By Ed Mendel
Wednesday, February 19, 2014

A divided CalPERS board yesterday approved a faster rate hike for the state urged by Gov. Brown, but opposed by unions. A proposal to give struggling cities the option of more time to phase in the rate hike, seven years instead of five, was rejected.

The rate hike to cover the cost of retirees living longer is the third in the last two years, following a lower earnings forecast and a more conservative actuarial method. Many local government rates could increase roughly 50 percent by 2020.

An underfunded CalPERS has about 70 percent of the projected assets needed to pay promised pensions. There were big pension increases and deep employer rate cuts in good times, then huge investment losses during the bad times last decade.

“The board today took important and responsible action to strengthen California’s pension system,” Brown said in a brief news release after the CalPERS board voted 7-to-4 to begin a three-year phase in of the state rate hike July 1.

The California Public Employees Retirement System staff, following board policy, had recommended that the rate hike be delayed until July 2016 and then phased in over five years to pay off the increased longevity projection over 20 years.

Brown sent the CalPERS board a letter two weeks ago urging a three-year phase in of an immediate state rate hike. He said the “unacceptable” delay recommended by staff would cost an estimated $3.7 billion more over the next 20 years.

The governor said the longevity rate hike, when fully phased in, will cost the state an additional $1.2 billion a year, up from the current $3.8 billion. He said the debt or “unfunded liability” for state pensions will increase from $45 billion to $54 billion.

As noted during debate yesterday, the state has the option of paying more than the rate set by the CalPERS board. At Brown’s direction, the state was said to have paid an unspecified amount more than the CalPERS rate the last two years.

Now with a rate set by the CalPERS board, the governor will not have to persuade the Legislature to make a higher contribution. A projected $5.6 billion state budget reserve next year will create pressure for reversing recession cuts and possibly pay hikes.

“I do not think we have an obligation to help the governor jam the Legislature,” said CalPERS board member J.J. Jelincic. “If the state has extra money, the fund across the river (California State Teachers Retirement System) is actually in far worse shape.”

CalSTRS lacks the power to set employer rates, needing legislation instead. Assembly Speaker John Perez, D-Los Angeles, wants a rate solution this year, sooner than Brown expected next year. An Assembly committee hearing is scheduled today.

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