By Ed Mendel
April 9, 2015

Actuaries recommend a $487.2 million annual increase in state payments to CalPERS in the new fiscal year that begins in July, an increase for state worker pensions of about 10 percent to $4.9 billion.

Most of the increase is the result of expecting retirees to live longer and a change of actuarial methods aimed at getting to full funding sooner. More rate increases are expected for another four years.

The proposed rates that the California Public Employees Retirement System board will be asked to adopt next week are a little lower than expected in the new state budget proposed by Gov. Brown in January.

His Finance department expected the annual payment to CalPERS for state workers to be $5 billion ($2.9 billion from the general fund) in the new fiscal year, up from $4.5 billion this year.

The five state worker retirement plans as of June 30, 2014, had an average of 72 percent of the projected assets needed to pay future pension obligations, up from 66 percent the previous year due to strong pension fund investment earnings.

The debt or “unfunded liability” (pension obligations over the next 30 years not covered by the projected assets) dropped to $43.3 billion as of June last year, down from about $49.9 billion in the previous year.

Part of the rate increase results from the governor’s recent pension reform. Most state workers are required to pay 50 percent of the pension “normal” cost,” the rate for the pension earned during the year excluding the debt from previous years.

State workers contribute about 6 to 11 percent of their pay to pensions. The reform requires that money the state saves from the reform’s higher employee contributions be used to help pay off the unfunded liability, rather than lower state rates.

As a result, the actuarially required payment to the state next fiscal year is $4.75 billion. But to comply with the reform’s directive on savings from higher employee rates, the actuaries recommend a total state rate of $4.9 billion.

CalPERS state rates have been on a roller-coaster the last 15 years. During a booming stock market boom in the late 1990s, CalPERS had a surplus with a funding level of about 135 percent of the projected assets needed to pay promised pensions.

The CalPERS board dropped the state rate, $1.2 billion in 1997, to a relative near zero: $159 million in 1999 and $157 million in 2000. This is called a contribution “holiday,” which is banned under the new pension reform.

The CalPERS rate jumped to $677 million in 2001 and had reached $2.7 billion in 2007, the eve of destruction. CalPERS had a funding level of about 100 percent then. And the investment fund, expected to pay two-thirds of pensions, was valued at $260 billion.

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