By Dan Walters | Feb. 21, 2018 | Commentary
The essence of California’s pension crisis was on display last week when the California Public Employees Retirement System made a relatively small change in its amortization policy.
The CalPERS board voted to change the period for recouping future investment losses from 30 years to 20 years.
The bottom line is that it will require the state government and thousands of local government agencies and school districts to ramp up their mandatory contributions to the huge trust fund.
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Client agencies – cities, particularly – were already complaining that double-digit annual increases in CalPERS payments are driving some of them towards insolvency and the new policy, which will kick in next year, will raise those payments even more.
“What we are trying to avoid is a situation where we have a city that is already on the brink, and applying a 20-year amortization schedule would put them over the edge,” a representative of the League of California Cities, Dane Hutchings, told the CalPERS board before its vote.
But CalPERS itself may be on the brink, and the policy change is one of several steps it has taken to avoid a complete meltdown.
The system, once more than 100 percent funded, now has scarcely two-thirds of what it would need to fully cover all of the pension promises to current and future retirees – and that assumes it will hit an investment earnings target (7 percent per year) that many authorities criticize as being too optimistic.
The trust fund lost about $100 billion in the Great Recession and never has fully recovered. By lowering its earnings projection – it had been 7.5 percent – while moving to a more conservative investment strategy and cutting the amortization period, CalPERS hopes to avoid another disaster were the economy to turn sour.
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