State payments to CalPERS next fiscal year are expected to total $6 billion, nearly double the $3.2 billion paid six years ago before a wave of employer rate increases.
A new state budget proposed by Gov. Brown last week also shows that state payments to CalSTRS for the fiscal year beginning in July are expected to be $2.8 billion, nearly double the $1.5 billion paid three years ago when a rate increase began.
Meanwhile, what had been the fastest-growing annual retirement cost in the budget, retiree health care for state workers, only increased by about half during the last six years, going from $1.5 billion in fiscal 2011 to $2.2 billion next year.
State payments to the California Public Employees Retirement System will continue to grow under a decade-long series of rate increases. For the California State Teachers Retirement System, state payments are expected to flatten and possibly decline.
Pension rates are a percentage of pay. So, in addition to the rate increases, some of the growth in state pension costs is due to an increase in pay and employees during the recovery from the deep economic recession.
The CalPERS and CalSTRS investment funds, however, have not recovered from huge losses ($100 billion for CalPERS) during the recession and a stock market crash nearly a decade ago in 2008.
Last week, CalPERS had an investment fund valued at $306 billion and about 64 percent of the projected assets needed to pay future pensions. The CalSTR investment fund was valued at $193 billion last November and was 69 percent funded as of June 30, 2015.
Both of the big pension systems expect their investment fund earnings to pay roughly two-thirds of future pension costs. The rest of the money will come mainly from the state and local governments with a smaller amount from employees.
After state payments stayed around $3 billion for four years, CalPERS adopted rate increases three years in a row: a lower earnings forecast in 2012, a more conservative actuarial method in 2013, and a forecast of longer live spans for retirees in 2014.
The employer rate paid for most state workers increased from 18.2 percent of pay in 2011 to 26.3 percent last year. The employer rate for the most expensive plan, Highway Patrol, increased from 31.2 percent of pay in 2011 to 50 percent last year.
Last month, CalPERS lowered the investment earnings forecast used to offset or “discount” future pension costs from 7.5 percent to 7 percent, a fourth rate increase that will be phased in over the next eight years.
A CalPERS news release said the lower discount rate will increase the average “normal cost” (the pension earned during a year) employer rate for most miscellaneous plans about 1 percent to 3 percent of pay and for most safety plans 2 percent to 5 percent of pay.
In addition, said the release, the “unfunded liability” (debt from previous years) for many employers will increase 30 to 40 percent. In underfunded pension plans, payments for the unfunded liability can be larger than the payments for the normal cost.
A previous Calpensions post argued that CalPERS should resume reporting both parts of the employer rate increase as a percentage of pay to give readers and taxpayers a clearer view of the total cost.
As the rate increases began, Gov. Brown’s Finance department started separately reporting the state payment to CalPERS for the California State University, reflecting a dispute over CSU employees paying less for pensions and health care than other state workers.
A chart in the Finance department’s summary of the governor’s budget proposal (see page 128) shows state retirement costs for the last decade.
Long-delayed legislation three years ago put CalSTRS on a path to full funding in three decades with a $5 billion rate increase phased in over seven years for the state, teachers and school districts.
Most of the money comes from more than doubling rates paid by school districts. But in addition to increasing the state rate by 4.3 percent of pay over three years, bringing the total to 8.8 percent, the legislation could affect the state general fund in the long run.
Unlike nearly all of California’s public pension systems, the California State Teachers Retirement System has lacked the power to set annual rates that must be paid by employers, needing legislation instead.
The rate legislation gave the CalSTRS board the power, starting this year, to raise the state rate up to 0.5 percent of pay a year. The current state rate of 8.8 percent of pay theoretically could reach 23.5 percent of pay before the legislation expires in 30 years.
The governor’s proposed budget “assumes CalSTRS will adopt new mortality assumptions, implement a discount rate reduction, and exercise its authority to increase state contributions by 0.5 percent.”
The current CalSTRS discount rate is 7.5 percent. The CalSTRS board may consider the discount rate and mortality assumptions next month and, for the first time, a state rate increase in April.
Teachers received a small rate increase under the legislation, going from 8 percent of pay to 10.25 percent for most and to 9.21 percent for teachers hired after a pension reform enacted by Brown and the Legislature took effect on Jan. 1, 2013.
The teacher rate increase was limited because CalSTRS attorneys cited the “California rule,” a series of state court rulings that the pension offered at hire becomes a vested right, protected by contract law, that can only be cut if offset by a comparable new benefit.
The comparable new benefit offsetting the teacher rate increase in the legislation (AB 1469 in 2014) vests a routine annual 2 percent cost-of-living adjustment, which previously could have been suspended, though that rarely if ever happened.
Two appeals court panels, citing precedents contrary to the California rule, recently have ruled in separate suits that the pensions of workers can be cut without a comparable new benefit. The state Supreme Court has agreed to hear an appeal of one of the appellate rulings.
The CalSTRS legislation increases the school district rate from 8.25 percent of pay to 19.1 percent by July 2020. The districts also are being squeezed by the CalPERS rate increases for non-teaching school employees.
Dennis Meyers of the California School Boards Association told the CalPERS board last month the CalPERS and CalSTRS rate increases will cost school districts an estimated $6 billion and the lower discount rate will add another $500 million.
“It’s money that’s not being able to be used to decrease achievement gaps or buy textbooks or technology or all those things that we need to do to move our student population forward,” Meyers said.
The pension reform enacted by Brown and the Legislature followed the California rule and limited the main provisions to workers hired after Jan. 1, 2013: lower pension formulas, a cap on pensionable pay, and a 50-50 split of the normal cast between employer and employee.
Brown was asked at a news conference last week whether the Legislature had done enough to rein in growing pension costs.
“Well, we have done more than in any time in the history of California and more than most other states,” the governor said. “Our pension reform, despite misinformed critics, was a major, major reform. It wasn’t as far as I wanted to go. It wasn’t as far as we need to go. But it’s very significant, and I don’t think we should minimize that.
“The reduction from assuming 7.5 return to 7, that’s another major step. I think the pension board, the PERS people, will continue to look at that. There are cases going on through the courts that are redoing the pension rules. So, I would say that this will be a lively topic.
“I think we have taken some solid steps. But it’s something delicate and so political I would say we are doing about what could be expected, and we will continue to take advantage of opportunities as they come up.”