The annual cost of state worker pensions would increase to $6 billion in July in a recommendation from CalPERS actuaries, up $521 million from the current fiscal year and double the amount paid a decade ago.
School districts would pay $2 billion next year for the pensions of non-teaching employees, up $342 million from the current fiscal year and also double the amount paid a decade ago.
California Public Employees Retirement System rates, already at an all-time high, will continue to climb for at least another half dozen years as the last of four rate increses enacted since 2012 are phased in.
The nation’s largest public pension system is in a bind.
As rates go up, the investment earnings expected to pay nearly two-thirds of future pension costs are expected to go down. In February, CalPERS lowered its long-term annual earnings forecast from 7.5 to 7 percent.
The CalPERS investment fund was valued at $315.5 billion Monday. But like many pension systems, CalPERS has not recovered from huge investment losses during the financial crisis, when its fund plunged from $260 billion in 2007 to $160 billion in March 2009.
State worker pension funds had an average of 65 percent of the projected funds needed to pay future pensions last June, according to the new actuarial valuation expected to be approved by the CalPERS board next week.
The California Highway Patrol was the most troubled of the six state worker funds in the report, only 58.5 percent funded. Experts have told CalPERS that falling below 50 percent makes recovery very difficult, if not impractical.
A generous “3 at 50” pension formula negotiated by the Highway Patrol union and approved in landmark CalPERS-sponsored legislation, SB 400 in 1999, provides 3 percent of final pay for each year served at age 50, capped at 90 percent of pay.
The “3 at 50” formula was widely adopted by local police and firefighters. Critics say the high cost of pensions for crucial safety workers, who are a large part of local government budgets, is one of the reasons retirement costs are crowding out funding for basic services.
In 2007 the rate paid by the state for Highway Patrol pensions was 32.2 percent of pay. The Highway Patrol rate recommended for the new fiscal year beginning in July is 54.1 percent of pay. By 2023 the Highway Patrol rate is projected to be 69 percent of pay.
The miscellaneous rate for most state workers in 2007 was 16.6 percent of pay. The recommended miscellaneous rate for next fiscal year is 28.4 percent of pay, projected to increase to 38.4 percent of pay in 2023.
Highway Patrol members contribute 11.5 percent of pay to their pensions and do not receive Social Security. Miscellaneous members, who do receive Social Security in addition to their pensions, contribute 6 to 11 percent of pay, many of them at 8 percent.
A cost-cutting pension reform requires state workers hired after Jan. 1, 2013, to work two years longer to receive the same pension benefit as previously hired workers. Due to their union clout or other factors, state workers are exempt from a reform cost-sharing requirement.
The reform requires new hires in CSU, the California State Teachers Retirement System, 21 independent county systems, and CalPERS school plans to pay half the “normal” cost of their pensions, excluding the now large debt or “unfunded liability” from previous years.
As new hires fill positions, the reform is expected to curb growing pension costs, but significant results are likely years away (see Los Angeles Times/CalMatters analysis). Meanwhile, CalPERS state rates will continue to climb.
In 2007 the state paid CalPERS $2.7 billion, less than half the $6 billion recommended for the new fiscal year. School districts and other education employers paid CalPERS $920 million in 2007, less than half the $2 billion recommended for the new year.
School districts pay a higher rate for non-teaching employees in CalPERS than for teachers in CalSTRS. And unlike teachers, non-teaching school employees receive Social Security in addition to their pensions.
The CalPERS rate recommended for non-teaching school employees next fiscal year is 15.5 percent of pay. Last week the CalSTRS board approved a rate of 14.4 percent of pay for teachers in the new fiscal year.
Under a funding plan enacted by legislation three years ago, the CalSTRS rate for teachers will reach 19.1 percent of pay in 2020. The CalPERS non-teaching rate is projected to be 23.8 percent of pay in 2020 and 27.3 percent in 2023.
The pension rate hikes will take a big bite out of school district budgets. In 2013 the combined rate was 19.65 percent of pay (CalPERS 11.4, CalSTRS 8.25). In 2020 the combined rate is expected to be 42.9 percent of pay.
Teachers pay more toward their pensions than non-teaching school employees. Teachers hired before the reform contribute 10.25 percent of their pay to CalSTRS. Non-teaching school employees hired before the reform contribute 7 percent to CalPERS.
The CalPERS rate for new non-teaching school employees hired after the 2013 reform is recommended to increase to 6.5 percent of pay in the new fiscal year, up from 6 percent. The CalSTRS rate for new teachers, 9.2 percent of pay, is not expected to increase until 2018.
CalPERS rate increases began in 2012 when the earnings forecast used to discount future pension costs was dropped from 7.75 percent to 7.5 percent. An actuarial method that no longer annually refinances debt was adopted in 2013.
A rate increase for a longer retiree life expectancy adopted in 2014 is still being phased in. One of the reasons listed for the CalPERS school rate increase next fiscal year is “the second year of a 5-year phase in of 2014 change in assumptions.”
And one of the reasons for the CalPERS state worker rate increase is the first year of a three-year phase in of lowering the discount rate from 7.5 to 7 percent. The discount rate next fiscal year is 7.375 percent.
Yet another complication is a five-year phase in of the rate increase resulting from the lower discount rate. As a result, the new actuarial report can project annual rates through 2023.
New actuarial valuations recommending rate increases for the pension plans of 1,581 local governments are expected this fall. The cities, counties and special districts in CalPERS have a wide range of funding levels.
This week Marc Joffe of the California Policy Center issued an updated report saying local governments will pay about $5.3 billion to CalPERS in the new fiscal year. He projects the payments to CalPERS will rise to $9.8 billion in fiscal 2022-23, an increase of 84 percent.
“In Fiscal Year 2015-16, at least 26 California cities and counties devoted over 10 percent of their total revenue to pension contributions,” said Joffe’s report.
“San Rafael, San Jose and Santa Barbara County shouldered the highest pension burdens — exceeding 13 percent of revenue. Major local governments that have recently surpassed the 10 percent pension contribution of total revenue threshold include Contra Costa County, Berkeley and Newport Beach.”
Originally posted at Cal Pensions.
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.