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.

To read entire column, click here.

By Marc Lifsher
May 15, 2012, 9:05 p.m.

SACRAMENTO — The state government’s contribution to employee pensions is expected to jump to $3.7 billion from $3.5 billion in the fiscal year that starts July 1.

On Tuesday, a committee of the board of the California Public Employees’ Retirement System recommended the increase as well as a $29-million drop to $1.2 billion for non-teaching school and community college district workers.

Even with the increase, the state’s contribution is lower than the $3.9 billion paid in fiscal 2010-2011, CalPERS said.

The biggest factor in next spending year’s rise was a board decision in March to lower the fund’s expected average annual rate of return on investments to 7.5% from 7.75%, CalPERS said.

To read entire brief, click here.

By Ed Mendel
Monday, May 14, 2012

A superior court judge this month upheld a voter-approved initiative giving lower pensions to all city of Menlo Park new hires except police, the first court ruling as unions challenge similar measures in Pacific Grove and Bakersfield.

Voters in the three cities approved cost-cutting pension reforms in November 2010 that bypassed bargaining with unions. California is one of only several states where public employee retirement benefits are set by labor negotiations.

The measures in the small cities of Menlo Park and Pacific Grove, with relatively wealthy and well-educated residents, were overwhelmingly approved by more than 70 percent of voters.

In the much larger and more diverse Bakersfield, a measure that sharply cuts the pensions of new police and firefighters, not other non-sworn city employees, was approved by 56 percent of voters.

(A twist on ballot-box pension reform: Riverside County deputy sheriffs put a measure on the November 2010 ballot requiring voter approval to cut the pensions of new officers and firefighters, receiving 53 percent of the vote.

(But a counter measure backed by county supervisors allowing pension cuts for new hires and requiring voter approval of pension increases received 61 percent of the vote, becoming the new law because it received more votes.)

The measures in the three cities, which are in the giant California Public Employees Retirement System, set the stage for widely watched votes next month on pension reforms in the state’s second and third largest cities.

Voters in San Diego and San Jose, charter cities with “home rule” power under the state constitution and their own pensions systems, are being asked by their mayors and others to cut pensions earned by current workers in the future.

Unions oppose the measures that have become an issue in the San Diego mayor’s race and an open seat on the San Jose city council. The San Jose measure was placed on the ballot by a narrowly divided city council.

Pension reformers, unable to get a majority of city council votes, gathered voter signatures for initiatives in San Diego and Menlo Park. After signatures were gathered in Pacific Grove, the council enacted the measure confirmed later by voters.

Being able to bypass a city council, where members may rely on union support, is one argument for ballot-box pension reform. Critics say setting pensions through local bargaining, rather than statewide legislation, tends to drive up employer pension costs.

If one local employer raises pensions, unions ask other employers to match the benefit to remain competitive. A CalPERS-sponsored bill, SB 400 in 1999, gave state workers a major retroactive pension increase.

A report last year by a nonpartisan watchdog, the Little Hoover Commission, said SB 400 started “a chain reaction of retroactive pension increases granted to public employees up and down the state” and is regarded as “pivotal” in the pension crisis.

Some union leaders contend there is little hard evidence for the alleged “ratcheting up” effect of bargaining. Unions also say that pensions are a form of compensation, and therefore an important part of collective bargaining.

The Pacific Grove measure was an early attempt to cut current-worker pension costs. Reformers say employer savings from cutting new-hire pensions can take decades, and bargaining higher worker pension contributions often requires offsetting pay raises.

Pacific Grove’s Measure R caps the city contribution to pensions at 10 percent of pay, requiring employees to pay the rest or choose a low-cost option like a 401(k)-style individual investment plan.

In addition to filing a lawsuit, a police union also persuaded the state Public Employment Relations Board to issue a complaint charging the city with violating labor laws.

The labor-friendly board attempted earlier this year to get a court to block the San Diego pension measure from the ballot, unsuccessfully arguing that union negotiations were required first and then a vote of the city council.

A report to the Pacific Grove city council this month said agreements reflecting Measure R have been made with general employees and management. The city is using part-time employees when possible to reduce pension enrollment.

To read entire story, click here.

By Ed Mendel
Wednesday, May 9, 2012

Actuaries recommend a $213 million increase in annual state pension payments to CalPERS in July, bringing the total to $3.7 billion.

But $149 million would be added to the increase if the impact of a lower earnings forecast, dropped by the board in March from 7.75 percent to 7.5 percent a year, is not phased in over 20 years.

Either way, the annual state payment to CalPERS next fiscal year would still be less than the $3.9 billion payment expected two years ago when major investment losses began to push up rates from $3.3 billion.

The state CalPERS payment was cut by about $400 million when unions agreed to new contracts that increase worker pension contributions, up from 5 percent of pay to 8 percent pay for most workers. The current state contribution is 18 percent of pay.

Former Gov. Arnold Schwarzenegger used a record 100-day budget deadlock, ending in October 2010, to get the largest state worker union, SEIU Local 1000, to agree to a new contract.

Several smaller unions held out and agreed to contracts last year with the new administration of Gov. Jerry Brown. The nonpartisan Legislative Analyst’s Office said state savings will be offset by pay raises as the contracts expire in several years.

So far, state pension costs have not soared as some feared after California Public Employees Retirement System investments peaked at $260 billion in the fall of 2007, dropped to $160 billion in March 2009 and were $233 billion Monday.

Part of the reason rates have not skyrocketed is that on three occasions CalPERS adopted actuarial “smoothing” methods aimed at avoiding the big rate shocks of the past.

When CalPERS had a surplus during a high-tech stock market boom, the CalPERS board gave the state a contribution “holiday” and dropped the annual state payment to $150 million in 2000, down from $1.2 billion several years earlier.

CalPERS also sponsored SB 400 in 1999, sharply increasing pensions and starting what critics say was a statewide trend toward “unsustainable” benefits. Many of the new contracts that raise worker contributions also give new hires lower pensions.

After the stock market dipped and investment earnings expected to provide about two-thirds of pension revenue faltered, CalPERS made a series of big rate increases that brought the state payment to $2.5 billion by 2005.

Schwarzenegger, citing the soaring CalPERS rates, briefly backed legislation for a ballot measure that would have switched new state and local government hires to 401(k)-style individual investment plans.

The CalPERS board adopted a radical “smoothing” policy in 2005 that spreads gains and losses over 15 years, well beyond the three to five years used by most pension systems to smooth employer rates as volatile markets go up and down.

After the CalPERS investment fund had a 24 percent loss during fiscal 2008-09, the board adopted another smoothing plan that phased in a rate increase over three years and treated the huge one-year loss as an isolated event to be paid off over 30 years.

The third smoothing came last April after the board lowered the earnings forecast from 7.75 to 7.5 percent a year. A third of the resulting rate increase will be paid in the first year and the rest spread over 19 years, unless the state opts for full payment now.

Schwarzenegger opposed the smoothing in 2009, arguing that the state would be using “our kids’ money” to gamble that investment earnings in the future will grow faster than pension obligations.

A big rate increase (at one point the Schwarzenegger administration suggested increasing the $3.3 billion state payment to $4.5 billion) presumably would have increased public pressure for a major cost-cutting pressure reform.

A report actuaries prepared for a CalPERS board meeting next week said the state has not asked to opt out of the phased-in rate increase resulting from the lower earnings forecast, a move that would add $146 million to the $213 million increase in July.

The state budget Brown proposed in January had a $9 billion deficit that could grow by $5 billion if voters do not approve a tax increase in November. A revised budget plan expected Monday may show a larger deficit due to a recent fall off in tax receipts.

In the current fiscal year, the state is paying CalPERS $3.5 billion ($1.9 billion general fund), California State Teachers Retirement System $1.3 billion, state worker retiree health care $1.5 billion, Social Security $500 million, Medicare $240 million.

To read entire story, click here.

Tuesday, May 8, 2012 – 08:00 a.m.

San Bernardino County, Calif. – San Bernardino County’s budget woes are likely to worsen in the coming fiscal year as employee pension fund returns fail to not only deliver relief, but instead bring more pain.

The San Bernardino County Employees Retirement Association (SBCERA) has, to date, only generated a 0.6% return for its 2011-2012 fiscal year.

The return is 7.15% below the actuarial-required annual assumption of 7.75%.

This means in order to break even the fund needs to earn 7.75% each and every year on average. And with only three months remianing in the current fiscal year it’s likely the fund will once again miss the mark.

The five-year average investment return is a meager 1.0%.

A return symptomatic of chaotic investment markets and a U.S. economy on life support.

The following return benchmarks were released on the pension funds website yesterday.

________________________________________________________________________

FY Performance

The following is the annualized returns for SBCERA for periods ending 3/31/12. The SBCERA Fiscal Year runs from July 1 through June 30.

________________________________________________________________________

Any shortfall in funding must be offset by increased pension contributions approved by the San Bernardino County Board of Supervisors.

The current situation is likely to further impact labor negotiations between the county and its employee unions.

By Ed Mendel
Monday, May 7, 2012

The mayors of San Jose and San Diego are backing local measures on the June ballot that aim to make the change critics of costly public pensions say is the key to major reform — cutting the cost of pensions earned by current workers in the future.

Using different methods, Measure B in San Jose and Proposition B in San Diego would allow current workers to keep pension amounts already earned, but pensions earned in the future could be cut or cost workers more.

The San Jose measure would give current workers the option of switching to a lower pension or staying in the current plan and paying off pension debt with annual contribution increases of 4 percent of pay, capped at 16 percent or half the debt cost.

The San Diego proposition could impose a six-year freeze on the amount of pay used to calculate pensions and would switch all new hires, except police, to the 401(k)-style individual investment plans now common in the private sector.

A widely held view is that the courts have ruled pensions promised current workers cannot be cut, even by requiring workers to pay more toward their pensions, without providing an offsetting benefit of equal value.

But the nonpartisan Little Hoover Commission and others argue that cutting current worker pension costs is needed to prevent soaring pension costs from eating up government budgets, diverting money from other programs.

“The Legislature should give state and local governments the authority to alter the future, unaccrued retirement benefits for current public employees,” was the lead recommendation in a Little Hoover report last year.

Most public pension funds are deep in debt after a decade of below-forecast investment earnings, punctuated by a stock market crash in 2008. Critics say the retirement systems also are burdened with overly generous pensions.

The commission and others think that financially troubled government employers, who are responsible for ensuring that pensions are funded, will not get enough savings from the two standard attempts to cut government pension costs:

1) Giving new hires lower pensions may take decades to yield significant savings. 2) Getting current workers to agree through bargaining to increase worker contributions often is a temporary saving, offset by an equal benefit such as a future pay raise.

Federal courts allow private-sector pensions to lower amounts earned in the future. A law professor told the commission the state courts have not explained why future public pension amounts cannot be cut.

“Legal experts have told the commission it likely will take a financially distressed county, city or special district to scale back its promised future benefits for current employees, then attempt to defend the action in court before the Supreme Court would have an opportunity to consider a new precedent,” said the Little Hoover report.

Two state Supreme Court actions last year may not be encouraging for those seeking new precedents that weaken the legal protection of public employee retirement benefits.

The high court upheld a pension increase for years already served, the opposite of the proposals to cut pensions for years not yet served. A suit contended that a retroactive pension increase given Orange County deputy sheriffs violated a state debt limit.

Because no employer-employee contribution increase had paid for the big boost in pensions for years already served, the suit argued that the retroactive pension increase created an “unfunded liability” that was a debt exceeding the state limit.

A lower court ruled that the unfunded liability is not a debt but only an estimate based on variables, mainly investment earnings expected to provide two-thirds of pension revenues. The high court unanimously refused to hear an appeal.

In another Orange County suit, the court unanimously ruled that when local elected officials approve a retiree health care benefit, an “implied contract” can create a lifetime right to the benefit even though no resolution or ordinance specifically grants it.

The legal arguments for the San Jose and San Diego ballot measures are based in part on the fact that they operate under their own charters, rather than state general law, and have their own pension systems.

To read entire story, click here.

Faced with worsening budget problems, chances are growing that the Legislature won’t vote on comprehensive pension reform until the end of the session in August, some officials said Wednesday.

Democratic leaders are concerned that with revenue projections falling short, they are going to have to make more cuts that affect unions and others who also have concerns about changes to pension benefits.

Pushing budget cuts and pension changes at the same time could create political problems jeopardizing pension reform, according to one legislator with knowledge of negotiations but not authorized to talk on the record.

“It would be a double whammy,” the legislator said. “It would be like hitting them with a two-by-four twice.” Other legislative sources confirmed that there are discussions about delaying final action on pension reform until August.

Asked about the timing of a vote, Senate leader Darrell Steinberg (D-Sacramento) was noncommittal Wednesday. “It’s our obligation to deliver comprehensive pension reform this session,” Steinberg told reporters at the Capitol. “When exactly, whether it is before or after the budget, I don’t know. It depends upon conversations with the governor and the Assembly as well.”

To read entire story, click here.

By Ed Mendel
Monday, April 30, 2012

Stockton has enrolled three mayors and 14 city council members in CalPERS since 1991, despite a provision in the city charter that clearly states no council member shall receive retirement or death benefits, the Stockton Record reported last week.

The discovery of $276,954 in unlawful city pension contributions comes as Stockton is in the national media spotlight during a last-ditch attempt to avoid bankruptcy, mainly by getting unions to agree to cuts in retirement and other costs.

It’s the latest quirk in the hodge-podge of laws and practices, drawing the attention of a legislative committee, that gives some elected officials pensions, prohibits pensions for other elected officials and allows some to choose no pension.

Elected official pensions are “under consideration” and “may be included” in the proposal made by a two-house legislative committee on pension reform, a co-chair, Sen. Gloria Negrete-McLeod, D-Chino, said at a hearing in her district this month.

The nonpartisan Legislative Analyst’s Office told the hearing that the Legislature has attempted to regulate pensions for elected officials in the past, but has not been completely successful.

A bill two decades ago (AB 3664 in 1994) said that members of all local legislative bodies should not receive pension benefits greater than the “most generous” pensions for non-safety employees.

In San Diego, city council members are eligible after four years of service for a “3.5 at 55” pension (3.5 percent of final pay for each year served at age 55), well above the “2 or 2.5 at 55” formulas for most city workers.

Some council members decline to enroll in the pension plan. The council pensions have been mentioned in the debate over an initiative on the June ballot in San Diego that would switch new city employees to a 401(k)-style individual investment plan.

San Diego operates under its own charter, rather than state general law, and has its own pension system, which was plunged deeply into debt by two agreements between the city and unions that lowered city contributions and raised pension benefits.

A legislative committee analysis of the two decade-old bill raised the question of whether the legislation would apply to charter cities, currently 120 of the 482 cities in California.

“It’s possible that is the reason San Diego doesn’t appear to be in compliance,” Jason Sisney of the Legislative Analyst’s Office told the hearing. “That law has never been litigated as best we can determine in talking to the Legislative Counsel.”

Another two decade-old bill (SB 53 in 1993) made some types of elected or appointed officials, such as board members of school districts and special districts, ineligible for pensions through the California Public Employees Retirement System.

“There are a few cases where water districts have figured out a way around that law,” said Sisney. “I think they have the right to do it under the law. But I am not sure that is what the Legislature intended back in ‘93.”

The analyst said at least two water districts contract with CalPERS for pensions for employees and provide pensions for elected board members through the Public Agency Retirement Services, a trust governed by a board of public agency employers.

Last week the Water Replenishment District of Southern California confirmed that its pensions are through PERS for employees and PARS for board members. The West Basin Municipal Water District did not return several calls.

Part of the rationale for prohibiting CalPERS pensions was that even if providing minimal service and receiving only meeting expenses, board members could get full credit for lifetime pensions.

Some elected officials serve full-time and others do not. The analyst said state controller’s data shows that more than half of all California cities, 252, provide pensions for council members. Most of the counties, 51 of 58, provide pensions for supervisors.

To read entire story, click here.

One of the biggest mysteries at the Capitol these days is whether lawmakers are really going to make any substantive changes in the pension system for public employees.

This week didn’t do much to answer that, even though there were hearings on bills that were taken word-for-word from proposals Gov. Jerry Brown had sent to the Legislature. The apparent problem? Republicans introduced the bills.

They deal with a host of issues, but the two most contentious are increasing the retirement age and creating some kind of hybrid system that includes a traditional pension plus a 401(k)-style plan.

Republicans were ready to make a big push for the plan, until the Assembly Public Employees, Retirement and Social Security Committee Chairman Warren Furutani, D-Gardena (Los Angeles County) sent a letter to Republicans the day before the hearing saying the measures would not be voted on.

Instead, Democrats on the committee made a procedural move to send the bills to an existing conference committee that is discussing pensions. What’s not clear is whether the proposals will ever face a vote, or if they have been disappeared.

Assemblyman Cameron Smyth, R-Santa Clarita (Los Angeles County), who introduced three of the bills, told the committee he had some hope, though, that they would be part of any final solution.

“I think it’s all kind of in the eye of the beholder whether this is going to be seen as moving these bills to legislative purgatory never to be seen again or will they be part of the discussion in front of the conference committee,” he said.

We should have an answer to that in the next few months.

Preacher-in-chief: Here’s a political pop quiz for you: How does a politician avoid a potential public relations land mine involving the death penalty and victims of violent crime?

Answer: Preach, or at least that’s what the governor did this week. Brown was scheduled to speak to an annual gathering of Crime Victims United of California, where many of the speakers before him expressed outrage that a ballot initiative to end the death penalty qualified on the eve of the march and rally.

Prior to his speaking there, Brown told reporters at an event in San Jose that he was glad the death penalty repeal would appear on the ballot, though he didn’t take a public position.

To read entire story, click here.

Cook

Friday, April 27, 2012 – 09:00 a.m.

As expected, two measures proposed by Assemblyman Paul Cook (R-Yucca Valley) related to pension forfeiture and disqualification from office have stalled in an Assembly committee.

AB 1653, the pension forfeiture bill, has been retained in the Assembly Public Employees, Retirement and Social Security Committee on a 4-2 vote.

AB 1654, is set to be considered by the same committee on May 2.

The measures are designed to prevent non-elected public officials convicted of certain public offenses from receiving pension benefits, holding office or public employment.

Cook says allegations in the criminal case involving a $102 million settlement between San Bernardino County and Colonies Partners L.P. was the motivating factor behind the legislation.

Even though the case is being adjudicated and no convictions have resulted.

Similar legislation previously proposed by Cook met the same fate last year.

Cook is running in the hotly contested 8th Congressional District.

The State Worker
Chronicling civil-service life for California state workers
April 24, 2012

A key legislative committee isn’t going to act on a package of public pension reforms proposed by Gov. Jerry Brown and adopted by Republicans in their own bills.

Assembly pension committee chairman Warren Furutani said in a letter that surfaced today that GOP measures that mirror Brown’s 12-point reform plan won’t be heard in his committee. Furutani also co-chairs a special conference committee that is working on public pension reform, and bills could surface there.

“I believe it is appropriate this year to limit the bills considered this year in the policy committees to those that are not within the purview of the Conference Committee,” Furutani said in an April 18 letter to Assemblyman Cameron Smythe, R-Santa Clarita.

To read entire brief, click here.

By JUDY LIN
ASSOCIATED PRESS
Published: Sunday, April 22, 2012 at 11:05 a.m.
Last Modified: Sunday, April 22, 2012 at 11:05 a.m.

SACRAMENTO — It’s been six months since Gov. Jerry Brown put forward his proposals to make the public pension system more affordable, yet action on his 12-point plan has been nearly imperceptible.

That has led Republican lawmakers to accuse the Democrats who control the Legislature of stalling. Democrats acknowledge the slow pace, yet say they are making progress and intend to enact reforms before the session ends in August.

“It’s not as fast as I would like, but it’s complicated,” Senate President Pro Tem Darrell Steinberg, D-Sacramento, said this week during an appearance before the Sacramento Press Club.

He said Democrats have an obligation to deliver pension reform, particularly as they will ask voters in November to approve hikes to the income and sales taxes. But he also said they have “a different take” on parts of the governor’s plan.

Brown’s reform packaged called for increasing the retirement age to 67 for new, non-public safety employees and having local and state government workers pay more toward their pensions and retiree health care. Among other changes, the governor would put new workers in a hybrid plan that includes a 401(k)-style vehicle.

Frustrated that Brown’s reform package had not been translated into individual bills, Republican lawmakers earlier this year did it themselves. They submitted a legislative package that copied Brown’s 12-point plan and asked that it be heard by the Conference Committee on Public Employee Pensions, which has held five hearings throughout the state reviewing retirement benefits for public employees.

To read entire story, click here.

By Ed Mendel
Monday, April 23, 2012

An annual look at CalSTRS, the nation’s second largest public pension system, once again raises the question of whether there is an urgent need to begin putting more money into the pension fund.

Actuaries estimate that the total annual contribution to the pension system, 19.4 percent of payroll, would have to be increased by an additional 12.9 percent of pay (about $3.25 billion) to fully fund pensions promised over the next three decades.

Each year that a contribution increase is delayed, the additional amount needed for full funding is expected to grow roughly half of one percent of pay, Milliman actuaries Nick Collier and Mark Olleman told the CalSTRS board earlier this month.

“Each year we defer there is an additional cost . . . all other things being equal,” Collier said.

Unlike nearly all public pension systems in California, the California State Teachers Retirement System lacks the power to set annual contribution rates that must be paid by employers, needing legislation instead.

So arguably CalSTRS, continuing a five-year quest for a rate increase, might have a tendency to paint a bleak financial picture, hoping to prod legislative action without unduly alarming teachers, who rely on pensions and receive no federal Social Security.

A CalSTRS news release on the actuarial report, based on data as of last June 30, focused on a growing pension shortfall. The projected assets only cover 69 percent of costs expected over the next three decades, down from 71 percent in the previous year.

The funding shortfall is $64.5 billion, up from $56 billion. The gap widened, despite stellar investment earnings last fiscal year (23 percent), due in part to lowering the annual earnings forecast from 7.75 percent to 7.5 percent in the decades ahead.

The funding level and the shortfall or “unfunded liability” are standard measures of pension fund health. And CalSTRS is indeed underwater: The fund peaked at $180 billion in 2007, dropped to $112 billion in 2009 and was $152 billion last February.

But it’s important to remember that the new “unfunded liability” of $64.5 billion is only a floating estimate of the shortfall, not an actual debt that must be paid like a 30-year mortgage.

The big variable is the earnings forecast. The huge CalSTRS shortfall is mainly due to earnings that averaged 5.5 percent during the last decade, well below the old forecast of 7.75 percent.

Critics say a CalSTRS board decision in February to lower the earnings forecast to 7.75 percent is still overly optimistic, concealing massive debt. Whether earnings targets can be hit is part of the debate about “sustainable” public pensions.

Just as being 2 percentage points under the target created the CalSTRS shortfall, the Milliman actuaries estimate that earnings averaging 2 points above the target, 9.6 percent, would fully fund CalSTRS in 30 years without a contribution increase.

More dramatically, CalSTRS could be fully funded without a contribution increase in five years if earnings averaged 16 percent.

“It’s not impossible,” said Collier. “But it’s not realistic to expect investment returns to bring us out of it.”

CalSTRS building in West Sacramento

CalSTRS, one of the nation’s oldest public pension funds, was formed in 1913 and has its centennial next year. Part of its long history is recovering from funding levels less than half of the current 69 percent — a scant 29 percent in 1975.

“One of the things that has come up when we have had discussions with stakeholders and the Legislature about the issue is ‘Why can’t you invest your way out of it?’ You did it before,” Ed Derman, CalSTRS deputy chief executive, told the board.

Among the changes as CalSTRS matured, said the actuaries, is the value of the investment fund compared to the size of the payroll. The ratio was about one to one in 1975, but now the investment fund assets are about six times greater than the payroll.

The Milliman actuaries, following the lead of the California Public Employees Retirement System and a new state actuarial advisory panel, included an “asset volatility ratio” in the new report to show how small losses create the need for bigger contributions.

To read entire story, click here.

By Jon Ortiz
jortiz@sacbee.com
Published: Tuesday, Apr. 17, 2012 – 12:00 am | Page 1A
Last Modified: Tuesday, Apr. 17, 2012 – 7:44 am

The line at CalPERS’ customer service window is getting longer.

After converting to a half-billion-dollar computer system to process benefits for hundreds of thousands of California public agency retirees last September, backlogs for some services are worse than before the project launched.

The new hardware and software installed by New York-based tech firm Accenture aimed to consolidate 49 old data systems into one when it launched last September, two years late at nearly twice its original $279 million budget. The California Public Employees’ Retirement System committed another $6.8 million in December, bringing the total cost to $514 million. The money has come from CalPERS assets, currently valued at $234 billion.

Meanwhile, fund members have complained that a system intended to speed up service and boost efficiency has done the opposite.

Since September, CalPERS has run into snags issuing death benefits to widows and widowers, and for a while failed to make timely payments to health insurers. The delayed payments triggered cancellation notices from the insurers, shocking retirees who thought everything was fine. CalPERS apologized and assured the members that their insurance hadn’t lapsed.

CalPERS’ ongoing struggles with the system have angered members, tarnished the fund’s reputation for strong service and frustrated front-line staff who can’t get their work done because of computer foul-ups.

CalPERS’ managers say they’re making progress.

An 11-page staff assessment of the so-called “my|CalPERS” system that the CalPERS board will get today notes improvements in recent months, including software fixes, training, outreach to employers who weren’t using the system and strategic decisions to prioritize work that have helped the nearly 5-year-old project turn the corner.

“The important thing to recognize is that we’re starting to see normal processing levels” in some areas, said Donna Lum, CalPERS’ deputy executive officer of customer service.

Callers to the fund’s member service center aren’t on hold as long, according to the report. Pension check direct deposit processing is speeding up. A unit that examines pensions for spiking abuses and errors has cut the number of reviews in its queue by more than half to 1,285. More employers are using the new system correctly.

On the downside, my|CalPERS can’t perform some basic functions that affect pension payments, death benefit disbursements and employee retirement planning. Backlogs in several areas will continue through the end of this year, according to the report:

• Retirement adjustments: The system has been unable to automatically process common adjustments to retirees’ pension checks. The fund started January with nearly 6,951 accounts that needed adjustments. It added another 4,195 during the month and closed just 35. CalPERS says software fixes due soon will speed up the work, and estimates it will close 10,000 cases per month by the end of this year. Still, the backlog by then will be three times larger than it was in January.

• Survivor death benefits: The backlog for processing claims by widowed spouses and others due benefits has become so severe that to catch up, CalPERS is hiring six temporary employees. The caseload is expected to grow nearly 20 percent by August to more than 10,000 cases before trending back down.

To read entire story, click here.

By Ed Mendel
Monday, April 16, 2012

CHINO — Proposed legislation may curb “spiking” that has made county retirement systems notorious for providing pensions that exceed salaries earned on the job, a legislative committee was told last week.

After the Contra Costa Times revealed that two fire chiefs retired at ages 50 and 51 with pensions well above their salaries, one of them told the Wall Street Journal: “People point to me as a poster child for pension spiking, but I did not make these rules.”

The Los Angeles Times reported last month that a Ventura County chief executive earning $228,000 retired last year with a $272,000 pension — one of 84 percent of the system’s $100,000 and above pensioners receiving more now than earned on the job.

The 20 independent county retirement systems operating under a 1937 act include Los Angeles, the nation’s 34th largest public pension with 156,000 members and $40 billion in assets, and Mendocino with 1,953 members and $350 million in assets.

The California Public Employees Retirement System, which covers about half of the non-federal government employees in the state, sponsored anti-spiking legislation in 1993 making it more difficult to manipulate final pay used to determine pension amounts.

Similar legislation for the county systems cleared the Senate in 1994 but died in the Assembly. In 1997 the state Supreme Court issued a unanimous ruling in a suit filed by Ventura County deputy sheriffs that opened the door for more spiking.

The court said that in addition to the salary any cash commonly received in a pay grade or class for other things, such as uniform allowances and unused vacation time (but not overtime), must be counted toward pensions under the 1937 act.

The ruling was made “even though through the previous years in collective bargaining the counties and their members had agreed that these additional bonuses would not be treated as pensionable, which is how they got them over base salary in the first instance,” Harvey Leiderman, a fiduciary counsel, told the legislative hearing.

The court ruling created pension debt because annual contributions by employers and employees had not been made for pensions based on the additional pay. To cover the new “unfunded liability,” many county systems dipped into reserves built up over years.

“As a result reserves that had been allocated to cover unfunded liabilities created by the Ventura decision were no longer available to mitigate the negative investment experience that happened with the dot-com bubble,” Richard Stensrud, State Association of County Retirement Systems legislative chairman, told the committee.

A stock market led by high-tech stocks boomed in the late 1990s before plunging. What became known as the “dot-com bubble” burst, punching holes in investment funds expected to provide two-thirds of the money needed by many pension systems.

Later court rulings made the Ventura decision retroactive, boosting the pensions of some persons who had already retired. Several counties made court-approved settlements before the Ventura decision, adding to the legal complexity.

Unlike the state pension systems — CalPERS, the California State Teachers Retirement System and UC Retirement — many county systems declined to release the names and pensions amounts of retirees receiving more than $100,000 a year.

In an unbroken string since 2009, seven county retirement systems have lost separate lawsuits seeking information about how pension funds are spent. The suits were filed by several newspapers and reform, taxpayer and freedom-of-information groups.

Superior courts have ordered disclosures by retirement systems in Contra Costa, Stanislaus, Orange, Ventura, San Diego, Sacramento and Sonoma counties, upheld by appeals court decisions in San Diego, Sacramento and Sonoma.

The Los Angeles Times report last month, which focused on information from Ventura and Kern counties, said most of the other 18 county systems resisted requests for pension information or said it would be too costly or laborious.

“Some have asked to be paid for extracting the data — $63,000 in the case of Sacramento County,” said the Times story. The county association legislative chairman, Stensrud, also is the Sacramento retirement system chief executive.

He told the legislative committee the association, working with other stakeholders and legislative staff, backs a bill, AB 340, that would focus on the conversion of additional pay items to cash during the period that determines pension amounts.

To read entire story, click here.

PolitiCal
On politics in the Golden State
April 13, 2012 | 5:12 pm

As state lawmakers consider proposals to reduce pension costs in California, they face legal obstacles to restricting the retirement benefits enjoyed by many local officials, including some city council members, experts warned Friday.

A legislative committee meeting in Chino indicated that one of the issues it will consider in developing a pension reform plan is whether state and local elected officials should be allowed to participate in public retirement plans.

About a quarter of California’s 482 cities, including Los Angeles, have adopted charters that regulate compensation for elected officials, including pension benefits. Lawmakers would not be able to change pension benefits for charter cities that have their own retirement systems, local officials told the Legislature’s Conference Committee on Public Employee Pensions.

“There would at least be a question. I think there would at least be a court case on it,” said Dwight Stenbakken, deputy executive director of the League of California Cities.

To read entire story, click here.

Thursday, April 12, 2012 – 09:30 a.m.

As San Bernardino County continues to grapple with its ongoing budget woes and confrontations with employee unions continue to escalate, more bad news is on the horizon.

Like most public pension systems, the county’s pension fund hasn’t been able to maintain it’s investment return benchmark.

A benchmark necessary to guarantee the funds actuarial soundness.

The San Bernardino County Employees Retirement Association (SBCERA) has posted on its website the following investment results through 12/13/2011.

Last year, the fund lowered it’s benchmark target to 7.75% from 8.0%.

The benchmark is the rate of return the pension fund must achieve to pay all current and future obligations.

Pension giants California Public Employees Retirement System and California State Teacher’s Retirement System have lowered their own assumptions to 7.75% and will likely lower them again.

To ease its under funded condition, SBCERA must reach a stream of years averaging out to the benchmark target.

If SBCERA can’t meet its threshold then the benchmark rate must be reduced to a realistic target, and county supervisors must come up with even more money to contribute into the fund, sooner rather than later.

SBCERA smooths investment gains and losses over a short period of time. (i.e.  5 years). But actuarial assumptions are factored over periods of twenty years, and even twenty-five or thirty years for some pension funds.

The long term assumptions are used to prevent extreme ripples in funding requirements and allow smaller adjustments over a longer period of time.

But, in the instant circumstance, kicking the can down the road only makes the situation worse.

The last place the county wants to put precious dollars is in the pension system.

SBCERA is no different than any other pension fund in the fact that long-term investment strategies haven’t really paid off with the markets rise from 2008 lows.

The lagging returns place renewed pressure on public coffers to infuse additional cash into the system to pay benefits.

SBCERA Third quarter performance results should be forthcoming shortly.

By Ed Mendel
Monday, April 9, 2012

SANTA ROSA — A two-house legislative committee is working with Gov. Brown’s Department of Finance on a ‘hybrid’ retirement plan for new state and local government hires, a committee member told a forum here last week.

Assemblyman Michael Allen, D-Santa Rosa, twice referred to a “cash balance” plan while talking about a cost-cutting hybrid, proposed by Brown, that combines a lower pension with a 401(k)-style individual investment plan.

At a hearing in February, the committee was briefed on the cash balance plan of the California State Teachers Retirement System, a pension supplement that guarantees a bond-based rate of return on individual investments.

In a typical 401(k)-style plan there is no protection against major investment losses, widespread during a stock market crash in 2008, or a prolonged period of low earnings like some experts predict for the next decade.

A hybrid plan that combines a lower pension with a cash balance plan instead of a 401(k)-style plan could reduce savings for government employers, who would be responsible for covering the gap if earnings fall below the cash balance guarantee.

But protecting workers from the risk of losses in a typical 401(k)-style plan might make a hybrid more acceptable to public employee unions, who have criticized the governor’s hybrid plan at hearings and in news releases.

“We are working on different models to design a plan that will protect the low-paid workers and also be fair to the higher-paid workers,” Allen told the forum. “It’s complex and we are getting a lot of help from the state Department of Finance on this.”

Allen

Brown’s proposal expected the hybrid plan to be developed after the legislation passed. His finance department told a hearing that outside experts would help develop a hybrid plan in about six months, before a Jan. 1, 2013, deadline in the legislation.

The governor’s proposal is a retirement plan that replaces about 75 percent of annual income on the job after a 30-year career, with roughly a third each coming from the smaller pension, the investment plan and federal Social Security.

If the worker is not in Social Security, the pension would be two-thirds of the retirement. A cap on the retirement plan would be based on the Social Security earnings limit, $110,000 this year.

“The whole concept of capping pensions at higher levels is being discussed and probably will be part of the proposal that comes forward,” Allen said.

The assemblyman said the governor’s 12-point pension reform plan is mainly conceptual. Developing legislation for the broad range of California public pension plans is a complicated task, he said, but the committee hopes to issue a proposal in June or July.

“I understand the press believes there has been a long silence on this,” Allen said. “I’ve been advocating for an interim report to let people know what the timelines are, what the expectations are.”

“But we are working on it,” he said. “I do agree when there has been so much controversy and concern on this it would be irresponsible for the Legislature not to respond to the governor’s proposal.”

The six-member committee is scheduled to hold its fourth hearing Friday (April 13) in Chino, this one focusing on county retirement plans. Allen, an attorney, has negotiated labor contracts and served as executive director of SEIU, Local 707.

Asked by an audience member if public pensions are sustainable, Allen said the intent of the governor’s plan is to “inflect a cost curve,” reducing projected government spending on retirement in the future.

“That can be done over a period of time,” he said, “whether done through increased contributions, changing the benefit mix. That’s something we are talking about.”

Allen said the committee also is discussing what some call “intergenerational compacts” and the transfer of debt to future generations through, for example, Social Security or other means. He said the committee wants to strike a balance.

“So what we are trying to do is be fair to the younger generation and also be fair to those who gave their lives in service,” he said.

To read entire column, click here.

Debra J. Saunders

Debra J. Saunders
Friday, April 6, 2012

Why is the federal government under President Obama arguably tougher on medical marijuana operations than it was under George W. Bush? That’s the question that antidrug-war groups have been asking themselves for months.

In 2008, antiprohibitionists thought an Obama administration would not tread on medical-marijuana dispensaries in states where they are legal. Obama 2008 campaign spokesman Ben LaBolt told me Obama “believes that states and local governments are best positioned to strike the balance between making sure that these policies are not abused for recreational drug use and making sure that doctors and their patients can safely access pain relief.”

Now that Obama’s in office, however, his Department of Justice is not allowing the 16 states that have legalized medical marijuana to self-regulate. Exactly the opposite: Last fall, U.S. attorneys in California warned landlords that they must evict medical-marijuana clubs or risk having their assets seized. In October, the Internal Revenue Service informed dispensaries that they cannot declare standard tax deductions because they are criminal enterprises.

“Drug kingpins and cartels don’t file taxes. We do,” Steve DeAngelo, director of medical-marijuana giant Harborside Health Center, told MSNBC. “But no business, including ours, can survive if it is taxed on its gross revenue. The IRS is trying to tax us out of existence.”

On Monday, the feds raided the apartment and medical-marijuana businesses run by Richard Lee, the wheelchair-bound Oakland pro-marijuana activist, who put more than $1 million into the 2010 Proposition 19 campaign to legalize marijuana.

According to news reports, Lee’s supporters came out to protest the raid, and some punctuated their point by lighting up in public. Such antics reinforce law enforcement’s suspicion that recreational users are hiding behind the skirts of medical marijuana.

The thing is, Obama The Candidate said he’d let locals decide how to handle any abuses, and there is local enforcement. According to the office of California Attorney General Kamala Harris, there were 16,585 felony marijuana arrests in 2010. Some cities go after dispensaries suspected of illegal trafficking, others choose to use their resources on higher priorities. (Lee points out that Oakland police were detailed to control crowds that gathered to protest the raid on his Oaksterdam University on the day of the horrific Oikos University shootings.)

An Obama official informed me that the administration has not changed positions. The administration always maintained that federal officials have the authority – indeed, a duty under the Controlled Substances Act – to go after traffickers who use medical marijuana as a pretext to sell a drug.

To read entire column, click here.

By Ed Mendel
Thursday, April 5, 2012

Regents last week reaffirmed the use of a federal IRS cap on the amount of pay used to calculate UC pensions, an inflation-adjusted $250,000 limit this year that also is proposed in a bill capping the pensions of all new hires in state and local government.

A letter from 36 of UC’s highest-paid executives threatened a lawsuit because UC, allegedly breaking a promise made in 1999, did not lift the cap after federal approval finally came in 2007, the San Francisco Chronicle reported in December 2010.

The demand was criticized by Gov. Brown, faculty leaders and others. The executives issued the threat as UC regents approved a painful plan to begin closing a $21 billion retirement funding gap amid budget cuts, pay freezes and layoffs.

Big pensions were in the spotlight. An inflated-salary scandal had erupted in the city of Bell, the “$100,000 club” list of big pensions on a reform group’s website grew, and huge investment losses fueled debate about whether pensions are “sustainable.”

The UC demand prompted Assemblyman Jerry Hill, D-San Mateo, to introduce legislation requiring all pension funds to use the IRS limit. AB 89 was one of several bills held last year at the request of Brown, who wants sweeping pension reform this year.

Now a two-house legislative committee on pension reform, scheduled on April 13 to hold its fourth hearing, is expected to include a pension cap in its proposed legislation, even though a cap has not been specifically discussed so far.

Powerful unions oppose or are skeptical of Brown’s proposed cost-cutting structural changes: higher employee contributions, delayed retirement and a “hybrid” plan for new hires. But the unions support curbs on salary “spiking” and excessive pensions.

The nonpartisan Legislative Analyst’s Office and others have suggested that the inequity between public and private-sector security, much like rising employer costs, is a threat to the “sustainability” of public pensions.

Public employee unions support moves to bolster private-sector retirement such as Retirement USA. Unions and Democratic legislators back SB 1234 by Sen. Kevin de Leon of Los Angeles requiring businesses to put employees in a “personal” pension plan.

Big pensions can draw attention to the wide gap between retirement security for government workers and the private sector, where an estimated six million California workers have little or nothing in retirement plans beyond federal Social Security.

Leading the 12,199 members of the “$100,000 club” on the reform group’s California Public Employees Retirement System list of retirees receiving pensions of $100,000 a year or more:

Bruce Malkenhorst, Vernon city administrator, $530,268; Joaquin Fuster, UCLA neuroscientist, $314,713, and Donald Gerth, CSU Sacramento president, $295,086.

Topping 5,259 retirees on the California State Teachers Retirement System list: James Enochs, Modesto elementary, $296,555; Fredrick Wentworth, San Joaquin County, $290,485, and Edward Hernandez Jr., Rancho Santiago Community College, $286,396.

The highest of the 1,642 on the University of California Retirement Plan list: George Miller, Lawrence Livermore National Laboratory, $270,075; Thomas Cesario, UC Irvine, and James Holst, UC general counsel, $237,129.

After the Los Angeles Times reported in July 2010 that officials of the small city of Bell were receiving some of the highest municipal salaries in the nation, CalPERS began a system-wide review of high pensions.

The Times reported last August that CalPERS had reviewed 2,250 pensions so far and reduced 329, “mostly because employers incorrectly reported employees’ pay.” No updated information was available from CalPERS this week.

Former Bell city administrator Robert Rizzo, once expected to get a $650,000 pension and a second pension boosting the annual total to more than $1 million, had his CalPERS pension slashed to $50,000, the Times said.

The pension of his assistant, Angela Spaccia, was cut to $43,000 from a projected $250,000. Rizzo and Spaccia have been charged with misappropriation of public funds and related crimes.

In addition, CalPERS, criticized for not sounding an alarm about big Bell pay raises, changed internal guidelines and formed a task force to look at pay disclosure, capping pay used to determine pensions and spreading pension costs among employers.

CalPERS and CalSTRS both say they use the IRS cap on pay used to calculate pension amounts. The pay limit under section 401(a)(17) of the Internal Revenue Code increased from $245,000 to $250,000 this year in an inflation adjustment.

To read entire column, click here.

Emmerson

Point of View

Sen. Bill Emmerson
Created: 04/02/2012 09:14:27 AM PDT

Californians have made it clear that they support key reforms to our unsustainable public employee pension system. According to a recent poll by the nonpartisan Public Policy Institute of California, 83 percent of Californians agree that our state’s pension problems must be addressed. With the average debt of both state and county pensions at $30,500 for each California household, it’s no wonder that an overwhelming majority of Californians are demanding reform.

As stated in The Sun’s editorial, “Before pushing taxes, governor must act,” Californians want their governor, as well as legislators, to get “serious about restructuring the state’s expenditures and revenues.” I agree and reforming our costly pension system is an important first step toward balancing our state’s finances.

That’s why legislative Republicans recently introduced several bills to enact the governor’s 12-point pension plan. Our legislative package outlined the governor’s plan verbatim, with no strings attached. While not solving the entire pension problem, the governor’s proposal makes great strides toward addressing our unfunded pension liabilities.

Reforming our state’s public employee pension system has long been a priority for Republicans. Last June Sens. Tom Berryhill, Anthony Cannella, Tom Harman and I introduced Senate Constitutional Amendment 13 – a reform measure that controls pension costs and ends abusive practices. During our failed budget negotiations with Gov. Jerry Brown last year, it was clear to us that he supported virtually every tenet of our proposal. That’s why it was no surprise that the governor’s pension plan, which was put forth last fall, virtually mirrored SCA 13. Unfortunately, legislative Democrats have failed to set either measure for policy hearing.

Both the governor’s proposal and SCA 13 seek to address not only the “easy” fixes such as pension spiking and double dipping, but also addresses the underlying structural issues that contribute to the pension problems faced by state and local government.

Specifically, both plans offer new public employees a hybrid between defined-benefit plans most public employees have and the defined-contribution plans most private-sector companies offer. New employees would be required to contribute more toward their retirement, but would have the additional opportunity to take advantage of a 401(k)-style plan they could manage themselves.

With regard to abuse, both proposals eliminate spiking – a practice that artificially inflates salary at the end of an employee’s career to maximize retirement benefits – by averaging an employee’s final compensation over multiple years. Furthermore, pension benefits would be calculated based only on an employee’s salary – not counting overtime, car allowances and other perks. Double-dipping would also end so an employee cannot receive a pension while simultaneously earning a salary from a government entity.

To read entire story, click here.

Wes Woods II, Staff Writer
Created: 03/30/2012 06:07:44 PM PDT

CLAREMONT – After months of rancor, lawsuits and even some threats, the City Council and the Claremont Police Officers Association have reached a tentative agreement on a 3-year labor contract.

The council is due to vote on the contract at its April 10 meeting, city officials said. The CPOA will present the agreement to its members on Monday.

The negotiations have gone on for months as both sides argued over increased employee pension payments, pay increases and even a dispute over where the union could pass out fliers at the annual Village Venture event.

Mayor Larry Schroeder announced the tentative agreement out of closed session at the regular council meeting this week. He said the vote in closed session was not unanimous but the actual vote was not released.

In the tentative agreement, the CPOA agreed to pay the remaining percentage of its California Public Employees Retirement System contribution starting July 8, 2013 and withdraw the two legal actions it filed against the city.

Union members currently pay 6 percent of the employee PERS contribution and before the end of the contract term will pay the full 8 or 9 percent depending on the employment classification.

City council members, during the length of the contract, agreed to pay union members cost of living adjustments totaling 5 percent.

CPOA president Claremont police Cpl. Rick Varney said the deal was reached after negotiating team members met with city representatives.

He said he did not anticipate the deal collapsing when it is presented to the union membership.

“It’s a formality to have our vote,” Varney said. “The city and our negotiating team worked well together. It’s amazing what you can do without attorneys.”

Schroeder said the agreement allows the council to achieve several long-term goals.

“These are aligning the police union members to be on the same negotiation schedule as other units,” he said, “and all employees will be paying the full amount of their share of PERS contribution by the end of their contracts in June 2014.”

Councilmen Corey Calaycay and Opanyi Nasiali, when reached Friday, declined to discuss the matter because the vote was reached in closed session.

To read entire story, click here.

By Ed Mendel
Thursday, March 29, 2012

After a decade of similar below-target investment earnings, punctuated by huge losses during the stock market crash in 2008, the nation’s two largest public pension funds are looking at different futures.

The California Public Employees Retirement System, putting a new focus on risk, worries about another recession dropping pension funding levels to 40 percent or below, a “warning track” zone that could make it difficult to get back to full funding in the future.

The California State Teachers Retirement System, no longer aiming for full funding, has developed several limited funding scenarios for legislative consideration that would keep the system from running out of money three decades from now.

The views emerged as CalPERS and CalSTRS lowered their earnings forecasts from 7.75 to 7.5 percent. The small drop raises employer pension costs to offset lower investment earnings, which are expected to provide two-thirds of future pension revenue.

The reason the two retirement systems are looking at different funding scenarios is that the CalPERS board, like most public pension boards in California, has the power to set annual contribution rates that must be paid by government employers.

But CalSTRS, the nation’s second largest public pension system, also is one of the oldest, formed in 1913. As if trapped by time, CalSTRS is an outlier unable to raise employer contribution rates, needing legislation instead.

For more than five years, CalSTRS has been trying to get the Legislature to raise contribution rates. It has explored getting the power to raise contribution rates, pursued more aggressive lobbying and even issued a $600,000 public relations contract.

Teacher unions, one of the most powerful groups at the Capitol, are consumed by historic cuts in school funding and teacher layoffs. School districts are said to have had more than $20 billion in reductions in the last four years.

Now the annual increase in contributions needed to get CalSTRS to full funding in 30 years, more than $4 billion, is approaching the total amount of contributions CalSTRS received from all sources last fiscal year, $5.3 billion.

A breakdown of the contributions, little changed from the previous year: teachers $2.4 billion, employers $2.3 billion and state $600 million. The state contributes another $600 million to a separate inflation-adjustment fund.

Meanwhile, pension payments going out to CalSTRS retirees last year increased to $10.1 billion, up 7.8 percent. Spending nearly twice as much on pensions as received in contributions eats up an investment fund valued at $150 billion earlier this year.

Even if investment earnings hit the target, 7.5 percent (which critics say is overly optimistic), the CalSTRS investment fund is expected to run out of money in about 30 years.

In an era of deep cuts in funding for current school operations, future teacher retirement costs have not been a priority. Gov. Brown’s 12-point pension reform plan does not specifically address the CalSTRS funding gap.

Part of the governor’s plan would put new state and local government hires in a “hybrid” plan combining a lower pension with a 401(k)-style individual investment plan. Phasing in a hybrid, opposed by unions, could take decades to yield significant savings.

“It would have some impact — nothing nearly enough to address the problem,” Ed Derman, CalSTRS deputy chief executive, told the board last month, referring to an analysis of the governor’s concepts done before bill language was introduced.

A two-house legislative committee is working on pension reform. Unions support curbs on excessive pensions and other abuses, but are skeptical or opposed to cost-cutting structural changes such as a hybrid, delayed retirement and higher worker contributions.

At the request of legislators, CalSTRS gave the committee a half dozen easily altered funding scenarios to consider. Only one, which puts new members in Social Security, is projected to get CalSTRS to full funding.

But under that scenario CalSTRS would not be 100 percent funded until 2085, with a 47 percent chance of running out of money at some point before then.

To read entire story, click here.

Dan Walters

By Dan Walters
dwalters@sacbee.com
Published: Monday, Mar. 26, 2012 – 12:00 am | Page 3A
Last Modified: Monday, Mar. 26, 2012 – 6:33 am

California’s great public pension battles are heating up, and may be headed for some kind of political explosion.

The Legislature’s Democratic majority appears to be doing its best to ignore significant pension reform, even though Gov. Jerry Brown says the current system is “unsustainable” and an overhaul is needed to persuade voters to raise taxes this year.

Democrats are reluctant to do anything that public employee unions oppose – such as passing Brown’s 12-point pension reform plan – in a year when they’ll be running in much-changed districts and will need all the union help they can get.

With Brown’s plan stuck in neutral and an outside pension initiative dead for lack of financing, the big action will be in the state’s second- and third-largest cities, San Diego and San Jose, where unions are pulling out all the stops to prevent voters from even seeing pension reform on their ballots this year.

The mayors of both cities, Republican Jerry Sanders in San Diego and Democrat Chuck Reed in San Jose, are sponsoring pension overhaul measures, Sanders via initiative and Reed via City Council action. Unions are trying to keep them off the ballot.

San Diego union leaders filed a complaint with the state Public Employment Relations Board, whose lawyer then asked a judge to block the Sanders-sponsored initiative, contending that it circumvented state law requiring negotiations on compensation changes.

It was a novel legal theory and a judge didn’t buy it, ruling that the proper time to challenge a ballot measure was after voters had acted, not before. And the unions left no doubt they’ll do that if the Sanders measure passes in June.

Meanwhile, unions representing San Jose’s city workers directly filed suit themselves, alleging that placing pension reform on the ballot also violates the state collective bargaining law that Brown signed three-plus decades ago.

To read entire story, click here.

PolitiCal
On politics in the Golden State
March 23, 2012 | 5:00 pm

California voters do not blame public employees for the state’s pension woes and are in no hurry to make steep cuts in the system, according to a new USC Dornsife/Los Angeles Times poll.

A majority agreed with the statement that public workers “didn’t create the problem with the pension system” and that any solution must include adequate retirement benefits. When public workers were identified as “teachers, police and firefighters,” that statement had 51% support. Even when no occupation was given, nearly half — 47% — of respondents agreed.

Far fewer agreed with the statement that “we can’t continue to ignore this issue when our debts keep piling up” and that cuts must be made immediately. Only 38% agreed with that statement. When workers’ occupations were not identified, 40% agreed.

California has one of the most troubled pension systems in the nation. This year it is spending $3 billion to help pay retirees’ pensions, and its largest public pension fund recently cut its forecasted investment returns, which will increase the burden on taxpayers. A recent study by the National Assn. of State Retirement Administrators found that pension costs eat up a larger share of California’s budget than of any other state except Alaska.

To read entire story, click here.

By Ed Mendel
Thursday, March 22, 2012

As CalPERS puts a new focus on risk, a funding level that drops to 40 percent is emerging as the red line.

The worry is that if the funding level of the big pension fund drops too far, it may not be practical to raise annual employer payments enough to regain proper funding.

The rough estimate (final figures are not in yet) is that CalPERS funding as of last June averaged 74 percent, up from 65 percent the previous year. A spokesman said the average level has never fallen below 55 percent.

But CalPERS wants some cushion in case the economy slides back into a major recession, punching another big hole in investment earnings expected to provide about two-thirds of pension revenue.

Board member Henry Jones, the new CalPERS investment committee chairman, said last week the nation’s largest public pension fund has the dual task of respecting the employer’s financial situation as well as the “fiduciary” duty to protect pensions.

“If you dig a hole so deep, as Mr. (board member Dan) Dunmoyer said, you could find institutions going into bankruptcy,” he said, “and we have been provided with a chart which shows that if your funding drops to 40 percent you probably can’t survive.”

Jones was explaining why he voted with all but one of the other board members to lower the CalPERS earning forecast from 7.75 to 7.5 percent, raising the annual payments to CalPERS from state and local governments struggling with deep budget cuts.

Dropping to 40 percent of the projected assets (employer-employee contributions and investment earnings) needed to pay pensions promised in the decades ahead would probably not be literally fatal to the California Public Employees Retirement System.

But some recent board reports have charts showing that funding levels would enter a “warning track” (see investment roadmap, p. 15) if they were to drop to 40 percent or below due to big losses during another deep economic recession.

The chief investment officer, Joe Dear, and the chief actuary, Alan Milligan, are trying to understand what might happen if there is another sharp “drawdown” of the pension fund, valued at $237 billion this week.

“I’m quite confident of our ability to achieve a long-term target rate of return,” Dear told the board last week. “I’m more concerned about the risk we have in the portfolio with respect to drawdown.”

At a January workshop, said Dear, the board went through a preliminary exercise showing under what conditions the funding level could drop below 40 percent if a deep recession resulted in investment losses of 20 percent.

“Alan Milligan and I will be bringing a report to you at the end of June and expect, with your agreement, to spend some time at the July off-site (board meeting) on this topic,” Dear said.

Milligan said theoretical work on this type of risk has been done by an actuary, Bill Hallmark, who uses the term “pension event horizon” for the point at which an employer cannot sustain the payments needed to pay off pension debt in a given period.

CalPERS began a new focus on risk after huge losses during the recession, when the investment fund plunged from a peak of $260 billion in the fall of 2007 to a bottom of $160 billion in March 2009.

In addition to developing a risk-based framework for investments, CalPERS also has begun giving the 1,573 government agencies in the system a five-year analysis showing how rates go up if investment earnings are below the target, now 7.5 percent.

CalPERS has been criticized for telling legislators investment earnings would pay for a major trendsetting state pension increase, SB 400 in 1999, even though its actuaries had accurately forecast how rates could soar if earnings fell below the target.

This month CalPERS began making more information public through its website. Board meetings are now being webcast and archived, actuarial reports for 2,043 separate retirement plans posted, and Public Records Act requests listed and summarized.

To read entire column, click here.

Neil Nisperos, Staff Writer
Created: 03/18/2012 03:36:06 PM PDT

Related story: Lawmakers react to CalPERS struggles

Local officials say funding for services are expected to take another hit with the California Public Employee’s Retirement System lowering investment return forecasts last week.

CalPERS, the nation’s largest public pension fund, has requested state, local government and school districts increase contribution rates.

Return projections were lowered from 7.75 percent to 7.5 percent.

Cost calculations have yet to be made for local governments, still reeling from the economic downturn of 2008 and the loss of redevelopment agencies this year.

Under the plan, school districts would contribute another $137 million to cover the pension costs for nonteaching personnel.

Cities, counties and local agencies will see an increase in contributions of 1 percent to 2 percent for civil workers and 2 percent to 3 percent for public safety employees beginning in 2013.

The CalPERS adjustment is expected to add to financial woes in the Inland Empire.

San Bernardino Mayor Pat Morris said his city is in a precarious financial situation, with a 40 percent reduction in the budget in recent years and a minuscule amount left in reserves.

Morris said increasing contributions to the public employees’ retirement system will be an intolerable burden.

“We’ve lost tens of millions from our city’s budget since the economic meltdown, and we’ve had to reduce our work force by hundreds,” Morris said.

“The state then dissolved our redevelopment agency, which cost us $35 million a year in income to the city. Now we have this recalculation of the return rate for the PERS retirement account, and that decrease in the return rate will likely cost us millions more.”

Montclair City Manager Ed Starr said the move could mean city service reductions.

“In the case of our community, it will simply mean absorbing it into our general fund budget, and that might mean looking at service level reductions,” Starr said.

“We think we can build it into the general fund budget, but it limits the amount of money for services, supplies, and capital outlay.”

Chino Mayor Dennis Yates echoed the financial concern.

“It’s another expenditure coming out of the general fund and, of course, it finances fire personnel, police, and different activities in the city. We continue to bear the brunt. From what I gather, (CalPERS) has got some very poor investment practices. They’ve been under investigation, and the public has to pay for it.”

The CalPERS action came amid increasing scrutiny of the cost of providing for government retirees, who receive the types of defined-benefit pensions that are unavailable in the vast majority of the private sector.

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By Dale Kasler
dkasler@sacbee.com
Published: Wednesday, Mar. 14, 2012 – 12:55 pm

CalPERS gave final approval today to a quarter-point reduction in its investment forecast, but will look at softening the fiscal impact on government budgets.

The lowered forecast will cost the state an extra $167 million a year, and will also raise costs for the school districts and municipalities that belong to the California Public Employees’ Retirement System.

But the CalPERS board, sensitive to piling a higher burden on cash-strapped government agencies, told its staff to examine phasing in the dollar impact over two years.

CalPERS’ governing board voted 9-1 to lower the investment forecast to 7.5 percent, affirming a recommendation Tuesday by its pension and health benefits committee. The panel sidestepped a proposal by CalPERS’ actuarial staff that the forecast be slashed a half point, to 7.25 percent – a move that would have cost the state’s general fund $425 million a year in additional costs.

As it is, cutting the forecast by a quarter point will put increased financial pressure on the state, beginning with the new fiscal year July 1. With the state in a $9.2 billion deficit, the higher costs could influence the debate over Gov. Jerry Brown’s push for changes in the public pension system.

Instead of forcing agencies to swallow the change all at once, board member George Diehr proposed phasing it in over two years. Labor leaders and local government officials pleaded for the phase-in.

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By Dale Kasler
dkasler@sacbee.com
Published: Tuesday, Mar. 13, 2012 – 12:00 am | Page 3A
Last Modified: Tuesday, Mar. 13, 2012 – 9:02 am

The state’s cost of supporting CalPERS could jump by as much as $425 million in the next fiscal year, generating more political heat on public pensions at a time of massive budget deficits.

The additional cost would result from a proposed reduction in CalPERS’ all-important investment forecast. The pension fund today will consider slashing its forecast by half a percentage point, to 7.25 percent.

With the forecast lowered, the California Public Employees’ Retirement System would need another $772 million from the state each year, according to figures CalPERS released Monday. The higher contribution would kick in when the new fiscal year starts July 1.

Because much of the money would come from so-called special funds, the hit to the general fund would come to $425 million. That would bring the total annual contribution to CalPERS from the general fund to more than $3.9 billion.

CalPERS has the power to set the contribution rate without the Legislature’s approval. But the pension fund isn’t oblivious – or immune – to political forces. It’s leery of increasing the burden on taxpayers, with the state facing a $9.2 billion deficit and Democratic Gov. Jerry Brown leading a push for pension reform.

Yet in the turbulent climate following the 2008 market crash, CalPERS also is under pressure to reduce its investment forecast, as many other pension funds have. CalPERS rejected a staff proposal to cut its forecast last year, but this time appears ready to act.

Cutting the rate “sounds like a sensible series of actions,” said Alicia Munnell, head of the Center for Retirement Research at Boston College.

CalPERS Chief Executive Anne Stausboll said the decision “might be difficult for some of our employers, but it is the right course of action to protect the benefits of our members and their families.”

By cutting the forecast, CalPERS would be “recognizing what the current financial markets can deliver,” she said in a prepared statement.

The issue is so sensitive, CalPERS staff has proposed an alternative, less dramatic change – reducing the forecast by just a quarter point, to 7.5 percent. In a memo to the board last week, senior actuary Alan Milligan said the quarter-point change might be advisable, “given that the state of the economy has put severe pressure on employers’ budgets.”

The less severe adjustment would cost the general fund $167 million a year.

CalPERS spokesman Brad Pacheco said the fund has earned an average return of 8.4 percent annually over the past two decades. Its return in 2010 was more than 20 percent. But it earned just 1.1 percent in 2011, and critics have said it has been dragging its feet on reducing its forecast.

Any change in CalPERS’ investment forecast trickles down to the local level as well.

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By Marc Lifsher
March 7, 2012, 11:53 a.m.

The chief actuary of California’s biggest public pension fund is recommending that it cut its assumed-rate-of-return target by half a percentage point.

The change, if adopted by the board of the California Public Employees’ Retirement System next Wednesday, could boost retirement costs by millions of dollars for the state government and more than 3,000 local agencies that participate in CalPERS.

Actuary Alan Milligan in a memo suggests lowering the assumed annual rate of return from 7.75%, where it’s been for the last decade, to 7.25%. It would be the first such reduction since the fund, currently valued at $238.4 billion, lost nearly a quarter of its investment portfolio during the 2007-09 recession.

Milligan also is recommending that CalPERS lower its ongoing inflation assumption from 3% to 2.75%.

The effect of the two changes would raise the state government’s employee pension costs by as much as 4.5% in the fiscal year that begins July 1. Some pension costs for public safety agencies could jump by as much as 6.6%, according to Milligan’s report to the board.

Last year, the board rejected a more modest Milligan recommendation to lower the assumed rate of return rate from 7.75% to 7.5%. Members at the time were concerned about the financial impact on local governments that were struggling to pay for basic services with declining tax revenue.

As an alternative this year, Milligan now also is proposing that it might also be prudent to cut the assumed rate of return to just 7.5%.

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