CalPERS and Gov. Jerry Brown agree the pension fund needs to significantly raise its contribution rates to keep up with ever-increasing life expectancies.
They disagree on how quickly rates should rise.
The CalPERS staff, in a report to its board Wednesday, outlined a plan for raising rates starting in fiscal 2016-17. The increases, covering the state as well as several thousand local government agencies and school districts, would be phased in over five years under the staff recommendation.
The recommendation could meet with more friction from Brown. Responding to a preliminary CalPERS report issued in December, Brown last week labeled as “unacceptable” the plan to delay implementation until 2016.
He said the higher rates should start taking effect in the upcoming fiscal year, which begins in July, and the phase-in period should be only three years instead of five.
“No one likes to pay more for pensions, but ignoring their true costs for two more years will only burden the system and cost more in the long run,” he said in a letter to CalPERS President Rob Feckner.
Brown reiterated his stance Wednesday evening. “The board has the legal authority and moral responsibility when the facts warrant,” the governor said in a prepared statement. “And the facts certainly warrant prompt action –now.”
CalPERS, though, has said it wants to give its member agencies as much time as possible to prepare for the higher rates, particularly when many are still strapped for cash in a slowly recovering economy. “Our board must balance a number of factors in their decision making, including the state of our financial markets, our economy and the ability of our members and employer partners to pay increased pension costs,” the pension fund said last week in response to Brown’s criticism.
Despite the governor’s stance, the pension fund’s board has final say on rate implementation.
The increases would be hefty, even if they’re imposed on the CalPERS timetable. The state, which currently contributes $3.8 billion a year to CalPERS, would see a $1.2 billion increase in the fifth and final year of the ramp-up, according to calculations by the Governor’s Office. CalPERS said Brown’s calculations are accurate.
The issue of higher contribution rates has long been a delicate point for CalPERS, whose board is dominated by employees and union groups. With two major California cities in bankruptcy, CalPERS is leery of adding to other cities’ financial stress, which could create a political backlash against public pensions. As it is, the mayor of San Jose is pushing a ballot initiative to give California governments greater power to ratchet down pension costs.
At the same time, CalPERS is sensitive to criticisms about its finances and wants to shore up the pension fund for the long haul. Despite stronger investment returns this past year, CalPERS is still affected by the 2008 market crash and faces a long-term shortfall of $100 billion.
“The idea is to increase the long-term sustainability of the fund,” said Brad Pacheco, spokesman for the California Public Employees’ Retirement System.
Wednesday’s staff report makes a passing reference to Brown’s letter and says that under current CalPERS policy, member agencies already can “pay more in contributions than the minimum contribution rate set each year.” The state is paying extra to CalPERS this year and did so last year as well, although CalPERS officials weren’t able to provide details.
The League of California Cities, in a letter to CalPERS, said it supports the CalPERS plan but wants the higher rates phased in even more slowly for those cities that need it. The shorter phase-in “would likely cause drastic service reductions in some cities and even more dire consequences in others,” said the league’s executive director Christopher McKenzie in his letter.
McKenzie also asked CalPERS to consider “a more aggressive pre-funding option for those few local units that may be able to afford to do so.”
The CalPERS board is set to vote on the recommendation on Tuesday, although the actual rate-setting won’t occur until late 2015 for local governments and early 2016 for the state and school districts.
Driving the higher contributions: new actuarial studies showing public employees and retirees are living longer. Public safety agencies will be particularly hard hit because their ranks are dominated by men, and “the life expectancy of male members continues to increase at a faster pace than female members,” according to the report.
While Brown has pressed CalPERS to move quickly on higher rates, he has also said he wants to work with lawmakers and others on a plan for CalSTRS, which is at least $70 billion under-funded. His budget plan suggested a rescue could be enacted by the Legislature in 2015, although he supported a call by Assembly Speaker John A. Pérez for a hearing this year. Unlike CalPERS, the teachers fund needs the Legislature’s permission to raise rates.