By Ed Mendel

The state contribution to CalPERS should increase to $3.9 billion in the new fiscal year beginning July 1, up $600 million from the current year, actuaries for the giant public pension fund calculate.

The recommendation to the CalPERS board next week comes as Gov. Arnold Schwarzenegger is scheduled to issue a revision Friday of the state budget he proposed in January, which assumed a $200 million CalPERS increase to $3.5 billion.

Increasing the CalPERS contribution by $400 million would add to a huge state budget deficit estimated to be $20 billion in January. The governor proposed closing the gap by cutting most programs, going even deeper if the state does not get a federal bailout.

Much of the recommended increase in the CalPERS contribution, $299 million, is the result of a study issued last month of trends among CalPERS members, the first in six years. They are living longer, earning more pay and retiring earlier.

The main driver is an increase in average life expectancy. At age 50, for example, the increase for males is a full year, from 80.9 to 81.8 years, and for females a smaller increase, from 84.8 to 85 years.

A report by the actuaries said $101.7 million of the increase reflects a decision by the CalPERS board in February to improve the funding level, which last June was 58.4 percent of the estimated amount needed to meet future obligations.

That’s well below the 80 percent funding level regarded by many as an acceptable minimum for public pension funds. The recommended contribution increase would improve the estimate for the largest state worker fund to 76 percent by 2042.

Last December, the CalPERS board adopted a radical “smoothing” policy to avoid a contribution rate shock, a three-year phase in of the impact of investment losses from the historic stock market crash and economic recession.

The policy produced the estimate that the state contribution would increase $200 million in July. The new actuaries report said a 24 percent investment loss in fiscal 2008-09, when smoothed, accounts for $115 million of the hike.

Most of the rest of the increase, $58 million, is attributed to more retirements than expected last fiscal year. CalPERS thinks the retirement rate has jumped because of the economic downturn, cutbacks in positions and pay, and an aging workforce.

The CalPERS fund has been on a roller coaster. The 24 percent loss last fiscal year included the historic stock market crash in the fall of 2008, part of a worldwide financial crisis.

But the investment portfolio of the nation’s largest public pension fund was falling before the market crash. It peaked at $260 billion in fall 2007, plunged to $160 billion in March 2009 (a 38 percent loss), and was back up to $207 billion this week.

In the last two decades, state contributions to CalPERS also have had big swings. The state contribution to CalPERS was steady at $1.2 billion in 1996 and 1997, an attachment to the new actuaries report shows.

Then the state contribution dropped to $159 million in 1999 and $157 million in 2000 as the economy during a high-tech boom produced big investment gains, giving CalPERS a surplus with a funding level of more than 100 percent.

The powerful CalPERS board, which sets the rate that must be paid by the state, was not required to give a contribution “holiday” to a state budget that had a surplus of its own as tax revenue soared during the high-tech boom.

But the CalPERS board, instead of investing the surplus for the next downturn in the economic cycle, went the other direction and sponsored a major benefit increase, SB 400 in 1999.

The now-controversial legislation replaced a cut in pension benefits enacted under former Gov. Pete Wilson in the early 1990s with a pension increase that allows a state worker to retire after 40 years on a pension equal to 100 percent of final pay.

State retirees were given a retroactive pension increase. And most famously, the Highway Patrol received a pension formula (3 percent of final pay for each year served at age 50) that critics say set an “unsustainable” statewide trend for police and firefighters.

Although critics blame SB 400 for soaring state pension costs, CalPERS says state payroll growth has caused 51 percent of the increase, the SB 400 benefit increase 27 percent, other benefit changes 8 percent, and miscellaneous factors 14 percent.

The first Democratic governor in 16 years, Gray Davis, took office in 1999. Public employee unions, chafing under the Wilson pension cut, also noted that their pension contributions, 5 percent of pay for most workers, were not reduced in the good times.

At a Senate committee hearing this week, David Crane, the governor’s pension advisor, read from what he said was a 17-page CalPERS proposal urging passage of SB 400.

Crane said the CalPERS document said “no increase over current employer contributions is needed for these benefit improvements” and that CalPERS could “remain fully funded” despite benefit increases that would not cost taxpayers “a dime.”

He said the document failed to disclose that the state would have to pay for investment shortfalls, the Dow Jones market index would have to hit 25,000 by 2009, and the potential state costs were uncapped.

In addition, he said, the document did not disclose that CalPERS employees would benefit from the pension increases, and that CalPERS board members received campaign contributions from pension beneficiaries.

“It’s nothing short of astonishing that the CalPERS proposal, which promoted the largest non-voter approved debt issuance in the state’s history, was not accompanied by disclosures of risks or conflicts of interest,” Crane said.

“Frankly, I’ve never seen a document like this,” he said. “And even what Goldman Sachs is alleged to have done looks like child’s play in comparison.”

(The U.S. Securities and Exchange Commission last month filed a complaint against Goldman Sachs, a major Wall Street firm, alleging it sold mortgage-backed securities created with help from an investor who intended to bet against them.)

“This episode,” Crane said of SB 400, “illustrates the perverse nature of CalPERS’ governance. The party with 100 percent of the risk and zero percent of the upside — that is, the people of the state of California — have no control over CalPERS.

To read entire story, click here.