CalPERS rate hike: governor wins, cities lose

A divided CalPERS board yesterday approved a faster rate hike for the state urged by Gov. Brown, but opposed by unions. A proposal to give struggling cities the option of more time to phase in the rate hike, seven years instead of five, was rejected.

The rate hike to cover the cost of retirees living longer is the third in the last two years, following a lower earnings forecast and a more conservative actuarial method. Many local government rates could increase roughly 50 percent by 2020.

An underfunded CalPERS has about 70 percent of the projected assets needed to pay promised pensions. There were big pension increases and deep employer rate cuts in good times, then huge investment losses during the bad times last decade.

“The board today took important and responsible action to strengthen California’s pension system,” Brown said in a brief news release after the CalPERS board voted 7-to-4 to begin a three-year phase in of the state rate hike July 1.

The California Public Employees Retirement System staff, following board policy, had recommended that the rate hike be delayed until July 2016 and then phased in over five years to pay off the increased longevity projection over 20 years.

Brown sent the CalPERS board a letter two weeks ago urging a three-year phase in of an immediate state rate hike. He said the “unacceptable” delay recommended by staff would cost an estimated $3.7 billion more over the next 20 years.

The governor said the longevity rate hike, when fully phased in, will cost the state an additional $1.2 billion a year, up from the current $3.8 billion. He said the debt or “unfunded liability” for state pensions will increase from $45 billion to $54 billion.

As noted during debate yesterday, the state has the option of paying more than the rate set by the CalPERS board. At Brown’s direction, the state was said to have paid an unspecified amount more than the CalPERS rate the last two years.

Now with a rate set by the CalPERS board, the governor will not have to persuade the Legislature to make a higher contribution. A projected $5.6 billion state budget reserve next year will create pressure for reversing recession cuts and possibly pay hikes.

“I do not think we have an obligation to help the governor jam the Legislature,” said CalPERS board member J.J. Jelincic. “If the state has extra money, the fund across the river (California State Teachers Retirement System) is actually in far worse shape.”

CalSTRS lacks the power to set employer rates, needing legislation instead. Assembly Speaker John Perez, D-Los Angeles, wants a rate solution this year, sooner than Brown expected next year. An Assembly committee hearing is scheduled today.

State Controller John Chiang’s representative on the CalPERS board, Terry McGuire, said his office supports the rate speedup, but hopes the state will begin pre-funding state worker retiree health, which has an unfunded liability of $62 billion.

Three public employee union representatives spoke against the motion for a speedup of the state rate hike made by board member Steve Coony of state Treasurer Bill Lockyer’s office.

“We have never viewed the CalPERS board as an extension of the executive branch,” said Christy Bouma, a lobbyist for California Professional Firefighters. She said separate standards for the state and local governments is “inappropriate” and an “unprecedented path” for the CalPERS board.

“If you impose a separate, more stringent standard on the state,“ said Terry Brennand of SEIU California, “you also impose it on some agencies for which the governor is not the employer, namely CSU. They would have no opportunity to meet with their board and deal with this directly.”

Voting 8-to-3, the CalPERS board approved a staff recommendation that the longevity rate hike for local governments and schools begin in July 2016 with a five-year phase in to pay off the projected cost over 20 years.

Coony said the treasurer’s office considered proposing a three-year phase in for local governments, but concluded that some of the struggling local governments are less “resilient” than the state.

The League of California Cities, after a survey of its members, urged the board to give local governments, some still in serious financial trouble, the option of “slight breathing room” with a seven-year phase in of the rate hike.

“I think we all want to make sure that cities survive the next 10 years as we go through this fiscal challenge,” said Chris McKenzie, League executive director.

Leyne Milstein, Sacramento financial officer, said the city might consider a seven-year phase in. After cutting 1,200 positions in the last six years, the longevity rate hike is expected in the fifth year to cost $12 million, the equivalent of 102 full-time positions.

Board members said CalPERS calculations show rates with a seven-year phase in would not be much lower than five-year rates, and starting a seven-year phase in two years from now would mean delaying the full rate increase for nearly a decade.

CalPERS is delaying the start of the local government rate hike until 2016 for two reasons: 1) Actuaries must calculate rates for more than 2,000 separate plans. 2) Issuing a projected rate hike a year before it takes effect allows employers time for planning.

The League survey found that the longevity rate hike, proposed early last month, would boost city spending on pensions from 0.1 to 5.9 percent of the general fund, with a low end median of 1.3 percent and a high-end median of 2.5 percent.

The total general fund spending on pensions was not collected. A governor’s pension commission said in 2008 the average local government pension cost was about 4 percent of the general fund.

When voters in San Diego and San Jose overwhelmingly approved pension reform measures two years ago, the two cities were spending 20 percent or more of their general funds on retirement costs.

Ron Bates of Pico Rivera, chairman of the League city manager pension reform committee, said he made a presentation two weeks ago to the Independent Cities Association (48 cities in Southern California) where pension costs were discussed.

He said “it’s clear on average” that by the end of the decade miscellaneous pension rates for miscellaneous employees will be about 35 percent of pay and rates for police and firefighters about 70 percent of pay.

“This is going to put a lot of strain on cities,” Bates said.

In the 7-to-4 vote to speed up the state rate hike, voting “yes” were Howard Schwartz, Terry McGuire, Richard Costigan, George Diehr, Henry Jones, Steve Coony and Bill Slaton.

Voting “no” were Priya Mathur, Michael Bilbrey, J.J. Jelincic and Ron Lind. The board president, Rob Feckner, usually votes only if there is a tie. One seat is vacant, a governor’s appointee representing the insurance industry.

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at Calpensions.com. Posted 19 Feb 14

5 Responses to “CalPERS rate hike: governor wins, cities lose”

  1. Michael Coleman Says:

    “Cities lose” really mischaracterizes it I think. In the League’s surveys, 84% of cities wanted the board to stay with the 20yr amortization rather than the less aggressive and more costly 30yr and a majority of cities preferred the 5yr phase-in rather than the 7. As noted by everyone the cost difference between the 5 and 7 is not substantial. Locals simply requested this small flexibility for more financially stessed agencies (as self-determined). The choice by the board not to offer this option is a minor sidebar in the more important issue that local governments, the Governor, CalPERS staff and now the board all agree upon.

  2. Tim Brown Says:

    Anybody watching the situation for the past five years knows that PERs assumptions were ludicrous and would result in a crisis. The only real question was where the burdens would fall. These increases will force our city will go bankrupt or merge with another city that has a stronger sales tax base. So much for the benefits of local control. Unless they have a shopping center there will be no more small cities. But what officials have done is ignore the problem of unrealistic investment assumptions / poor management and pushed the crisis down the road for a few years. At some point the state is going to have to offer a major bail out or pensioners are going to have to take a haircut. End of story. No choice. No other scapegoats.

  3. Captain Says:

    Tim Brown Says:

    “Anybody watching the situation for the past five years knows that PERs assumptions were ludicrous and would result in a crisis. The only real question was where the burdens would fall….. So much for the benefits of local control….But what officials have done is ignore the problem of unrealistic investment assumptions / poor management and pushed the crisis down the road for a few years.”

    – With that I agree. The elected officials supposedly working in the taxpayers best interest have FAILED miserably. And there is a reason for that; political clout and campaign funding going to the Democratic Party, from the unions, has taken on a role much more significant than “the will of the people.”

    Mr. Brown says, “At some point the state is going to have to offer a major bail out or pensioners are going to have to take a haircut. End of story. No choice. No other scapegoats.”

    – the major bailout comes at the expense of taxpayers. Why should they/we pay for the bailout of what amounts to a PONZI SCHEME? I think the Haircut is in order. No Choice. Taxpayers shouldn’t be the Scapegoats!

  4. Bille Says:

    I love it when you post Captain. You destroy any credibility that Ed hopes he still has. This website states that comments are under a moderator’s review before they can be seen. Your ridiculous ignorance and that of your parrot Toughlove are all over this website for the world to see.

    Keep up the good work!

  5. Tim Brown Says:

    Michael notes”the more important issue that local governments, the Governor, CalPERS staff and now the board all agree upon.” I am an elected local official and I sure as heck do not agree. We tried to get out of PERs. We have less than $200,000 per year and salaries, but PERs wanted well over a million (unfunded liability) for us to get out. PERs should let the world know of the real costs of unfunded liabilities and the impacts that it will have on local government and schools if nothing is done at a state level. The game playing to hide the truth is what drives me crazy.

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