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

CalPERS boosted the state’s annual pension payment 18 percent, up $600 million to $3.9 billion, and the question now is how big will increases be in the future?

The powerful CalPERS board, delaying action for a month, set the new rate this week after learning that it would have less impact than thought on the state’s huge budget problem.

Only $87 million of the increase would come from the state general fund that has a $19 billion deficit, the nonpartisan Legislative Analyst estimated. The rest would come from special funds, such as transportation, and other sources.

“We feel that those contribution increases are needed,” the new CalPERS chief actuary, Alan Milligan, told the board. “We are expecting contribution increases in the next two fiscal years as well, very significant contribution increases.”

A written report (see agenda item 3e) said the board was told in December that state contributions to the California Public Employees Retirement System are expected to increase by “an additional $1.1 billion” in the two years following the new fiscal year beginning July 1.

“Even after that, contributions are still expected to increase, although at a much slower rate, as the regular asset smoothing policy builds more of the asset losses into the employer contribution rate,” said the report by David Lamoureux and Milligan.

The main problem is enormous investment losses in the stock market crash and recession. The CalPERS portfolio peaked at $260 billion in the fall of 2007, dropped to $160 billion by last March, and then rebounded to about $200 billion.

Two other pension systems also are underfunded and seeking contribution increases from the state. But unlike CalPERS, the California State Teachers Retirement System and UC Retirement cannot set their own rates, needing legislation instead.

CalSTRS will receive about $1.2 billion from the state in the new fiscal year, but may need to double that amount to reach full funding. It’s not planning to seek a contribution increase until next year.

UC Retirement, operating only on investment earnings for two decades, has not received a state contribution since 1990. But the system now may need an annual state payment of roughly $1 billion a year to reach full funding.

The state expects to pay $1.4 billion for retiree health, a pay-as-you-go program. Two years ago a governor’s commission said an additional $1.2 billion a year in pension-like payments would be needed to cover retiree health care promised current workers.

In total, state payments for retiree costs will be about $6.5 billion in the new fiscal year (CalPERS $3.9 billion, CalSTRS $1.2 billion, and retiree health $1.4 billion) with pressure for big increases in the following years.

Gov. Arnold Schwarzenegger, who announced tentative cost-cutting agreements with four labor unions this week, has said that state pension costs could soar to $10 billion a year or higher.

The governor’s pension advisor, David Crane, said the CalPERS rate increase is a move away from a “troubling trend” in which the cost of paying retirement benefits promised current workers is passed to the next generations.

“While this week’s step will be a small one (the state has already built up $550 billion in unfunded retirement pension and healthcare debt as a result of under-contributing), it’ll be welcome nevertheless,” Crane wrote in an article.

The only member who spoke as the CalPERS board approved the rate increase, J.J. Jelincic, a former leader of a large state worker union, said he believes CalPERS funding will recover from a “temporary” problem as the economy improves.

“It’s interesting that those who support cuts to pension benefits are those who are most interested in seeing the higher rates,” he said.

Jelincic said he believes the attack on secure retirement is “basically political, not really economic.” He said the state contribution for about two-thirds of the workforce is the same, as a percentage of payroll, as the average during the 1980s.

The rate hike increases the state contribution for most state workers from 16.9 to 19.9 percent of pay. Most state workers contribute 5 percent of their pay to the pension fund.

To ease rate shocks, CalPERS adopted a radical smoothing policy in 2005 that spreads gains and losses over 15 years, far beyond the periods used by most pension funds, three to seven years.

A second smoothing policy adopted last year phases in the big losses from the crash and recession over a three-year period. The report said the new smoothing policy lowered what would have been a $900 million state increase to $200 million.

But because the funding level of the state pension funds had dropped so low, an average of 58 percent, the board in February adopted an additional increase, $109 million, to bring the funding levels up to near 80 percent, regarded as the acceptable minimum.

Then a new study in April of decade-long trends among CalPERS members found they are living longer, earning more pay, and retiring earlier. The study added another $300 million to the state rate hike, bringing the total to $600 million.

Now the report to the board said the loss last year “has pushed our asset smoothing to the limit of its corridor, which would prevent us from being able to do any smoothing in the event of another asset loss” this year.

In addition to investment losses, the report said, higher rates also could result if CalPERS, after a year-long look, decides to lower the average annual earnings assumed, now 7.75 percent, in forecasts of future costs.

A decision on the assumed earnings is not scheduled until February. Last month CalPERS received 10-year earnings forecasts from its staff and four consultants averaging 7.29 percent.

The Governmental Accounting Standards Board asked for comment this week on a proposed rule directing pension funds to assume earnings based on municipal bonds when projecting the cost of paying for future obligations not covered by current assets.

Some pension consultants have said that projecting a lower earnings rate based on bonds to discount the cost of “unfunded liabilities,” rather than using a diversified portfolio with stocks and other investments, would result in higher government pension payments.

But a fact sheet accompanying the GASB proposal this week said “no” to the question of whether adoption of the proposed rules would increase government payments to pension plans.

“The GASB sets standards for accounting and financial reporting, not for how governments provide resources to fund their pension benefits,” said the fact sheet.

The Legislative Analyst thinks the increase in the state payment to CalPERS could be $481 million, not $600 million. The CalPERS rate assumes the state payroll will grow, but the analyst disagrees.

Milligan told the board there are different impacts on pension fund forecasts from a decline in pay and a reduction in workforce, which could be through terminations, early retirement or not filling vacancies.

“There are a number of different factors,” he said. “Some of them will result in gains. Some of them will result in losses, and all of that will be reflected in the (fiscal year) 12-13 rates.”

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