New criticism of CalPERS: rate hike too small

CalPERS bent the rules to avoid hitting state and local governments with a big rate increase after heavy losses in the stock market crash. Now it’s being criticized for passing some of the cost for today’s workers to future generations.

The president of a new group working on a pension reform initiative, Dan Pellissier, said in a newspaper article last week that a CalPERS decision to remain underfunded is a “Ponzi scheme” and “intergenerational theft,” legal but immoral.

A consultant, Girard Miller, who said he wants to save CalPERS from itself, told a pension “boot camp” sponsored by a reform group last week that paying off unfunded pension debt over 30 years is “kicking the can to our children and to our grandchildren.”

Most of the post-crash concern about CalPERS and other public pension funds has been that their rising costs are not “sustainable,” resulting in a number of proposals or labor agreements to raise employee contributions and give new hires lower pensions.

The new criticism seems to recast the problem as a dilemma:

Make much bigger pension contributions now that could increase pressure for tax increases and crowd out funding for education, health and other programs — or require future generations to pay for government services they did not receive.

The new criticism also may sharpen the focus on the power of the giant California Public Employees Retirement System, and most of the other public pension funds in California, to set an annual pension contribution that government employers must pay.

The powerful pension boards that control one of the few costs that can’t be cut by state and local government elected officials are, like CalPERS, usually dominated by labor representatives and their allies.

But in nearly all cases, the labor-friendly pension boards cannot set the rate paid by employees. What the workers pay toward their own pensions is set through collective bargaining with labor unions.

The government employer pension contribution often is much higher than the employee rate. For most state workers the employer currently contributes 17 percent of pay and the employee 8 percent, changed from a 20-5 split by a recent labor agreement.

The contribution to federal Social Security, by comparison, is split equally between the employer and the employee, each currently providing 6.2 percent of pay.

Pension boards set employer rates by using actuaries, who make estimates of future costs and revenue decades into the future. Actuarial methods can vary, apparently allowing a wide range of flexibility in the high-stakes work.

Two decades ago control of the actuaries was shifted from CalPERS to the governor and Legislator when former Gov. Pete Wilson sought $1.6 billion in CalPERS “surplus” funds to help balance the state budget.

To prevent future “raids,” labor groups got voter approval of an initiative, Proposition 162 in 1992, that greatly strengthened CalPERS and other public pension boards, giving them control of all pension funds and, crucially, the actuaries.

In the last half dozen years, as public pension fund costs have become more controversial, the CalPERS board made several changes aimed at spreading costs over a number of years, avoiding the shock of a sudden major rate increase for employers.

CalPERS adopted a policy in March 2005 of spreading investment gains and losses over 15 years, up from the previous three years and more than double the industry standard for actuarial “smoothing” of three to seven years.

“This plan will help end the whiplash employers experience when contribution rates dramatically increase and decrease year to year,” the CalPERS board president, Rob Feckner, said in a news release.

After losing a quarter of its assets during the 2008 stock market crash, CalPERS briefly expanded the actuarial “corridor” for valuing assets, allowing a three-year phase in of a rate increase to help cover the losses, which will be paid off over 30 years.

In February of last year CalPERS adopted a policy that requires a rate increase for state and school plans if cash flows hamper hitting either of two funding levels by 2042 — an increase of 15 percent or a level of 75 percent.

It’s the failure to push for full funding, the contributions needed to cover 100 percent of future obligations, that is criticized by the head of the group working on a pension reform initiative.

“In setting its state contribution rates, CalPERS brazenly assumes that it does not need to eliminate the pension fund deficits, intentionally leaving unconscionable deficits that range from 13 percent to 25 percent … in 2042,” Pellisier said in a newspaper article.

It’s a violation of the “fiduciary” duty of the CalPERS board to protect pensions promised workers, Pellisier said, comparing it to an “extremely easy payment plan” that only pays off half of a 30-year home mortgage.

A study issued last year by the Pew Center, which found that state pension funds had a “$1 trillion gap” before the full impact of the market crash, said part of the problem is that states “shortchanged their pension plans in both good times and bad.”

A rule of thumb is that pension funding should not drop below 80 percent. A complication is that CalPERS uses the market value of assets, an offset for the radical 15-year smoothing, which tends to be lower than the actuarial value used by most funds.

“Based on our current market value of assets, $231 billion, our funded status is approaching 70 percent,” said Brad Pacheco, a CalPERS spokesman. The CalPERS fund dropped to $160 billion in March 2009 after peaking at $260 billion in the fall of 2007.

The state contribution to CalPERS, $3.3 billion last year and $3.8 billion this fiscal year, is expected in Gov. Brown’s proposed budget to be $4.1 billion next year ($2.4 billion from the deficit-ridden general fund and the rest from special funds).

Another way of looking at CalPERS is a comparison with the California State Teachers Retirement System. It’s a rare California public pension with contribution rates set not by a labor-friendly board, but instead by the Legislature.

The Legislature allowed the CalSTRS funding level to drop to about 30 percent during the 1970s. After a long stock market boom, CalSTRS funding exceeded 100 percent around 2000, when a half dozen bills cut contributions and increased benefits.

Now CalSTRS, about 78 percent funded in June 2009 using the actuarial asset value, needs a contribution increase of $3.8 billion a year to be fully in 30 years. Without a contribution increase, CalSTRS is expected to run out of money in three decades.

At the pension “boot camp” for local government officials, the pension consultant, Miller, said the Governmental Accounting Standards Board is expected to recommend that pension “unfunded liabilities” be paid off in 15 years, not the current 30 years.

“We will be converting a 30-year mortgage into a 15-year mortgage when we finally step up to the realization that we have to pay for these pension promises during the lifetime of those employees before they retire,” said Miller. “Otherwise they are truly kicking the can to our children and to our grandchildren.”

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at Posted 25 Feb 11

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