By Ed Mendel
Monday, April 22, 2013

The question of whether pensions are “sustainable” may get an answer as a CalPERS board action last week ratchets up annual state and local pension costs during the next seven years.

A former CalPERS chief actuary, Ron Seeling, gave pension critics ammunition in 2009 when he said his personal view was that “without a significant turnarounds in assets” the big system could be facing decades of “unsustainable pension costs.”

Now actuarial methods adopted by CalPERS will raise many employer rates to what Seeling worried could be “unsustainable costs of between 25 percent of pay for a miscellaneous plan and 40 to 50 percent of pay for a safety plan (police and firefighters).”

The official CalPERS view ignores the possibility that the big rate increase could squeeze funding for other programs enough to trigger a backlash, perhaps even rekindling fear among public pensions of a switch to 401(k)-style individual investment plans.

Instead, the rate hike is said to be needed to put CalPERS back on the path to full funding in 30 years and build a cushion against another deep economic recession, which could slash investment earnings and pension funding levels.

“This was one of the most difficult, yet most important decisions we have had to make,” Rob Feckner, the CalPERS board president, said in a news release last week. “Moving our plans more swiftly toward full funding will ensure a sustainable pension system for our members, employers and ultimately taxpayers over the long-term.”

Moody’s, a Wall Street bond rater that tracks pension debt, gave the CalPERS rate hike a qualified thumbs up, summed up by a headline in its weekly credit outlook: “Near-term Pressure but Long-Term Positive.”

The new rates do not begin until 2015, giving employers time to plan and adjust. But after years of budget cuts, Moody’s suspects some local governments may “lose their willingness and ability” to make further cuts needed to maintain their credit rating.

“While marginal increases in required pension contributions phased in over five years will likely be manageable for the state and most California local governments, the most fiscally challenged local governments could find these proposed increases unmanageable,” said Moody’s.

“These governments will likely follow the developments in the Stockton and San Bernardino bankruptcy proceedings with even greater interest, since the ability of a CalPERS participant to use the bankruptcy courts to adjust pension liabilities will be a significant issue in these proceedings.”

The giant California Public Employees Retirement System serves state workers, non-teaching school employees and 1,576 cities, counties and special districts that have 2,044 separate retirement plans, each with its own benefits and funding level.

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