By Ed Mendel
Thursday, June 20, 2013

State pension costs drop slightly in the new fiscal year under CalPERS rates set yesterday, a short break before a new full-funding policy adopted in April is expected to boost costs nearly 50 percent during the next seven years.

The state payment to CalPERS in the fiscal year beginning July 1, $3.9 billion, is about $8 million less than the current annual payment, “budget dust” to use an old Capitol term for an amount dwarfed by a large expenditure.

Most of the decrease is attributed to increased employee pension contributions under Gov. Brown’s pension reform, lower-than-expected salary growth and a reduction in total payroll.

“I think it’s appropriate to acknowledge that is some difficult work there and some pain for our members,” Alan Milligan, the CalPERS chief actuary, told a committee earlier in the week. “So that’s why we only characterize this as modestly good news.”

State costs are reduced $71.3 million under the new rates. But the reform legislation, AB 340, calls for savings from increased employee contributions to be used to pay down the pension “unfunded liability.”

The new state budget is said to give CalPERS $63.1 million for the savings from higher employee contributions, making the net reduction in state pension costs next fiscal year $8.2 million.

Pension costs paid by schools for non-teaching employees, $1.2 billion, also drop slightly under new rates set yesterday, down $31.5 million. Salary increases and overall payroll growth were less than expected.

The new state and schools rates are a small increase from the current year. But the cost of the higher rates is offset by reduced pension obligations from the lower-than-expected salaries and payroll (and higher employee contributions for some state workers).

The staff report showing CalPERS will receive less money next year also shows that the state and schools funding level dropped last year, breaking a rebound after huge investment losses in the recession and stock market crash five years ago.

Last fiscal year, the total state funding level dropped to 66.1 percent of the projected assets needed to cover future pension costs, down from 70.3 percent the previous year because investment earnings missed the 7.5 percent earnings target.

That’s still above the low point, a funding level of 58.4 percent in June 2009. But pension officials, who have a duty to protect retirement benefits, can worry when funding levels are on a downward path or make little progress toward funding goals.

A new actuarial method adopted by the CalPERS board in April will phase in rate increases aimed at reaching full funding in 30 years. But rate increases under the new method are not scheduled to begin until 2015.

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