Pension Reform

By Ed Mendel
Monday, July 7, 2014

A bill that started out as Gov. Brown’s proposal to restructure the CalPERS board emerged from the Legislature last week as a more modest change: a requirement that CalPERS board members receive 24 hours of education in pension fund operations.

A 12-point pension reform proposed by Brown in October 2011 called for more “independence and expertise” on the CalPERS board. The governor’s appointees would have doubled to six, matching the number of labor representatives.

“In the past, the lack of independence and financial sophistication on public retirement boards has contributed to unaffordable pension benefit increases,” said No. 11 of the governor’s 12-point plan.

The “unaffordable” pension increases were not identified. But the reference may have been to two bills backed by the powerful CalPERS board, which sets annual rates that must be paid by government employers in the giant retirement system.

When a booming stock market gave pension funds a surplus, a CalPERS sponsored bill, SB 400 in 1999, sharply boosted Highway Patrol pensions and authorized the same pension formula for local police, which many obtained through bargaining.

For state workers, SB 400 rolled back a pension cut given new hires earlier in the decade. Low pensions earned under the old plan could be boosted through a “buy back” with increased contributions. Retirees received a 1 to 6 percent pension increase.

A second bill, AB 616 in 2001, authorized three escalating pension formulas for local governments in CalPERS and 20 county systems operating under a 1937 act. The top formula, “3 at 60,” provides 120 percent of pay after 40 years of service at age 60. (See table at bottom)

The CalPERS board, rejecting the advice of its chief actuary, encouraged local governments to boost pensions authorized under AB 616 by offering in 2001 to inflate the value of their pension fund investments to help cover the increased cost.

While boosting pensions, the CalPERS board sharply cut employer rates. The state CalPERS contribution was $1.2 billion in 1997, dropped to less than $160 million in 1999 and 2000, before rebounding after four low years to nearly $1.2 billion in 2002.

Contributions

Now CalPERS is underfunded and has imposed three rate hikes in the last two years. The last valuation (as of June 30, 2012) showed CalPERS had about 70 percent of the projected assets needed to pay pension obligations over the next three decades.

What would the CalPERS funding level be if a more “independent and expert” board had not raised pensions and cut employer contributions as the funding level went above 100 percent during good economic times?

CalPERS has not done the calculation. But an example of the impact of spending down a brief pension fund surplus comes from the California State Teachers Retirement System, which also cut contributions and raised pension benefits around 2000.

If the boom-time changes had not been made and CalSTRS still operated as in 1990, the funding level would have been 88 percent instead of 67 percent, the CalSTRS actuary, Milliman, reported last year.

A huge CalSTRS rate increase signed by the governor last month, which will squeeze school funding with a $5 billion increase over the next seven years, could have been sharply reduced by better management, possibly even avoided.

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