The chief executives of CalPERS and CalSTRS this week advised legislators thinking about pension reform to take a long-term view, rather than over-react to a sharp drop in pension fund levels.
A major cost-cutting overhaul of public pensions urged by a bipartisan watchdog, the Little Hoover Commission, got no support from the two executives, particularly a proposal to test the legality of cutting the unearned pensions of current workers.
More money must be put into the pension funds to cover investment losses from a weak economy and stock market crash, the executives said, but pension costs won’t soar, crushing government budgets and wiping out funding for other programs as some fear.
The CalSTRS executive, Jack Ehnes, said the Hoover proposal diverts attention from workable solutions. He is preparing a written rebuttal, similar to his response to a cost-cutting pension overhaul recommended by the nonpartisan Legislative Analyst.
“You do need to recognize the long-term performance of the plan and not be suckered into these short-term reactions to the market,” Ehnes said. “I think that’s going to lead you astray and force you to make financial decisions that you don’t have to make.”
The California State Teachers Retirement System, unlike most public pension funds in California, cannot set the contribution rates that must be paid by government employers, requiring legislation instead.
In a June 2009 valuation, CalSTRS was 78 percent funded and in need of a $3.8 billion a year contribution increase to be fully funded in 30 years. Last fiscal year CalSTRS received a total of $5.3 billion from teachers, school districts and the state.
Ehnes said CalSTRS is not asking the state to “sign a check” for the full contribution increase. The state is struggling to close a huge budget gap estimated to be about $25 billion.
“That would be impossible,” Ehnes said of full funding now. “We recognize that. But we also recognize that you can right the fund through thoughtful incremental strategies going forward.”
The California Public Employees Retirement System, on the other hand, is the rare state agency that appears before the Legislature not seeking funding, but with the power to give the Legislature a bill that must be paid, the pension contribution rate.
The CaPERS executive, Anne Stausboll, did not directly criticize the Hoover or Legislative Analyst recommendations. She said the proposed pension reforms are big decisions that “affect the livelihood” of state workers.
“So we encourage you . . . look at them in a long-term framework related to a cost-benefit analysis,” she said.
Stausboll showed a joint meeting of the Senate and Assembly public employee retirement committees a chart with the contribution rates CalPERS projects for the state during the next decades.
The average CalPERS rate among the nearly two dozen state bargaining units, now about 21 percent of pay, is expected to increase to 25 percent by 2018, stay there for a decade, and then drop to 20 percent by 2040.
If CalPERS lowers its investment earnings forecast this month, the rate increase would be higher. The chart did not show dollar amounts. But the projected increase appears to be less than $1 billion.
The Department of Finance said the state payment to CalPERS this fiscal year, $3.769 billion ($2.148 billion general fund), is expected to increase to $4.14 billion ($2.384 billion general fund) in the new fiscal year that begins in July.
The general fund, which pays for schools and most state programs, has the $25 billion deficit. The rest of the CalPERS payment would come from special funds such as transportation.
Gov. Brown is proposing that the general fund spend $84.6 billion next year. The state payment to CalSTRS, all from the general fund, is $1.257 billion this year and expected to be $1.35 billion next year.
Providing health care for retired state workers is expected to cost $1.394 billion ($1.358 billion general fund) this year and $1.554 billion ($1.515 billion general fund) next year.
For Social Security that many state workers receive in addition to their pensions, the state expects to pay $632 million ($297 million general fund) next year. The state payment for Medicare is expected to be $217 million ($102 million general fund).
Much of the alarm in the Hoover report is about pension costs in local government, where personnel is a larger part of the budget. An actuary expects pension costs to increase 40 to 80 percent and remain there for decades.
The report said “cities such as Los Angeles, San Diego, San Francisco and San Jose prepare to spend one third of their operating budgets on retirement costs in coming years.”
The Hoover report argues that a common pension reform, higher contributions from workers and lower pensions for new hires, will not produce enough savings to avoid serious budget problems.
But the recommendation that the Legislature establish the groundbreaking legal authority for cutting pensions not yet earned, without reducing pensions for years already served, drew no support at the hearing.
Sen. Alex Padilla, D-Los Angeles, said he did not think it would “happen” this year. Dave Low, chairman of a labor coalition, said protecting collective bargaining, which set the pension benefits, is “an issue that is sacrosanct to us.”
The chairpersons of the retirement committees, Sen. Gloria Negrete McLeod, D-Montclair, and Assemblyman Warren Furutani, D-Long Beach, both thanked the Hoover commission for the report and said there is a need for pension reform.
Furutani, listing a number of clichés used at the Capitol, said he liked “don’t throw the baby out with the bath water.” He said he expects legislators to introduce a wide range of pension reform bills this year.
“I think some times people look at the PERS committee as a sleepy committee that deals with retirees and there is not much action,” said Furutani. “But I’m telling you folks we are not going to be a lounge act off in the saloon area.
“We are going to get to the big room, because this is going to get a lot of attention as far as the whole state of California and the whole country. Everybody is talking about this issue.
“And I think a good sober discussion about it, working together in a bipartisan manner, I think we are going to get there. And everybody is looking to make sure we take care of those employees that should have pensions. Pensions are like apple pie … It’s something we should look at as an opportunity for all people.”
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 4 Mar 11
Calpensions 
March 4, 2011 at 3:24 pm
We should not forget that 3@50 was established by fraud. Calpers represented it had surpluses,when the surpluses claimed were based on an unrealistic rate of return on assets. Granted it had a great record until 3@50,results since then show it to be incompetent. The trend is for results to decline significantly. Taking the “long” view is the path to disaster. Delay in enacting reform will lead to a reduction of benefits already earned,so groups should be careful about what they ask for.It is time for Calpers to man up and admit it cannot achieve returns that will fund 3@50. It should be the leader not the drag on reform.
March 4, 2011 at 6:03 pm
Just quit yer cryin and pay our pensions as promised. The answer is easy…..just cut out all the waste and fraud and make those lame & lazy’s on welfare get a job, and you’ll have plenty of money to pay for pensions that us honest hardworking employees have earned.
March 4, 2011 at 6:07 pm
also, stop the flood of illegal aliens sneaking over here at night and taxing our system and taking american money that doesn’t belong to them….and there will be plenty of money to pay for hard earned pensions. We just need Governors and the people in DC to get some real balls to straighten this mess out. Maybe Neut Gingrich or Huckabee. Obama is worthless….he’s an enabler.
March 4, 2011 at 7:53 pm
Johh, you are committing slander and libel every time you say and print that the 3% at 50 pensions were established through fraud. Those formulas were established in good faith by the respective participating entities, that were led to believe the stock market was riding high, and would continue to go higher. The formula enhancements were approved and adopted by the State Legislature. Foolhardy? Perhaps. But, fraud? “NO”.
March 4, 2011 at 10:59 pm
“In a June 2009 valuation, CalSTRS was 78 percent funded ”
Ed, is the 78% number using the “Acturial Value of Assets” or the “Market Value of Assets”? The AVA numbers only hide the truth about a funds solvency. One CalPERS group in my city has an AVA funding ratio of 78%, but the MVA numbers show that the fund is ONLY 52% funded. These pension fund accounting gimmicks are getting tiresome.
March 5, 2011 at 1:52 am
It’s quite clear that CalSTRS executive, Jack Ehnes is an impediment to progress … and must be thrown out.
March 5, 2011 at 2:00 am
Dear Joe Pensioner, Yes we should take your suggestions and eliminate much of the fraud and excessive costs of illegal integration.
But none of the money saved should go towards your excessive pensions. We need to reduce your benefit level, not fund this excess.
There are PLENTY of VALID uses for this saved money. Your Pension ISN’T one of them !
March 5, 2011 at 8:14 pm
I doubt that “Joe Pensioner” was ever a government employee, or is a current pensioner. No public employee could think that Newt Gringrich or Mike Huckabee could ever provide the answers to our problems.
March 6, 2011 at 11:56 pm
CalTURDS is not 78% funded, it is 46% funded, and going BK very fast;
In California actuarial methods show the Public Employee Retirement Fund (Calpers) at a funding ratio of 87 percent but when private sector market valuation is applied to Calpers, the funding ratio drops to 48 percent, according to the Bigg’s study. Likewise, California teachers’ funding (Calstrs) ratio under current actuarial methods is also 87 percent, as opposed to 46 percent when private sector market valuation is applied. Pension experts say funding levels below 80 percent place the long-term viability of pensions in jeopardy and are nearly impossible to overcome without massive borrowing, painful tax increases, cuts to benefits and increased contributions. Pensions with less than 80 percent of the assets needed to cover present and projected liabilities are considered “endangered,” while those below 65 percent are classified as “critical” under the Pension Protection Act of 2006.
March 6, 2011 at 11:58 pm
Johh, you are committing slander and libel every time you say and print that the 3% at 50 pensions were established through fraud
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Actually Seesaw it is not slander-slander is the spoken, not written, word. And it is not fraud because it is 100% true.
SB400, aka 3%@50, was a fraud put into place by CalTURDS, of which 80% of their board were PUBLIC EMPLOYEE fraudsters. There, sue me 🙂
March 7, 2011 at 12:00 am
Maybe Neut Gingrich
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LOL @ “Neut” Gingrich 🙂
Yes, you are a public employee because only a public trough feeder could be stupid enough to spell his name like that.
😉
March 18, 2011 at 5:51 pm
To the person who says Jack Ehnes out to be thrown out, you’re lost. Read what he is saying–it makes sense. It should make us really nervous that public pensions is the latest wedge issue of politicians that are not known for their sincerity. They’re like dogs with a bone. Our open-and-shut/cause and effect thinking is going to lead us to cripple this great system while forcing public employees to rely defined contribution plans. Thus sending billions in California money to the pockets of Wall Street thieves–the folks that caused much of this problem in the first place. Yes, we need reform, but it has to make sense!