California Pension May Ask for 50% Boost to Close GapMichael B. Marois
California taxpayers may see the municipal pension contributions they fund for the California Public Employees’ Retirement System rise as much as 50 percent under a plan to fill $87 billion in unfunded obligations.
Alan Milligan, the fund’s chief actuary, recommends that the biggest U.S. pension stop spreading out losses and gains over 15 years and instead set rates based on how much is needed to reach 100 percent funding within 30 years.
The Sacramento-based pension, known as Calpers, is about 26 percent short of meeting its long-term commitments. The state and cities contributed $7.8 billion in the last fiscal year, almost four times more than a decade earlier.
In a version of pay-me-now-or-pay-me-later, Milligan said the plan “will result in a lower probability of large increases in employer contribution rates” in the future, according to a report to a Calpers committee. The $257.6 billion fund’s Pensions and Health Benefits committee approved the proposal today. The full board will consider it tomorrow.
Smoothing out gains and losses over 15 years, rather than accounting for them in one year, helps to ease potential spikes in the annual contribution rates. The rates are calculated as a percentage of the payroll of the state, cities and other local governments, financed by taxes.
Under Milligan’s proposal, the fund would shrink its 15-year rolling period for asset smoothing to five years and amortize gains and losses over a fixed 30-year period rather than the current rolling 30-year period. A fixed period means that all obligations will be fully funded by a specific date.
If approved, the rates charged to governments would increase by as much as 50 percent. The board amended the proposal to delay implementation of its rate increase for the state one year to 2015.
“This will reduce the risk our system currently faces,” said the fund’s chief executive officer, Anne Stausboll. “This is clearly the right thing for us to do.”
Government contributions were already set to increase under the current smoothing and amortization policy. Half of the increase for the state, for example, would occur even under the existing policy.
The pension fund currently has about 74 percent of the money it needs to pay benefits over 30 years, after dropping to 61 percent in 2009 amid the global financial crisis that wiped out more than a third of the fund’s market value. Under the current rates and smoothing policy, the fund would reach an 80 percent funded status within 30 years.
The median funded status of state pensions, meaning how much money a system has in order to pay its obligations, fell to 72 percent in 2011 from 83 percent in 2007, according to data compiled by Bloomberg.