A CalPERS committee yesterday approved raising employer rates roughly 50 percent over the next seven years, replacing actuarial methods that kept rates low during the recession with a new goal of full funding in 30 years.
The actuarial method approved by the benefits committee on a 5-to-2 vote, with some labor unions urging a delay for more study, is expected to be approved today by the full CalPERS board.
Board President Rob Feckner wanted to give employers the option of phasing in the five-year rate hike over a longer period, seven to 10 years. Board member J.J. Jelincic wanted to send the proposal to the finance committee for more study.
A motion by board member Henry Jones approved the proposal recommended by the chief actuary, Alan Milligan, but with a one-year delay for beginning the increase for the state and schools until 2015, the same as the start date for local governments.
Over five years, the new method increases employer rates to the level needed to project 100 percent funding in 30 years. Under the old method, plans for the state, local governments and non-teaching school employees are projected to be 79-86 percent funded in 30 years.
Milligan said the total increase from current rates is a little less than 50 percent, depending on how it’s calculated. He said about half of the increase was planned under the old method.
“We expect that the new method would result in contribution rates from 3 to 6 percent (of pay) higher than the current methods would have produced at the end of either the six or seven-year period,” Milligan said.
With the new method, he said, CalPERS is less likely to have a big rate spike after heavy losses, gets to full funding sooner, gives employers predictable rates and better aligns with new government accounting standards.
A strong statement of support for the new method came from Jon Hamm, a Highway Patrol union executive, who said the “first priority” is to ensure that employees receive the pensions promised to them.
“I understand that these are difficult decisions and that they will generate more attention and more pressure possibly for further pension reform or the debate about excessive pension benefits,” Hamm told the CalPERS board.
“I also recognize that by supporting the staff’s recommendation that I am also supporting an increase in my own member’s rates because of the 50-50 split,” he said, referring to the employer-employee “normal” cost share in Gov. Brown’s pension reform.
Hamm said his union has approached the state with a proposal to start paying off the Highway Patrol pension plan‘s “unfunded liability.” He said dealing with the debt “sooner rather than letter” will help build a solid retirement plan.
“I believe the employer is willing to work with us,” said Hamm. “So you have an employer and a labor group that want to send you more money.”
His union negotiated a trendsetting pension increase enacted by SB 400 in 1999 (3 percent of final pay for each year served at age 50) that was widely adopted by local police and firefighters and is now said by critics to be “unsustainable.”
The Highway Patrol union also led a small group of unions that negotiated the first cost-cutting state pension reforms early in 2010, increasing contributions from current employees and giving new hires lower pensions.
Jelincic said he understood the need to end the “rolling” or refinancing of debt and the radical 15-year period for “smoothing” investment gains and losses, with safeguarding “corridor” limits temporarily violated in 2009 to avoid a big employer rate increase after heavy investment losses.
“We keep getting branded as a labor-controlled board,” said Jelincic, a former state worker union leader. “But the movement to narrow or expand the corridors was really driven by the employers.”
Jelincic said he needed more information about several technical points: For example, over 30 years a state worker plan has a 52 percent probability of dropping below a 50 percent funding level and a 51 percent probability of going above 120 percent.
“Given that I really don’t understand the risks, I’m not prepared to vote on this,” he said.
Christy Bouma of California Professional Firefighters, who supported more study, reminded the board that her group opposed an employer rate reduction “when actuaries of a different generation were saying there is so much money we can never spend it all.”
Jelincic also mentioned a CalPERS decision in the late 1990s to give employers a contribution “holiday,” when a soaring stock market during a high-tech boom gave the pension fund a surplus.
As SB 400 gave state workers a generous retroactive pension increase in 1999, CalPERS dropped the state contribution from $1.2 billion in 1997 to near zero for several years. The state contribution this year is $3.8 billion.
A sharp increase in employer rates early in the last decade was cited by former Gov. Arnold Schwarzenegger as he briefly backed a proposal to switch all new state and local government employees to a 401(k)-style individual investment plan.
Avoiding future rate “shocks” is the reason that CalPERS adopted a 15-year “smoothing” period for investment gains and losses, well beyond the three to five years used by most public pensions.
With the five-year increase under the new method, the current employer rate for most state workers, 19.6 percent of pay, would increase to 29.2 percent, schools from 11.4 percent of pay to 18.9 percent, and public agencies from 14.9 percent to 23 percent.
When rates were raised last May mainly to reflect lowering the earnings forecast from 7.75 to 7.5 percent a year, the CalPERS board phased in the small increase — a third in the first year and the rest spread over the following 19 years.
Unions pushing for the rate delay expected the phase-in to make an extra $149 million available for worker pay and other programs this fiscal year. But the Brown administration, which opposed the phase in, paid the full rate, 20.5 percent.
“We believe it’s a matter of pay now or pay more later,” Richard Gillihan of Brown’s finance department told the board yesterday in support of the new actuarial method. “We believe pay now makes better fiscal sense.”
Some experts say that if pension funding levels fall below 40 percent, getting to full funding in the future may require impractical rate increases. The CalPERS board asked staff if pension funds in other states have dropped that far and recovered.
A staff report to the board yesterday said three state retirement systems have fallen below a 40 percent funding level since 2000: Illinois State Employees Retirement System, Kentucky State Employees Retirement System and West Virginia Teachers’ Retirement System.
Milligan said the small sample found during the survey showed that “it was possible to recover, but that benefit changes were very likely to be part of any recovery plan.”
Like most public pension funds, CalPERS was hit hard by the recession. The CalPERS pension fund peaked at $260 billion in 2007, dropped to $160 billion in 2009 and was $257.6 billion after the markets closed Monday.
Voting for the new actuarial method: George Diehr, Feckner, Jones, Grant Boyken for Treasurer Bill Lockyer and Howard Schwartz for Human Resources. Voting “no”: Michael Bilbrey and Terry McGuire for Controller John Chiang. Abstaining: Jelincic. Following custom, the committee chairwoman, Priya Mathur, does not vote unless there is a tie.
Ed’s Note: Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at http://calpensions.com/