Author: Ed Mendel

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at Calpensions.com.

The one thing some pension reformers say is needed to cut the cost of unaffordable public pensions: give current workers a less costly retirement benefit for work done in the future, while protecting pension amounts already earned.

It’s allowed in the remaining private-sector pensions. But California is one of about a dozen states that have what has become known as the “California rule,” which is based on a series of state court decisions, a key one in 1955.

The pension offered at hire becomes a “vested right,” protected by contract law, that cannot be cut, unless offset by a new benefit of comparable value. The pension can be increased, however, even retroactively for past work as happened for state workers under landmark legislation, SB 400 in 1999.

Last week, an appeals court issued a ruling in a Marin County case that is a “game changer” if upheld by the state Supreme Court, said a news release from former San Jose Mayor Chuck Reed, who wants to put a pension reform initiative on the 2018 ballot.

Justice James Richman of the First District Court of Appeal wrote that “while a public employee does have a ‘vested right’ to a pension, that right is only to a ‘reasonable’ pension — not an immutable entitlement to the most optimal formula of calculating the pension.

“And the Legislature may, prior to the employee’s retirement, alter the formula, thereby reducing the anticipated pension. So long as the Legislature’s modifications do not deprive the employee of a ‘reasonable’ pension, there is no constitutional violation.”

The ruling came in a suit by Marin County employee unions contending their vested rights were violated by a pension reform enacted in 2012 that prevents pension boosts from unused vacation and leave, bonuses, terminal pay and other things.

These “anti-spiking” provisions apply to current workers. The major part of the reform legislation, including lower pension formulas and a cap, only apply to new employees hired after Jan. 1, 2013, who have not yet attained vested rights.

The California Public Employees Retirement System expects the reform pushed through the Legislature by Gov. Brown to save $29 billion to $38 billion over 30 years, not a major impact on a current CalPERS shortfall or “unfunded liability” of $139 billion.

Similarly, legislation two years ago will increase the rate paid to school districts to the California State Teachers Retirement System from 8.25 percent of pay to 19.1 percent, while the rate paid by teachers increases from 8 percent of pay to 10.25 percent.

The limited teacher rate increase followed the California rule. The new benefit offsetting the 2.5 percent rate hike vests a routine annual 2 percent cost-of-living adjustment, which previously could have been suspended, though that rarely if ever happened.

While mayor of San Jose four years ago, Reed got approval from 69 percent of voters for a broad reform to cut retirement costs that were taking 20 percent of the city general fund. A superior court approved a number of the measure’s provisions.

But a plan to cut the cost of pensions current workers earn in the future by giving them an option (contribute up to an additional 16 percent of pay to continue the current pension or switch to a lower pension) was rejected by the court, citing the California rule.

In a settlement of union lawsuits, Reed’s successor locked in some retirement savings but dropped an appeal of the option. Reed, a lawyer, thinks the California rule is ill-founded and likely to be overturned if revisited by the state supreme court.

He has pointed to the work of a legal scholar, Amy Monahan, who argued that by imposing a restrictive rule without finding clear evidence of legislative intent to create a contract, California courts broke with traditional contract analysis and infringed on legislative power.

“California courts have held that even though the state can terminate a worker, lower her salary, or reduce her other benefits, the state cannot decrease the worker’s rate of pension accrual as long as she is employed,” Monahan wrote.

In the ruling last week, Justice Richman describes the setting for the reform legislation: soaring pension debt after the financial crisis in 2008-09 and a Little Hoover Commission report in 2011 urging cuts in pensions current workers earn in the future.

He cites several court rulings in the past that conclude cuts in pensions earned by current workers are allowed to give the pension system the flexibility needed to adjust to changing conditions and preserve “reasonable” pensions in the future.

Some of the court rulings cited allowed changes in retirement ages, reductions of maximum possible pensions, repeals of cost-of-living adjustments, changes in required service years, pensions reduced from two-thirds to one-half of salary, and a reasonable increase in pension contributions.

“Thus,” Richman wrote, “short of actual abolition, a radical reduction of benefits, or a fiscally unjustifiable increase in employee contributions, the guiding principle is still the one identified by Miller in 1977: ‘the governing body may make reasonable modifications and changes before the pension becomes payable and that until that time the employee does not have a right to any fixed or definite benefits but only to a substantial or reasonable pension.’”

Richman’s ruling makes several references to a unanimous state Supreme Court decision in 1977 in Miller v. State of California. He said the foundation of the unions’ constitutional appeal is a “onetime variation” in one word in another ruling.

“To be sustained as reasonable, alterations of employees’ pension rights must bear some material relation to the theory of a pension system and its successful operation, and changes in a pension plan which result in disadvantage to employees should be accompanied by comparable new advantages,” the state Supreme Court said in Allen v. City of Long Beach (1955).

Richman said a 1983 state Supreme Court decision (Allen v. Board of Administration) changed “should” have a comparable new advantage to “must,” citing two other State Supreme Court decisions that said “should” and an appeals court decision that said “must.”

In a decision a month later, he said, the Supreme Court used “should” while referring to a comparable new benefit and has continued to use “should” in all rulings since then.

“It thus appears unlikely that the Supreme Court’s use of ‘must’ in the 1983 Allen decision was intended to herald a fundamental doctrinal shift,” Richman said, citing two rulings that “should” is advisory or a recommendation not compulsory.

The 39-page decision written by Richman and concurred in by Justices J. Anthony Kline and Maria Miller makes other points in its rejection of a rigid view of the California rule and pension vested rights.

“The big question for pension reformers is whether or not the California Supreme Court will agree,” Reed said in a news release from the Retirement Security Initiative. “If it does, the legal door will be open for Californians to begin to take reasonable actions to save pension systems and local governments from fiscal disaster.”

There was no immediate word from the Marin Association of Public Employees and other county employee unions last week about whether the appeals court decision will be appealed to the Supreme Court.

Reporter Ed Mendel covered the California Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at Calpensions.com.

Two actuarial associations did not publish a controversial paper by their joint task force, reflecting a split in the profession over whether public pension debt should be measured with risk-free bonds or the earnings forecast for stock-laden investment funds.

Using safe but low-yield bonds to offset or “discount” future pension obligations would cause pension debt to soar, creating pressure to raise the annual rates paid by state and local governments that are already at an all-time high for many.

Critics have been contending for a decade that overly optimistic pension fund earnings forecasts conceal massive debt and the need to take even more money from government budgets or find a way to cut pension costs.

The leading California critics, now mainly at Stanford University, are not professional actuaries. They have backgrounds in finance, like David Crane, and in academic economics, like Joe Nation and Joshua Rauh.

The paper of the joint Pension Finance Task Force paper of the American Academy of Actuaries and the Society of Actuaries, which did not make it through the usual peer review process, was based on the principles of financial economics.

“One of the assertions of the paper is that public pension plans are purported to be default-free obligations so they would be valued using default-free interest rates,” an anonymous former task force member told Pensions & Investments.

Although not as well publicized as criticism from outside the profession, a group of actuaries has been urging the adoption of a risk-free discount rate for about a decade, said Paul Angelo of Segal Company actuaries in San Francisco.

Angelo, chairman of the California Actuarial Advisory Panel, does not favor the use of a risk-free discount rate. He agrees with not publishing the task force paper, saying it lacked the “science” to support the change and relied only on assertions.

For the first time, Angelo said, the actuaries urging a risk-free discount rate went beyond simply reporting debt and seemed to be advocating its use to set the annual payments to the pension fund made by government employers.

The California Public Employees Retirement System and the California State Teachers Retirement System currently assume their pension fund investments, expected to pay two-thirds of future pensions, will average 7.5 percent a year in future decades.

The systems use the 7.5 percent long-term earnings forecast to reduce or “discount” the cost of future pensions, as if it were money in the bank. Thirty-year U.S. Treasury bonds, regarded as risk free, were yielding 2.23 percent last week.

When a much lower rate is used to discount future pension obligations the pension debt or “unfunded liability,” the shortfall in the projected money available to pay future pensions, balloons to a much larger amount.

An example is shown on the “California Pension Tracker” website directed by Joe Nation at the Stanford Institute for Policy Research.

The debt of California public pension systems in fiscal 2013 using a 7.5 percent discount rate is $281.5 billion. Using a lower discount rate of 3.723 percent (the CalPERS rate in 2013 for terminating plans) the pension debt more than triples to $946.4 billion.

The giant California Public Employees Retirement System, covering half of all non-federal government employees in California, is deep in debt even when using its 7.5 percent discount rate.

CalPERS has not recovered from a $100 billion investment loss during the financial crisis. Its investment fund was $260 billion in 2007, dropped to about $160 billion in March 2009 and was $306 billion last week.

In 2007, CalPERS had 101 percent of the projected assets needed to pay future pensions. Now after weak earnings during the last two fiscal years, its funding level is lower than the outdated 75 percent reported in a previous Calpensions post.

A CalPERS spokesman said the funding level for the last fiscal year ending June 30 is an estimated 68 percent. Nearly a decade later, that’s not much higher than the CalPERS funding level of 61 percent in 2009 at the bottom of the financial crisis.

The reassurance that CalPERS long-term earnings average more than 7.5 percent has eroded, dropping to 7.03 percent for the last 20 years. And the outlook is dim: The 10-year earnings forecast from Wilshire and other CalPERS consultants is 6.64 percent.

Girard Miller is probably not rethinking a line from his widely circulated Governing magazine column in 2012 debunking a dozen “half-truths and myths” used by both sides in the public pension debate:

“Pension funds are not going to invest their entire portfolio in 3 percent Treasury bonds right now — or ever — so the risk-free model is not even descriptive of reality and has little normative value.”

The current Economist magazine says (“No love, actuary” Aug. 13-19 issue) it has seen a draft of the joint pension task force report and thinks the two actuary associations should allow the paper to be published.

“American public-sector deficits are more than $1 trillion, even on the most generous of assumptions,” said the magazine. “This is an issue in which debate should not be stifled.”

Some of the debate was aired when the Governmental Accounting Standards Board spent several years developing new rules that took effect in 2013 and 2014. Pension systems can use their earnings forecasts to discount future pension obligations.

But if the projected assets fall short of covering the pension obligations, the system must “crossover” and use a risk-free rate to discount the remainder of the pension obligation. CalPERS did not have to crossover.

The new accounting rules require pension systems to use the “blended” rate to report pension debt. But they can continue to use the previous method based only on their earnings forecast to set the annual rates paid by employers.

The California Actuarial Advisory Panel agreed with the blended rate and suggested a few tweaks in a letter to GASB on Sept. 17, 2010, from the chairman at the time, Alan Milligan, CalPERS chief actuary, who is retiring this year.

An independent “Blue Ribbon Panel” commissioned by the Society of Actuaries issued a report in 2014 that, among other things, endorsed the use of some version of a risk-free discount rate.

“The Panel believes that the rate of return assumption should be based primarily on the current risk-free rate plus explicit risk premia or on other similar forward-looking techniques,” said the panel report.

Angelo said the influential Actuarial Standards Board, which was essentially neutral in Actuarial Standards of Practice issued in 2013, may revisit the risk-free discount rate issue, possibly within a year or so.

Reporter Ed Mendel covered the California Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at Calpensions.com.

Twice in recent decades CalPERS fell below 100 percent of the funding needed for promised pensions, and twice CalPERS climbed back. But since a $100 billion investment loss in 2008, the CalPERS funding level has not recovered.

Now with about 75 percent of the projected assets needed to pay future pensions, CalPERS has had low investment earnings during the last two fiscal years. Experts expect the trend to continue during the next decade.

“We have some challenges to confront in what is, both for ourselves and all institutional investors, moving into a much more challenging low-return environment,” Ted Eliopoulos, CalPERS chief investment officer, told reporters last month.

If the investment fund earnings that are expected to pay two-thirds of future pensions remain low, the annual payments to CalPERS from state and local governments may continue to grow.

So far, the CalPERS board has resisted Gov. Brown’s calls to raise rates even higher, citing the pressure on local government budgets of recent rate increases. The last one, covering longer lives expected for retirees, is still being phased in.

Many employer rates are already at an all-time high. For 80 miscellaneous plans, rates are over 30 percent of pay. For 135 police and firefighter plans, rates are over 40 percent of pay.

“Employers are reporting that these contribution levels are putting significant strain on their budgets and limiting their ability to provide services to the people in their jurisdictions,” the annual CalPERS funding and risk review said last November.

Low earnings also would undermine a new CalPERS “risk mitigation” strategy that over the decades could very gradually, without triggering a major rate increase, reduce the current earnings forecast, 7.5 percent a year, which critics say is too optimistic.

When earnings are 11.5 percent or higher, the strategy switches half of the money above 7.5 percent to investments with lower yields but less risk of loss. The CalPERS board rejected a Brown aide proposal for a five-year phase in of a 6.5 percent forecast.

After the CalPERS board adopted the risk mitigation strategy last November, Brown said in a news release: “This approach will expose the fund to an unacceptable level of risk in the coming years.”

Some CalPERS board members and union officials predicted CalPERS would once again recover when investments plunged from $260 billion in the fall of 2007 to $160 billion in March 2009, dropping the funding level from 101 percent to 61 percent.

But among the differences this time, in addition to the size of the loss, were low interest rates, stagnant or shrinking payrolls, a wave of Baby Boom retirements, and a maturing fund with negative cash flow requiring the sale of investments to pay pensions.

When the funding level remained low after a lengthy bull market in stocks, which are half of the CalPERS fund valued at $302 billion last week, board members began to mention a new threat.

The board has been told by experts that if the funding level drops low enough, perhaps around 40 to 50 percent, pushing rate increases and earnings forecasts high enough to get back to full funding becomes impractical.

The investment earnings CalPERS reported for the fiscal year ending June 30 were a scant 0.61 percent, lower than the 2.4 percent earned the previous year. The two lean years followed two good years of double-digit earnings, 17.7 and 12.5 percent.

Markets, like most things happening in the future, tend to be difficult to predict with certainty. In the famous quip of the distinguished economist Paul Samuelson: “Wall Street indexes predicted nine out of the last five recessions.”

The earnings forecast or “capital market assumptions” adopted by CalPERS two years ago was 7.1 percent during the next 10 years, Eliopoulos told reporters last month. Now Wilshire and other consultants have dropped their 10-year forecast to 6.64 percent.

“We quite clearly have a lower expected return expectation than we had just two years ago,” Eliopoulos said. “So that will be reflected in our next cycle, which again will look at a 10-year period.”

A routine CalPERS “asset liability management” process begins next year and will be completed in 2018. If the earnings forecast is lowered, CalPERS presumably faces difficult decisions about raising rates and adding higher-yielding but riskier investments.

“We are cognizant that this is a challenging environment for institutional investors and that we have to work collectively within CalPERS to address these challenges,” Eliopoulos said.

The CalPERS reply to earnings forecast critics has been that its long-term earnings average more than 7.5 percent. But after the two weak years, the three-year CalPERS earnings average is 6.86 percent and the 20-year average 7.03 percent.

In a new nationwide look at public pension funding, CalPERS is about average despite generous pensions it sponsored (SB 400 in 1999) and encouraged (AB 616 in 2001) and placing last five years ago in a Wilshire ranking of investment performance.

The average pension system was 74 percent funded last year with an earnings forecast of 7.6 percent, said a brief by Alicia Munnell and Jean-Pierre Aubrey of the Center for Retirement Research at Boston College using the Public Plans Database.

Why the earnings forecast is at the center of the debate over whether CalPERS and other public pension systems are “sustainable” or need major cost-cutting reform is shown by a chart in the brief.

Using a 7.6 percent earnings forecast to offset or “discount” future pension costs, the funds in the national database have 74 percent of the projected assets needed to pay future pensions and a debt or “unfunded liability” of $1.2 trillion.

But if the earnings forecast is dropped to 4 percent, near the risk-free bond rate some critics say should be used to discount guaranteed pensions, the funding level drops to 45 percent and the unfunded liability soars to $4.1 trillion.

The brief issued in June by Munnell and Aubrey uses italics to emphasize that financial economists argue that a risk-free rate should be used for reporting purposes, apparently implying not for setting employer rates and allocating investments.

“Moreover, even many who agree that the expected return may be appropriate for funding purposes are concerned about the level of assumed returns in the current financial market environment,” their brief added, echoing the remarks by Eliopoulos.

Since the CalPERS funding level last year reported in the database, 74.5 percent, is similar to the 74 percent national average, another chart in the brief shows two possible investment scenarios that might roughly apply to CalPERS, given investment differences.

If investment earnings are the “baseline” average of 7.6 percent, the funding level would by 77.6 percent in 2020. If earnings are the “alternative” average of 4.6 percent, the funding level would be 72.1 percent in 2020.

Reporter Ed Mendel covered the California Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at Calpensions.com.

The two big California public pension funds, CalPERS and CalSTRS, are going opposite ways on a controversial investment strategy, hedge funds, that is under fire from a powerful teachers union.

CalPERS announced two years ago that it was eliminating its $4 billion hedge fund program, citing their cost, complexity and one of its own investment principles: “Take risk only when we have a strong belief that we will be rewarded for it.”

CalSTRS adopted a “risk mitigation strategy” last November that will move 9 percent of its investment portfolio into long-term U.S. Treasury bonds and hedge funds with strategies designed to lose less value during recessions.

The different views of hedge funds is one of the biggest separations of investment strategy since CalSTRS, under legislation 34 years ago, took control of the teacher pension fund that had previously been managed by CalPERS.

Both funds have similar investment categories — stocks, bonds, private equity, real estate, liquidity, inflation — but with differing ratios and applications of the “ESG” screens (environmental, social and corporate governance) often used by large investors.

When the California State Teachers Retirement System became the manager after the legislation in 1982, the teacher pension fund was $10.9 billion. Now CalSTRS manages a $190 billion fund from its own new 13-story office tower.

It’s across the Sacramento River from the four-block complex where the California Public Employees Retirement System manages a fund worth $301 billion last week. With two of the largest and most impressive state buildings, the pension systems look prosperous.

But both are underfunded, with roughly 70 to 75 percent of the projected assets needed to pay future pensions. They are phasing in painful employer rate increases, while critics say overly optimistic earnings forecasts hide the need for even higher rate hikes.

Both funds have investments with money managers that follow the modern trend of institutional investors to “maximize shareholder value” (recently criticized here) by streamlining businesses, outsourcing jobs and cutting other costs.

As pension funds focus on cutting their own costs in what many expect to be a period of low investment earnings, the 1982 decision creating duplicate staffs and facilities for the two largest U.S. public pension funds may not look like a way to “maximize taxpayer value.”

Hedge funds, typically open only to large investors, use a variety of strategies aimed at out-performing the market and reducing risk. They are known for charging investors high fees and creating a class of wealthy hedge fund managers.

For some, hedge funds are the face of Wall Street greed. One hedge fund strategy, buying defaulted debt at a low price and relentlessly pushing for full repayment, made news this year with huge profits in a $4.65 billion settlement of a 15-year battle with Argentina.

In another debt squeeze, Bernie Sanders, the former Democratic presidential candidate, said last month “billionaire hedge fund managers on Wall Street are demanding that Puerto Rico fire teachers, close schools, cut pensions, and lower the minimum wage so they can reap huge profits off the suffering and misery of the American citizens on that island.”

The distressed debt strategy may be getting much of the attention. But the broader criticism of the thousands of hedge funds, which have a wide range of strategies and nearly $3 trillion in assets, is high costs and poor performance since the financial crisis.

“Hedge funds have underperformed, costing us millions,” Letitia James, an elected public advocate said as the New York City Public Employees Retirement System voted in April to end its $1.7 billion hedge fund program. “Let them sell their summer homes and jets, and return those fees to their investors.”

A Financial Times story in April said public pension funds in several states are considering dumping their hedge funds, nearly two years after CalPERS became the first big pension fund to eliminate hedge funds.

“At the time, many thought it would trigger a wave of redemptions,” the Financial Times said of the CalPERS announcement, “but with public boards tending to be deliberative, it is only now that the wave seems ready to break, hedge fund managers say.”

The CalSTRS decision last fall to increase hedge fund investments caught the eye of Randi Weingarten, president of the American Federation of Teachers, who is in a long-running battle with hedge fund managers, the Wall Street Journal reported last month.

Dozens of wealthy hedge-fund managers are said to have contributed millions to the promotion of charter schools (often opposed by teacher unions if they are not part of a public school system) and the reform of public pensions (often by advocating a switch to 401(k)-style plans common in the private sector).

Three years ago, Weingarten’s union published a list of roughly three dozen Wall Street asset managers that have donated to causes opposed by the union, the Journal said. Teacher pension funds with $1 trillion in assets were advised to use the list when making investment decisions.

“Why would you put your money with someone who wants to destroy you?” Weingarten told the Journal.

A hedge-fund manager who got himself removed from the union’s list, Cliff Asness of AQR Capital Management, remained on the board of the Manhattan Institute, a think tank said by the union to support charter schools and pension reform. The Journal said Weingarten viewed the CalSTRS hedge fund expansion as a chance to apply pressure last fall.

“Dan Pedrotty, an aide to Ms. Weingarten who runs the hedge-fund effort, spoke to a CalSTRS official about Mr. Asness’s continued service on the Manhattan Institute’s board,” the Journal reported. “The official then called Mr. Asness.”

Asness had already decided to leave the Manhattan Institute before receiving the CalSTRS call, his spokesman told the Journal, after reassessing the time that he was spending on non-profit boards.

Last week, a CalSTRS spokesman did not confirm or deny that a CalSTRS official called Asness at the request of the union, pointing instead to an Asness letter on July 4 replying to the Journal story.

“This article implies I left the Manhattan Institute’s board under such pressure, which is false,” Asness wrote. He said, among other things, that he is a supporter of public pensions and the mission of the Manhattan Institute, but not everything written under its banner.

Weingarten’s union published a report last fall, “All That Glitters Is Not Gold,” that criticized hedge funds for high fees and poor performance in recent years. CalSTRS was not among the 11 public pension funds analyzed in the report.

The CalSTRS chief investment officer, Chris Ailman, told CNBC in May that CalSTRS is “not a big fan” of hedge funds and invested in them in 2009-10, after many other pension funds rushed in during 2004 to 2007. He said CalSTRS invested in two hedge fund strategies, not 22 strategies like some of its peers.

Now CalSTRS is looking at a handful of hedge funds that are “counter-cyclical to growth,” Ailman said, and expected to provide some balance during recessions. He said “2 and 20 is dead,” referring to the traditional hedge fund fee of 2 percent of assets and 20 percent of profits as an incentive.

With a long-term risk management strategy to invest 9 percent of its portfolio, Ailman said, CalSTRS has a size advantage in fee negotiations that have already begun. “Our staff has put on their boxing gloves and gone in there and just laid it out, what we are looking for,” he said.

Reporter Ed Mendel covered the California Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at Calpensions.com.

California pension funds take a bigger share of tax revenue than the national state average, a research website shows. Why the growing costs are outpacing the norm is not completely clear.

A prime suspect for some would be overly generous pensions, particularly what critics say is an “unsustainable” increase for police and firefighters widely adopted to match a big increase given the Highway Patrol by SB 400 in 1999.

The Public Pension Database does not have information on the formulas that determine pension amounts, like the Highway Patrol’s “3 at 50” or three percent of final pay for each year served at age 50.

One problem is the wide range of pension formulas, made even more complex by a recent national wave of cost-cutting reforms. Under a California reform three years ago, most new hires must pay more toward their pensions and work longer and retire at an older age to earn the same pension as workers hired before the reform.

“Trying to compare plan benefits in one state with another state has become complicated,” said Keith Brainard, research director for the National Association of State Retirement Administrators.

Brainard started the database now operated jointly by NASRA and the Center for Retirement Research at Boston College and the Center for State and Local Government Excellence.

Several web-based seminars have been held to show how the “big data” can be used by researchers, government officials, media, and others. Trends and patterns can be identified, comparisons made, and the findings displayed in charts.

A chart on the database shows the amount of tax revenue taken by California public pensions was slightly below the national average in 2001. Then from 2003 to 2005 the California pension tax bite climbed well above the national average, maintaining a gap that by 2013 was about a third higher.

In rough terms, the public pension share of California tax revenue in fiscal 2013 was 8 percent by fiscal 2013 compared to a national average of 6 percent.

In an interview, Brainard mentioned two factors for the above-average share of tax revenue taken by California pensions. Most California government workers, including teachers and many police and firefighters, do not receive Social Security.

Only 40 percent of state and local government employees in California receive Social Security, according to the database. The Social Security coverage in some other large states: New York 99 percent, Florida 95 percent, and Texas 47 percent.

The cost of using the federal Social Security program to provide part of the retirement benefit (6.2 percent of pay each from the employer and the employee) would not show in data about the share of tax revenue taken by state and local pensions.

Another factor: The period covered by the research begins around 2000 when the three big state pension funds were spending a “surplus” from a stock-market boom not only on increased benefits but on lower employer contributions.

The California Public Employees Retirement System, which covers about half of all non-federal government workers in the state, sponsored the retroactive SB 400 rate increase for all state workers and dropped employer rates to near zero in 1999 and 2000.

Then as the stock market dipped, CalPERS had to begin raising employer rates not only to cover pension increases (AB 616 in 2001 authorized a bargaining menu for local government employees) but also to regain funding lost by the big employer rate cuts.

In addition to CalPERS, the California plans in the database include the California State Teachers Retirement System, the University of California Retirement System, the Los Angeles County Employees Retirement Association, and 11 other local systems.

The data covers most of the public pension members in California, but far from all of the pension systems. An annual report from the state controller lists 131 separate California retirement systems, many of them relatively small.

California systems in the database, with two major exceptions, paid their full Annual Required Contribution (ARC) to cover the annual or “normal” cost of pensions earned each year and the large debt from previous years, the “unfunded liability.”

Debt often is created when pension fund investments, expected by big California funds to earn 7.5 percent a year, fall short of the target, which critics contend is overly optimistic. Among other factors that can create debt is longer than expected life spans.

The California State Teachers Retirement System is listed on the database as paying only 50.9 percent of the ARC in 2013. Unlike other systems, CalSTRS could not raise employer rates. Now long-delayed legislation two years ago to pay the full ARC will more than double school rates by 2020, cutting deep into budgets.

CalSTRS spent its small and brief “surplus” around 2000 on several benefit increases and rate cuts. The pension fund was shorted when a quarter of the teacher contribution, 2 percent of pay, was diverted for a decade into a supplemental 401(k)-style individual investment plan for teachers with a guaranteed minimum return.

Three years ago, a Milliman actuarial report said if CalSTRS had kept its 1990 structure without the rate and benefit changes around 2000, pensions would have been 88 percent funded instead of 67 percent. A much smaller rate increase could have closed the funding gap.

The UC Retirement Plan is listed on the database as paying 63.9 percent of the ARC. A large surplus prompted the plan to give employers and employees a remarkable two-decade contribution “holiday.”

Most made no payments to the UC pension fund from 1990 to 2010. The surplus, driven by investment returns and other factors, peaked with a 156 percent funding level in 2000.

As painful rates were set to resume in a time of tight budgets, a UC task force said in 2010 that if normal cost contributions had been made during the two decades, the system would have been 120 percent funded instead of 73 percent.

CalPERS has not calculated how much of its current funding gap results from the pension increases and rate cuts during the surplus years. But a CalPERS chart showed that SB 400 accounted for 18 percent of the state worker employer contribution increase between 1997 and 2014.

Nearly half of the state worker contribution increase, 46 percent, was due to investment gains and losses, demographic and actuarial changes, and higher employee contribution rates. Payroll increases accounted for 31 percent of the change.

Critics say the SB 400 “3 at 50” formula has the most impact in local government, where police and firefighters are a major part of the budget. The big cities (Los Angeles, San Francisco, San Diego, San Jose, and Oakland) have their own pension systems and are not in CalPERS.

Public pensions have not recovered from huge investment losses during the recession. The Center for Retirement Research reported last month that the 160 plans in the Public Pension Database were 74 percent funded last year, 72 percent under new accounting rules.

The Center’s report showed that from 2001 to 2015 the CalPERS funding level dropped from 111.9 percent to 74.5 percent. During the same period, the CalSTRS funding level fell from 98 to 67 percent and UC funding plunged from 147.7 to 81.7 percent.

Reporter Ed Mendel covered the California Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at Calpensions.com.

When CalPERS approved regulations to carry out Gov. Brown’s pension reform legislation two years ago, critics said they allowed “99 ways to boost pensions” that undermine the cost-cutting plan for new employees.

The critics had a field day going through the list of 99 types of regular extra pay that boost pensions, pointing out what seemed to be absurd bonuses for doing part of the basic job.

A Wall Street Journal editorial mentioned law enforcement incentive pay for staying physically fit, longevity pay for staying on the job more than five years, and pay for maintaining a government-issued license required to perform job duties.

An in-depth story by the Los Angeles Times mentioned bonus pay for “librarians who help the public find books, secretaries who take dictation, groundskeepers who repair sprinklers, and school workers who supervise recess.”

CalPERS said that because the reform listed a half dozen types of pay that can’t be counted toward pensions for new hires, such as overtime and unused sick leave and vacation, the 99 types of previously allowed extra pay not listed continue to count toward pensions.

Critics said CalPERS made a pro-labor interpretation of reform legislation intended to cut pension costs. The Times noted that CalPERS sponsored legislation in 1993 authorizing it to determine what bonuses count toward pensions, then created a list.

“The long-term cost of pensions calculated with bonuses is billions of dollars more than with base pay only,” said the Times. “But the exact price tag remains a mystery. The labor-dominated CalPERS board voted without estimating the potential tab.”

An illustration by Thomas Fuchs accompanying the Times story appears to show a pensioner at leisure on the backs of taxpayers.

Now the California Public Employees Retirement System board may have to revisit the controversial issue sharply criticized by major media. An update on the pension reform given to the board last week said the regulations never took effect.

Although much of the media criticism focused on the 99 types of extra pay, Brown’s Finance department had objected to a CalPERS decision to allow a pension boost from a “temporary upgrade” to a higher-paying position.

“Today CalPERS got it wrong,” Brown said in an August 2014 news release after the CalPERS board approved the regulations, referring to counting “temporary salary supplements” toward pensions.

“This vote undermines the pension reforms enacted just two years ago (AB 340 in 2012),” Brown said. “I’ve asked my staff to determine what actions can be taken to protect the integrity of the Public Employees Pension Reform Act.”

What the governor could do was not clear. A union-backed state constitutional amendment, Proposition 162 in 1992, gives CalPERS and other public pension boards sole control of their funds and administration.

As it turned out, Brown’s Finance department simply did not sign the regulations, a necessary step in the process. So, the regulations expired a year later, never taking effect. CalPERS proposed, the governor disposed.

The Brown administration thinks that allowing a temporary upgrade to a higher-paying position to count toward pensions would enable “spiking,” a boost in pensions from improperly increasing the final pay used to determine pension amounts.

“If someone is put into a higher-paying position at the end of their career, not on merit, that seems to present the potential for pension spiking,” Richard Gillihan, a Brown administration official, told his fellow CalPERS board members in April 2014.

The CalPERS staff reversed its position on temporary upgrade pay, excluding it from “pensionable compensation” in a circular sent to employers in December 2012, then including it in draft regulations.

Staff said the change reflected a reform cleanup bill, SB 13. If items other than base pay can be excluded from “pensionable compensation,” the staff reasoned, then there are items beyond base pay that are pensionable, like normal pay for temporary upgrades.

Whether temporary upgrade pay should count toward pensions split the 13-member CalPERS board: the governor’s three appointees opposed, the six members elected by active and retired employees in support.

In April 2014, a board committee removed temporary upgrade pay from the draft regulations, then it was replaced by the full board. In August 2014, Brown appointees tried and failed to remove temporary upgrade pay before the regulations were approved on a 7-to-5 vote.

Spiking is a recurring problem for pension systems. CalPERS and the California State Teachers Retirement System have anti-spiking units. To reduce spiking, the reform based new-employee pensions on a three-year pay average, a change from one year.

In addition to the pay regulations, the reform update given the board last week said two other unresolved issues will be addressed by “reconvening a team of stakeholders” that includes the Brown administration, employers, and labor unions.

A need to prevent the transfer of “excessive liability” was revealed when a former Glendale police chief, Randy Adams, took a high-paying job in Bell, more than doubling his pension to $510,000 and sticking Glendale and other former employers with the tab.

Transit workers got a two-year pension reform exemption after the federal government threatened to withhold $1.6 billion in transit grants, saying transit bargaining rights are protected. A court appeal and legislation (AB 1640) are pending.

The reform that took effect for new employees in CalPERS and county systems hired after Jan. 1, 2013, is expected to save CalPERS employers $29 billion to $38 billion over the next 30 years.

Brown could not get legislation for parts of his reform plan: adding two governor appointees to the CalPERS board and switching new employees to a “hybrid” plan combining a smaller pension and a 401(k)-style individual investment plan.

But the reform gives new hires a lower pension formula, caps the pay used to calculate pensions, requires employees to pay half the “normal” pension cost (excluding debt from previous years), and bars employer payment of the employee share of costs.

The reform only applies to new hires because a series of state court decisions, often called the “California rule,” are widely believed to prevent cuts in the pension offered at hire unless offset by a new benefit of comparable value.

In a surprise to some, the update said 29 percent of active CalPERS members, about 200,000 workers, are already covered by the reform, apparently due to filling positions vacated during the recession and other factors.

State savings are 1.2 percent of pay for miscellaneous workers and 5.1 percent of pay for peace officers, non-teaching school employee savings 1.7 percent of pay, and savings for other local government workers vary with their pension formulas.

“PEPRA is beginning to bend the cost curve and will continue to do so for many years,” Alan Milligan, CalPERS chief actuary, told the board last week.

Reporter Ed Mendel covered the California Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at Calpensions.com.

A former CalPERS chief executive officer, Fred Buenrostro, was sentenced to 4½ years in prison last week for taking bribes, including $200,000 in cash, from a former CalPERS board member, Alfred Villalobos, who collected about $50 million in fees from private equity firms for helping them get investments from the big pension fund.

Villalobos died from a pistol shot to the head at a Reno gun range in January last year, an apparent suicide on the day before a scheduled court appearance. His inside man at CalPERS, Buenrostro, pleaded guilty on the eve of his trial in July 2014 and has been cooperating since then with state and federal prosecutors.

Assistant U.S. Attorney Timothy Lucey told a federal court in San Francisco last week that Buenrostro, after his guilty plea, went on “to assist the government in a number of ongoing investigations the court is aware of through the filings that have been made to the court, both the public filings and the sealed filings.”

Buenrostro’s attorney, William Portanova, told the court that his client “took the investigation to a level far beyond that which his own case involved” and that information in the sentencing memorandum and sealed documents “touches on some of these larger investigations.”

U.S. District Judge Charles Breyer noted that Buenrostro’s cooperation resulted in refiled charges before his guilty plea that reduced the maximum sentence from ten years to five years. He disagreed with Lucey and Portanova that cooperation since then merited an additional one-year reduction, instead cutting six months for a total of 4½ years.

Breyer, quoting Lucey, said Buenrostro committed “a spectacular breach of trust for the most venal of purposes, which is self enrichment.” Buenrostro had years to turn back but chose to “double down,” said the judge, calling it “a dagger in the heart of public trust, and without public trust our government institutions cannot function.”

Buenrostro, 66, balding head slightly bowed, shuffled into court in faded blue pajama-style prison garb, with day-glow orange footwear and his legs apparently shackled together by a short chain not visible from the back of the court room.

“Your honor, I take full responsibility and accept the consequences of the actions I took,” Buenrostro said in a firm and clear voice. “I’m humiliated, embarrassed, and deeply ashamed of my actions.”

Asking mercy, Buenrostro said he “let down” family and friends and apologized to CalPERS, the court, prosecutors, and his fellow Californians. He said he assisted the U.S. Attorney, the Securities and Exchange Commission, and the state Attorney General “in their investigation and litigation and will continue to render assistance.”

So, what’s still being investigated? There were few public clues last week.

A sentencing memorandum filed by Lucey outlined the case against Buenrostro, adding some new detail but no major surprises to an extensive report in 2011 done for CalPERS at a cost of $11 million by Philip Khinda of a Washington, D.C., law firm.

Buenrostro, a former CalPERS board member, served as chief executive officer from December 2002 to May 2008. His earliest connection with a Villalobos deal mentioned in the Lucey and Khinda reports began with meetings in 2004 at the Villalobos home at Lake Tahoe.

Notably, three active CalPERS board members (Robert Carlson, Charles Valdes, and Kurato Shimada) met with Villalobos and Buenrostro (who had served on the board with the other three a decade earlier) and an executive of a firm, Medco, that was seeking a large CalPERS pharmacy contract, said the Khinda report.

Carlson and Valdes, now both deceased, voted in 2005 to give Medco the pharmacy contract. Shimada, though not a committee member, sat in and asked that his questions be reflected in the record. Villalobos reportedly got the final $1 million of a $4 million fee immediately after the vote.

“Early in the conspiracy,” said the Lucey report, “Villalobos used Buenrostro’s mere presence to add luster and gravitas to important meetings with his clients, knowing that Buenrostro would place his interests over his duty to CalPERS.”

Outside CalPERS, Villalobos was beginning to attract attention. In 2006 Los Angeles Times reporters asked the California Public Employees Retirement System for letters, e-mails or memos from Villalobos and former state Sen. Richard Polanco about investment opportunities.

A letter to the Times from a CalPERS attorney rejecting the Public Records Act request said “the release of the (sic) some of the requested information may harm CalPERS’ ability to continue to invest with top-tier private equity funds.”

Inside CalPERS, a staff proposal in 2007 requiring investment managers to disclose the use of “placement agents” such as Villalobos stalled in a committee chaired by Shimada, who had worked for Villalobos during a three-year absence from the CalPERS board beginning in 1999.

The California State Teachers Retirement System was adopting placement agent rules at the time. And crucially, as it turned out, in March 2007 a large private equity firm, Apollo, began requiring a written acknowledgement from investors like CalPERS before paying fees to placement agents like Villalobos.

When CalPERS investment and legal staff refused to give Villalobos an acknowledgement, he had Buenrostro sign a series of acknowledgements on phony CalPERS letterhead that became a key part of the charges against the two men.

Villalobos hosted Buenrostro’s wedding at Tahoe in 2004, promised (and later delivered) lucrative post-CalPERS employment, and betstowed other gifts. The notorious cash payments came as Buenrostro needed money for a divorce and Villalobos pursued the Apollo deal, said the Lucey report.

By December 2007, Villalobos had made cash payments to Buenrostro at the Hyatt hotel near the Capitol in Sacramento on three separate occasions: “The first two payments of $50,000 were each delivered in a paper bag, while the last installment of $100,000 was delivered in a shoebox.”

After receiving the last of the phony disclosure letters in June 2008, said the Lucey report, Apollo began payments to the Villalobos firm, ARVCO, that totaled more than $14 million before they were stopped on their way to as much as $35 million over the life of the contracts.

Buenrostro retired June 30, 2008, after his official duties ended on May 12 of that year amid staff complaints of “unprecedented levels of meddling in investment decisions.” Shimada resigned from the CalPERS board in April 2010.

The Khinda report concluded that the CalPERS investment staff “did withstand” the pressure from Buenrostro and did not make inappropriate investments. A CalPERS new release last week listed the reforms resulting from the scandal, including the disclosure of placement agents.

A mark of the passage of time, and CalPERS hopes the healing of wounds, since its survey of private equity firms in 2009 revealed the huge Villalobos fees: Buenrostro’s successor, the current CalPERS chief executive officer, Anne Stausboll, is retiring at the end of the month.

Buenrostro settled a state lawsuit by agreeing to pay a $250,000 fine, which if not paid will be reapplied by the federal ruling. He also agreed to a judgment in an SEC case and to accept a penalty, if one is imposed after the federal ruling.

His annual CalPERS pension, $201,600 based on a final salary of $238,992 and about three decades of service, was reduced to $141,278 under a “felony forfeiture” provision and a $360,000 overpayment will be deducted, the Sacramento Bee reported.

Nineteen letters in support of leniency for Buenrostro were sent to the judge by several of his Pepperdine classmates, ski instructor colleagues, family, two persons well-known at the Capitol, and the nonprofit Shores of Hope, which praised his post-guilty plea work on transportation management for the elderly and disabled.

One leniency letter dated in March was from a woman who said she had recently lived with Buenrostro for nearly three years. Buenrostro came to court in custody last week after being jailed in late April for misdemeanor battery on a former girlfriend, his second arrest.

Leniency was not urged in a letter to the judge from the CalPERS general counsel, Matthew Jacobs, that said Buenrostro “must be fittingly punished for this tremendous breach of the public trust” that led to an 18-month internal investigation and the Khinda report.

“CalPERS condemns Mr. Buenrostro’s misconduct in the strongest possible terms, and urges the court to hold him accountable for his actions,” Jacobs said. “Those actions eroded the trust that had been built up over 80 years between CalPERS and its members, employers, and stakeholders. It also had a tremendous impact on staff morale, and on CalPERS’s previously-strong reputation in the financial community.”