By Ed Mendel
Monday, November 24, 2014

In a few years CalPERS retirees are expected to outnumber active workers, a national trend among public pension funds that makes them more vulnerable to big employer rate increases.

A mature pension fund for a growing number of retirees becomes much larger than the payroll. So if the pension fund has investment losses, an employer rate increase to help fill the hole takes a bigger bite from the payroll.

The growing number of retirees, partly due to aging baby boomers, is one reason a staff report last week argues that CalPERS has too much “risk” and should consider a number of options during a board workshop early next year.

Among the options listed are a more conservative investment allocation, a lower earnings forecast, an employer choice of asset allocations with different risk and expected returns, and workers sharing the risk through contributions, benefit design or cost sharing.

The staff report, the third of its kind in recent years, was praised by several board members for proposing in good economic times that CalPERS increase its preparation for bad times.

CalPERS employers and employees are contributing more money. Investments have had two strong years. Reform legislation will cut future costs. And a funding level that fell to 60 percent during the recession is back up to 77 percent.

Now the odds are better that the funding level won’t drop below what for some is a fuzzy red line — 50 percent of the projected assets needed to pay promised pensions.

At roughly that level, some think getting to 100 percent funding may become difficult if not impossible. Employer contribution rates would have to be raised to an impractical level, crowding out funding for other programs, and investments would have to yield unlikely returns.

Despite the improved odds, the staff report said the probability of the funding level dropping below the 50 percent red line during the next three decades is still about 30 percent, varying among plans.

“The probability of reaching any of the three low-funded status thresholds shown has been reduced,” said the report. “However, the probability of this occurring is still higher than staff is comfortable with.”

Still fresh in the CalPERS memory is a huge investment loss. The CalPERS investment portfolio valued at $260 million in the fall of 2007 plunged to a low of about $160 million in March 2009, before climbing back to $297.5 billion last week.

Even full funding is risky, Alan Milligan, the CalPERS chief actuary, told the board last week. CalPERS was 100 percent funded on June 30, 2007, he said, and two years later on June 30, 2009, CalPERS was only 60 percent funded.

“Being 100 percent funded isn’t necessarily the target,” Milligan said. “Being 100 percent funded at an acceptable level of risk should be the target.”

Adding to the CalPERS risk is the drop in the ratio of active workers to retirees from 2 to 1.5 in the last 10 years, increasing the size of the payroll bite if employer rates are raised after a big investment loss.

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