiscal year beginning last July to boost the annual state payment from $3.3 billion to $3.9 billion. So the $600 million increase would be cut by $200 million.
But CalPERS acknowledges that its estimate of the total payment may be too high, because among other things it assumes payroll growth. The nonpartisan Legislative Analyst’s Office estimated $3.6 billion in a report last month.
The CalPERS board is trying to walk the line between its fiduciary duty to protect pension funding and, after huge investment losses in the stock market crash, avoiding a rate shock for government employers struggling in a deep economic recession.
Public pensions are in a long-running battle with critics. Some want to cut government costs and make pensions more “sustainable.” Others want to switch to the 401(k)-style individual investment plans now common in the private sector.
The CalPERS board adopted a policy in August aimed at quickly giving the state any savings from labor contracts, rather than a delay under the previous policy that would have enabled CalPERS to use some of the savings to reduce its unfunded liability.
Board member J.J. Jelincic reminded his fellow board members of one of the results of including savings from labor contracts approved by legislation in August and October in a rate cut effective Jan. 1.
He said putting the savings from eight or nine months into the last half of the fiscal year, a shorter six-month period, will “artificially depress” the rate, leading to a bigger rate increase next fiscal year.
“We won’t get credit for having given up the extra two months, but we will get criticized for the size of the increase,” Jelincic predicted.
The rate could go even lower if labor unions representing a third of the workforce, including the large California Correctional Peace Officers Association, reach similar agreements with the incoming administration of Governor-elect Jerry Brown.
Whatever happens to the rate this fiscal year a significant increase seems likely next year. CalPERS adopted a modest change in its investment allocations this week that maintains the current level of risk but is expected to lower the earnings forecast.
The current earnings forecast, an average of 7.75 percent a year, may be lowered in February or March to 7.5 percent or possibly 7.25 percent, if CalPERS adds a cushion of “conservatism” used in the past.
Until a new earnings forecast is adopted, the CalPERS chief actuary, Alan Milligan, told the board he is reluctant to speculate about the amount of a state rate increase next year.
One of the charts given to the board shows a blended state contribution rate of about 17 percent of pay, based on a June 2009 valuation of the fund, increasing to around 25 percent of pay in 10 years.
The Legislative Analyst’s report last month expected the state CalPERS payment to increase from $3.6 billion this year to $3.9 billion in fiscal 2015-16. The analyst said its projection is “in contrast” to CalPERS warnings of significantly higher rates to come.
But the analyst also said the rate could be “hundreds of millions” higher than its projection, depending on investment earnings and payroll and program growth. Higher worker contributions are not the main reason the analyst projects slow rate growth.
Under the new contracts, the state rate for most workers is 17.5 percent of pay, down from 19.9 percent in the first half of the fiscal year. The contribution for most workers increased from 5 to 8 percent of pay.
But the amounts vary among the 15 bargaining units. At the high end, for example, the new state rate for the Highway Patrol is 30 percent of pay, down from 32.6 percent, and the patrolman’s contribution is 10 percent of pay, up from 8 percent.
The investment portfolio of the California Public Employees Retirement System, the nation’s largest public pension fund, has been on a roller coaster.
The investment fund peaked at $260 billion in the fall of 2007, dropped to $160 billion in March of last year, and is now back up to $221 billion. Rate increases to replace the losses are being phased in over three years.
For the state, the rates this fiscal year are the first reflecting the stock market crash in the fall of 2008, which resulted in a 24 percent loss for the CalPERS investment portfolio in fiscal 2008-09.
For local governments in CalPERS, the three-year phase in of rates reflecting the loss begins next July. The delay is due to the time needed for actuarial calculations for 2,038 plans.
A report to the board this week shows that 42 percent of the local plans will get a rate increase next year of more than 3 percent of pay. Some of the increase is the result of early retirements and pay raises.
In addition, about 100 of the local government plans increased their pension benefits despite the economic hard times, adding to their rate increases. The report does not identify the plans.
CalPERS board member Tony Oliveira, a Kings County supervisor, estimated last month that the investment losses and lowering the earnings forecast would boost his county’s CalPERS rate 55 percent over the next three years.
At the board meeting this week, Oliveira, the outgoing president of the California State Association of Counties, praised his colleagues for adopting the three-year phase in of the rate increase.
Oliveira said the phase in saved jobs by helping local governments reduce or avoid layoffs. He said Kings County might have had to lay off 5 to 10 percent of its workforce, but instead was able to cut costs by not filling vacancies.
Noting that his term expires next month, Oliveira gave the board some parting advice. He said the greatest risk facing CalPERS during the next three years is federal intervention.
Oliveira pointed to federal legislation introduced this month by three Republican congressmen requiring state and local governments to report their pension debt to the U.S. Treasury using an earnings forecast based on “risk free” bonds, rather than a stock-based portfolio.
U.S. Rep. Devin Nunes, R-Tulare, and others contend that public pension funds use unrealistic earning assumptions to hide massive debt. Under his legislation, governments that failed to make a bond-based debt report could not issue tax-exempt bonds.
Using a bond-based earnings forecast of about 4 percent, Stanford graduate students reported earlier this year that the unfunded liability of California’s three state pension funds is about $500 billion, not the reported $55 billion.
The CalPERS federal lobbyist, Tom Lussier, told the board yesterday that groups are lining up on both sides for a battle over the legislation by Nunes and others. He said he wanted to be “measured” and not lapse into overstatement.
“But there clearly is a school of thought,” said Lussier, “that one of the goals of the new house leadership is to create an environment where state and local governments can in fact file for bankruptcy and can, in effect, use that to undo everything from pension commitments to health care benefits to collective bargaining agreements.”
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 16 Dec 10