CalPERS Updates their Rates

This past week, the CalPERS board met to address the 23 percent reduction in portfolio value since this time last year. Back in 2005, PERS had adjusted rates upward in an attempt to "smooth out" future payments to ensure that rates wouldn't skyrocket in bad years. Unfortunately, this most recent investment shock was larger than anticipated when rates were "smoothed out".

A second "smoothing" was approved that will raise rates but allow agencies to absorb the increase over a longer period of time. For local governments, we'll first feel the impact of this increased rate in the 2010-2011 fiscal year. We don't know yet what the actual rate will be, but will receive it soon and begin to factor it in to our long range budget planning. In any case, while some are not happy with the rate smoothing, it will save a lot of jobs over the next few years. Whether we will regret this in hindsight remains to be seen. If the stock market stabilizes, it will turn out to be a good decision. If the market starts heading south again for an extended period of time, we'll end up paying a far greater price in the future.

Here are a number of articles on the subject:

Click here for the Los Angeles Times story. Click here for Pensions & Investments take on the subject. For PublicCeo.com, click here. For calpensions.com, click here.

In a related matter, Orange County is close to putting in place the a two-tier pension system. Here's an excerpt from the Orange County Register:

Here's how it works: existing county employees could decide whether to keep their old benefits, or select a hybrid plan that includes reduced pension and a defined contribution plan, which is similar to a 401k. New employees also would get to choose between the two plans.
For example, an employee who has been working at the county for 30 years and makes $60,000, now pays about $700 a month toward his pension. He can retire at age 55 and collect $4,050 per month.
Under the new plan, employees would retire later – at 65 – and collect less from their pensions – about $2,430 a month for a 30-year employee. But when they're working, they'd pay less each month – about $360 for the employee who makes $60,000. Plus, they could decide how much to contribute to the 401a plan, which the county would generally match up to two percent.
The agreement also establishes a committee of union workers and county executives charged with finding more efficient ways to run the county. Any savings would be passed on to the employees in the lower-tier retirement plan in the form of a higher county matching contribution – a sort of public profit-sharing.

Click here for the entire story.

Back in the 1990s, the State of California had initiated a two-tier system when revenues dropped during the recession. Here is an excerpt from an editorial this week in the San Diego Union Tribune, which discusses legislation passed in 1999 to enhance state retirement benefits and eliminate the two-tier system that had saved the state hundreds of millions of dollars (be sure to read the section I've put in bold):

Three months after the CalPERS board made its recommendation, Senate Bill 400 swept to passage and was signed by Davis.
It revised sharply upward the formula under which retirement benefits were calculated for state and public school workers; it based the benefits on the final year of pay (normally the highest), not an average of the final three years; it erased a previous money-saving reform by ending a tier system under which new hires received smaller pensions; and it conferred a vast array of pension sweeteners on retirees and their survivors. It also paved the way for local governments throughout the state to offer similar retroactive gifts of public funds to their employees and retirees.
CalPERS' argument that this enormous pension spike would have little long-term fiscal consequence had carried the day. Its official estimate was that in 2008-09, the state's employer contribution would be only $379 million.
The actual figure: $4.6 billion. The likely figure in the next few years, thanks to the stock market's huge slide, will probably be much higher. (emphasis added)
In other words, the annual cost of the allegedly benign 1999 pension spike is likely to be at least a dozen times the original estimate. And if state leaders did the prudent thing and started setting aside money to cover at least $48 billion in unfunded retiree health benefits, that would add at least $2 billion more to the annual tab.