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CalPERS’ piece of budget woes gaining attention

California’s Public Employees’ Retirement System may need government employers to foot a larger share of its bill in 2011, a move that would stress state and local budgets at a time when they already face deep cuts.

The 1.6 million-member public pension fund, the largest in the country, is expected to require additional money to help it recover from recession-fueled investment losses. But just how much and when have yet to be determined.

The 13-member CalPERS board will make the decision in May for the 2010-11 fiscal year that begins July 1. CalPERS has signaled that the employer contribution likely will not rise for that year. But increases in 2011 are expected.

State staffers familiar with the issue believe it could be in the range of $200 million to $300 million by the middle of 2011. CalPERS did not comment on the estimate.

By law, public workers’ benefits must be protected. If CalPERS needs more funding to maintain benefits, it can get it. CalPERS provides benefits to 1.6 million workers, retirees and their families and pays out some $11.85 billion annually worth of benefits.
Estimates of the fund’s investment losses vary, but CalPERS estimated them at about 23.4 percent for the 2008-09 fiscal year ending in July. The value of CalPERS’ assets is slowly coming back, however, from a low of about $165 billion to the current level of $199.7 billion.

But how those losses translate into dollars from the state’s General Fund is not yet clear, in part because CalPERS employs a “smoothing policy” that spreads losses over time and in part because the investment landscape may change significantly by next spring.

“The actuaries start doing the analysis at the beginning of the year and will determine the actuarially required contribution, or ARC, which will be completed in May in time for the May Revise, said CalPERS spokesman Edd Fong.

The issue is whether government entities will be required to pay a greater contribution toward their workers’ pensions, calculated as a percentage of payroll, in order to cover the fund’s losses.

Currently, the employers’ contributions range from about 16.9 percent of government worker payroll to 28.43 percent, depending on the category of worker. The highest shares are paid by the government agencies employing public safety personnel – fire and sworn peace officers have nearly 26 percent paid by their employers, and the California Highway Patrol contributes the largest share, 28.4 percent.

For the 2008-09 fiscal year ending June 30, employees contributed about $3.8 billion toward their public retirement while the government– state, local and school districts –contributed about $6.9 billion.

Despite the weakened economy, the share was not changed during the current fiscal year, said CalPERS CEO Anne Stausboll, but she left open the possiblity of future increases are uncertain.

“This is partly due to the rate “smoothing policy” adopted by the CalPERS board in 2005 that reduces rate volatility by spreading investment gains and losses over 15 years. This prevents employer costs from going up or down dramatically after one or two good or bad years of investment returns,” she wrote in an open letter to members of the California League of Cities.

She said that the 2011-12 fiscal year remained uncertain.  

But “we do know that a loss of 20 percent or more could mean a rate increase of between 2 (percent) and 5 percent of payroll,” Stausboll noted.

But for the state, any requirement that boosts its share of workers’ pensions spells trouble. That’s because even a small increase in terms of percentage points is large in terms of dollars.

A 1 percent increase, for example, could translate into $300 million or more – money that would come directly from the state’s general fund. Pension levels are protected by law, which means any decision by the CalPERS board will be binding on the governor and Legislature.

The employees’ share also could be increased, although that action historically is unlikely. It could also prove politically damaging: State employees already have taken a 14.5 percent pay cut and boosting their pension costs at the same time could prove politically explosive.  

Following Stausboll’s comments to the cities, the CalPERS board further modified its smoothing policy to accommodate recent, deep losses.

Under the plan, the pension fund’s investment losses would be amortized and paid off over a fixed 30-year period, reported CalPensions, a blog that specializes in government pensions. If the economy and financial markets recover over the next few years, as many experts expect, the impact on future local government and school employer rates would be moderated.

“The board took this action in recognition that the economic recession and likely investment losses could add unnecessary stress to already strained government budgets,” said CalPERS Board President Rob Feckner. “The rate-setting modification isolates an extraordinary one-year event, spreads the need to pay additional contributions over a fixed 30-year period. It also allows local employers to pay a little less during the next three years than they otherwise would, while ensuring that the funded status of the CalPERS plan is not compromised.”


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