Archive for December, 2011

CalPERS surprise: smaller rate hike for local plans

December 14, 2011

The rate hike next July for most of the 2,043 local public pension plans in the giant CalPERS system will be lower than expected — an increase of 1 percent of pay or less for four-fifths of them.

The rates reflect the second year of a radical “smoothing” plan that spreads rate increases from huge investment losses over a three-year period.

The CalPERS investment fund dropped 24 percent in fiscal 2008-09 when the stock market crashed. The fund peaked at $260 billion in the fall of 2007, hit bottom at $160 billion in March 2009 and was $222.5 billion early this week.

Actuaries told the CalPERS board yesterday that a 13 percent gain in investment earnings the fiscal year following the crash, 2009-10, was better than what CalPERS expects in an average year, 7.75 percent.

“Most of the plans are experiencing an increase in rate for the 2012-13 year, although the increases are less than we projected in our prior report,” said actuary Nancy Campbell.

“And I may say that overall 80 percent of the local government plans had an increase in employer rates of 1 percent or less, some zero, some less than that,” Campbell said.

The local plan rates are not expected to change much in July 2013, when they will reflect a 21.7 percent increase in earnings last fiscal year, the end of the three-year smoothing period.

The local rates are based on two-year-old investment returns because of the time needed to make actuarial calculations for the 2,043 plans. The new rates for state workers, expected in May, will have a one-year lag reflecting the big earnings last fiscal year.

The state rates are not expected to change much next July. The nonpartisan Legislative’s Analyst Office estimated last month that the state payment to CalPERS, $3.6 billion this year, will increase to $3.8 billion by fiscal 2016-17.

The new rates set by the actuaries for the local plans drew praise from several California Public Employees Retirement System board members.

“I’m pleasantly surprised,” said board member J.J. Jelincic. “All the great fear we have heard about how much rates are going up and how we are destroying Western civilization — 75 percent of all the plans the rate change is plus or minus 1 percent. It would suggest that maybe it’s not as forsaken out there as some people would like to project.”

Member Tony Oliveira, a former Kings County supervisor leaving the board this month, thanked the actuaries and the board for their “courage” in adopting the smoothing plan despite criticism.

He said jobs were saved. As the economic downturn forced cuts in local government budgets, particularly hitting counties who lost state aid for social services, spreading out pension rate hikes allowed time to plan and phase in reductions.

“Because you helped us gain a little more time no one lost a job,” Oliveira said when Kings County cut about 11 or 12 percent of its staff positions. “We did it through attrition.”

The average funded status of the local CalPERS plans is still low. It was 89.6 percent in June 30, 2008, dropping after the stock market crash to 61 percent in June, 2009, and then increasing to 65.8 percent in June 30, 2010.

Actuaries estimated that the big earnings gain last fiscal year adds 7 to 8 percent, which would push the funded status as of last June 30 to about 73 or 74 percent. But with the stock market in turmoil, the funding level has probably dropped since then.

The CalPERS board may revisit a controversy in March, when actuaries are scheduled to make a recommendation about the investment earnings forecast, now 7.75 percent, which critics say is too optimistic.

The actuaries recommended early this year that CalPERS lower the forecast to 7.5 percent, which would increase rates. The CalPERS board decided to leave the forecast unchanged.

Critics contend that the earnings forecast used to offset or “discount” future pension obligations is too optimistic and conceals massive long-term debt.

A leading critic, Joe Nation of the Stanford Institute for Economic Policy Research, issued a new report yesterday contending that the long-term debt or “unfunded liability” of the three state pension funds is $500 billion, far greater than reported.

The governor’s budget proposal last May estimated a total unfunded liability of $118 billion for the three state plans: CalPERS $48.6 billion, California State Teachers Retirement System $56 billion and UC Retirement $12.9 billion.

A CalPERS news release said earnings from the pension fund‘s “highly diversified” investments are historically higher than assumed in the Stanford report, which is based on low earnings that “artificially magnify unfunded liabilities.”

When viewed as an average, the rate increase next July tor the 2,043 local CalPERS plans is minimal.

The average employer contribution for miscellaneous plans covering most workers increases from 14.6 percent of pay to 14.9 percent. For the public safety plans covering police and firefighters the increase is from 31.1 percent of pay to 31.2 percent.

Board member George Diehr asked about the “extremes,” 122 plans with a rate increase of more than 5 percent of pay and 41 plans with a rate decrease of more than 5 percent of pay.

Alan Milligan, the CalPERS chief actuary, said the plans where the rate increase is volatile, despite smoothing, tend to be plans with a small number of members. In a small plan, rates can change significantly with the gain or loss of just a few members.

In addition, he said, some of the plans make extra contributions to pay off their “side funds.” When smaller plans with varying assets were placed in a pool to spread risk and avoid rate shock, side funds were created to even out contributions to the pool.

“Anecdotally, it seems like the bulk of the significant reductions are probably due to extra payments being made by employers,” Milligan said.

Board member Henry Jones said he agreed with Oliveira’s praise for the three-year smoothing. He also asked about another part of the smoothing plan that allowed the losses to go well beyond the usual “corridor” limiting the spreading of gains and losses.

Milligan said he expected that the rate increase for the last year of the three-year smoothing, beginning in July 2013, “will not be very difficult for employers at all.” But he said the “remaining unrecognized loss within the original corridor” must still be covered.

He said annual actuarial reports to the local plans will try to show the rates they can expect for the next four years, including examples of what might happen if investment earnings fall short of the 7.75 percent forecast.

“We are trying hard to give employers the information they need so they can manage their budgets,” Milligan said.

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 14 Dec 11


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