By Ed Mendel
Thursday, May 17, 2012

The CalPERS board yesterday raised the annual state payment for state worker pensions $213 million to a total of $3.7 billion, rejecting Gov. Brown’s request for a bigger increase to avoid a “loan” costing “$145.9 million over the next 20 years.”

Unions asked the board to spread out higher pension costs mainly caused by a lower investment earnings forecast. Paying part of the new rate over two decades, instead of the full amount now, makes an extra $149 million available for worker pay and other programs next fiscal year.

Although the amount of money may be relatively small, compared to the $16 billion state budget deficit revealed this week, the issue is the big one facing public pensions.

Like former Gov. Arnold Schwarzenegger, who also unsuccessfully urged CalPERS to adopt higher state rates, Brown is asking the Legislature to enact cost-cutting pension reforms.

Painful increases in annual employer pension costs might increase public pressure for pension reform. But paying more now to avoid higher costs later also reflects the view that pensions are seriously underfunded.

Most pension funds expect to get about two-thirds of their revenue from investment earnings, not annual employer or employee contributions, and critics say the earnings forecasts are too optimistic.

Alarm grew when a deep economic recession, and a stock market crash in 2008, punched a big hole in pension investment funds. The CalPERS investment portfolio, still well below its peak of $260 million in 2007, was valued at $229.4 billion Tuesday.

CalPERS state worker plans were on average 70 percent funded last June 30 with an “unfunded liability” of $38.5 billion. That’s the shortfall in projected assets needed to pay for pensions over the next 30 years.

The state has a much larger debt for retiree health care promised current state workers over the next 30 years — $62 billion according to an actuarial report done for state Controller John Chiang.

There is no dispute about whether strong investment returns will help close the retiree health care funding gap. Legislation by former Assemblyman Dave Elder, D-Long Beach, created a retiree health care fund two decades ago.

But lawmakers chose not to put money in the fund. Now state worker retiree health care is a pay-as-you-go plan, up more than 60 percent in the last five years and costing the state general fund about $1.5 billion in the current fiscal year ending June 30.

Pension and other retirement costs are still a relatively small part of the current state budget, which is expected to spend $87 billion from the general fund and $34 billion from special funds for health, transportation and other programs.

The state is paying CalPERS $3.5 billion ($1.9 billion general fund), retiree health care $1.5 billion, California State Teachers Retirement System $1.3 billion, Social Security $500 million and Medicare $240 million.

In contrast, cities spend most of their budget on personnel, not on a range of programs like the state, and some cities are already overwhelmed. San Jose spends 20 percent of its general fund on retirement, an argument for a pension reform on its June ballot.

The state could have a much bigger pension problem if CalSTRS was properly funded, not to mention retiree health. Officials estimate that CalSTRS needs an additional $3.25 billion a year to be fully funded in 30 years.

Unlike the California Public Employees Retirement System and most public pensions, CalSTRS lacks the power to set annual contribution rates that must be paid by employers, needing legislation instead.

CalSTRS, about 69 percent funded, has been seeking a rate increase for five years. It’s offered legislators a half dozen scenarios that begin to phase in a rate increase in 2016, only one of which is projected to get CalSTRS to 100 percent funding.

The power of CalPERS to give the governor and the Legislature an annual bill that must be paid can be a friction point. In the dispute over paying off part of the new rate increase over 20 years, board members said they were giving lawmakers an option.

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