california pension reform

Reform Measure Aimed at CalPERS Could Appear on California Ballot by 2016

Back in November, Pension360 covered former San Jose Mayor Chuck Reed’s intention to keep pushing for pension reform even after leaving office.

According to a Reuters report, he’s following through: Reed, along with a coalition of business leaders and politicians, is launching a push to get a pension reform measure on the statewide ballot.

Details are sparse on what exactly the measure would look like.

But it’s likely the measure would aim to make it easier for cities to cut pension payments to CalPERS, or reduce the cost of leaving the fund entirely.

Outgoing San Jose Mayor Chuck Reed Will Continue Pushing For Pension Reform After Leaving Office

Chuck Reed won’t be the mayor of San Jose much longer. But even as he leaves office, Reed doesn’t plan on leaving politics behind. The outgoing mayor says he will continue raising money and campaigning for pension reform in California.

His ultimate goal is to get a state-wide pension reform measure on the 2016 ballot.

From Fox & Hounds:

“For me, it’s unfinished business,” says Reed, the outgoing mayor of San Jose, California. “I’m stubborn, persistent, whatever you want to call it.”

He’s talking about his plans for a statewide pension reform initiative in 2016; the $25 million is the cost of taking the message to the streets. While some observers may have thought he’d abandoned reform after his abortive 2014 attempt, Reed says he’s just getting warmed up.

“The fight will continue,” he says. “I’m going to work on fiscal reform issues, on the state and national level.”

For Reed, it’s personal.

“The problem is still threatening my city,” he says. “Retirement costs continue to go up, and this year the costs ate up all my revenue.”

And this was after voters in San Jose passed pension reform.

[…]

“The legislature is not going to take action,” he says. “So the best approach is working at the local level to create political momentum with a statewide initiative, allowing voters to go over the head of the legislature.”

Details are sparse on what Reed’s initiative would look like, in part because he is still figuring it out himself. But he offered some details to Fox & Hounds:

[Reed] says the main thrust will be to give state and local governments authority to alter future pension formulas for current employees.

“The retirees are the last people who should be impacted because they’re already retired,” he says. “That’s why I focus on current employees, because they still have the capacity to earn. The younger employees understand that it’s something that’s not sustainable, and they are the ones who are going to get hurt.”

The next mayor of San Jose will be Sam Liccardo. He starts Jan. 1.

Photo by San Jose Rotary via Flickr CC License

CalSTRS Weighs Worst-Case Scenarios in Latest Meeting

CalSTRS' Projected Funded Ratio. Credit: Chief Investment Officer and PCA — Credit: Chief Investment Officer and PCA

California’s pension reforms are designed to fully fund CalSTRS in the next 35 years. But that timeline assumes the fund will meet or exceed its assumed rate of return – 7.5 percent – year in and year out.

But what if CalSTRS doesn’t meet its investment return targets?

That was the topic of the fund’s most recent investment board meeting. Reported by Chief Investment Officer:

CIO Chris Ailman posed that question [of failing to meet return expectations] during the fund’s September 5 investment board meeting. A number of top asset managers and economists have predicted market returns below historic averages for the coming years, and CalSTRS has chosen to confront that possibility head-on.

Economic growth risk is the foremost factor determining asset returns, according to Pension Consulting Alliance (PCA), CalSTRS’ primary investment adviser. Weak growth brought on by cyclical recessions, another financial crisis, or geopolitical events pose the largest threat to the fund’s short-term returns. In turn, these draw-down events present the likeliest path to sub-7.5% returns over the long term and, taken to an extreme, plan insolvency.

“Mitigating short-term drawdown risk may improve the likelihood that the long-term pension reform measures will succeed,” PCA said in its presentation. But CalSTRS faces a “key tradeoff” in hedging. “Addressing major crisis risks could push the long-term expected rate of return lower,” the consultancy continued.

During the discussion, PCA Founder Allan Emkin, Ailman, and others expressed trepidation over equities’ long bull run and lofty valuations. According to research by Investment Officer Josh Diedesch, the US stock market’s price-to-earnings ratio (20) suggests annual returns below or barely surpassing the 7.5% threshold for the next five years.

As Ailman put it during his opening CIO report, the “US bull market is getting long in the tooth.”

The topic will be broached again at the next board meeting, according to Chief Investment Officer.

Quitting CalPERS Comes With Price For California Cities

City officials from a handful of California cities—Canyon Lake, Pacific Grove and, most recently, Villa Park—have publicly weighed the option of leaving the CalPERS system as their memberships become more costly.

But leaving CalPERS got a lot less enticing when the cities learned about the fee that would be levied on them upon their departure—a termination fee that could be as high as $3.6 million for Villa Park alone. From Reuters:

Villa Park fears that pulling out of its contract with the California Public Employees’ Retirement System could be prohibitively expensive because of a termination fee that could exceed the city’s annual budget.

Calpers, America’s biggest public pension fund with assets of $300 billion, last provided the city with a hypothetical termination fee of nearly $3.6 million as of June 2012. The city’s annual budget is $3.5 million.

“Getting out of Calpers is like getting out of jail,” said Rick Barnett, mayor of Villa Park, population 5,800. The City Council will vote next month on a resolution to begin the process of quitting Calpers.

Calpers recently voted to raise rates roughly 50 percent over the next seven years, citing its responsibility to maintain the fiscal soundness of the fund.

Now Villa Park is following the trajectory as California cities who have tried, but ultimately declined, to leave CalPERS in the past. Reuters reports:

Two other California cities, Pacific Grove and Canyon Lake, tried to quit Calpers last year, but both balked when they learned the termination fee.

If a city quits, Calpers continues to administer pension payments for the current and retired workers already on the books at the time of termination.

To do that, Calpers generally asks for an up-front sum to pay for potential future pension costs for all current and retired workers on city rolls.

Canyon Lake, with an annual budget of $3.6 million, was handed a termination bill last year of $1.3 million.

Keith Breskin, Canyon Lake’s city manager, said: “It would have been a serious depletion on our reserves, so the city decided not to proceed.”

If a city quits, Calpers also places that city’s funds in a more conservative risk pool, which lowers the potential return rate on its investments and in turn boosts the termination fee.

Villa Park Mayor Rick Barnett said this week that the termination fee hasn’t completely deterred the city from their plan to leave CalPERS. He did, however, leave open the possibility that the termination fee would be too burdensome to even consider leaving the System.

Will Villa Park Cut Ties With CalPERS?

The California city Villa Park could vote today to remove itself from the California Public Employees Retirement System (CalPERS).

The decision comes in the face of mounting pension costs and calls for increased transparency in local budgets, which would shine more light on California cities’ unfunded pension liabilities.

First reported by the Voice of OC:

The Villa Park City Council could vote Tuesday to end its contract with the California Public Employees’ Retirement System or CalPERS, the world’s sixth largest pension provider, in an effort to reduce increasing pension costs.

The CalPERS move follows an Orange County Grand Jury report that called for greater budget transparency in Orange County cities.

The report indicates Orange County cities’ unfunded pension liabilities have been increasing on an annual basis since 2007.

There have been increased calls for budget transparency in recent years as cities and towns in the CalPERS system have shouldered more liabilities. A recent report called for all cities to put their budgets online and include CalPERS cost projections in all budgets going forward.

Villa Park has millions in unfunded pension liabilities. From Voice of OC:

For its pension costs, Villa Park, a north OC bedroom community of about 5,000, has a shortfall of about $3.5 million, leaving 17.5 percent of its employee pension costs unfunded, according to the grand jury report.

Gov. Jerry Brown enacted sweeping pension reforms in 2012 aimed at reducing pension payments for most public employees hired after 2013.

But because many public workers were hired before 2013, they are grandfathered into the old system, and reforms likely won’t make a dent for another decade, the grand jury report states.

Villa Park could vote on leaving CalPERS as early as 6:30 pm (Pacific Time) Tuesday. The city wouldn’t be the first to leave CalPERS; Canyon Lake, a city of 11,000, left the system in 2013 due to increasing employee contributions.

CalPERS Weighs Withdrawal From Commodities

California is often on the cutting edge of trends that eventually reverberate throughout the rest of the country. The same is true of CalPERS, the pension fund that was among the first to invest in real estate, hedge funds and private equity.

So when CalPERS announces a dramatic change in investment strategy, other funds drop what they’re doing and listen. Funds are certainly listening lately, as CalPERS is considering a handful of moves that would shift its asset allocation significantly.

Among them: the fund is considering taking all of its money out of commodities. From the Wall Street Journal:

One of the more-dramatic moves under consideration is a complete pullback from tradable indexes tied to energy, food, metals and other commodities, according to people familiar with the discussions. Calpers began making such investments in 2007 as a way of diversifying its portfolio and it currently has $2.4 billion in such derivatives, or less than 1% of total holdings.

[…]

The discussions are taking place between the fund’s interim Chief Investment Officer Ted Eliopoulos and Calpers’s other top investment executives. The Calpers board hasn’t yet been informed about any possible changes and no final decisions have been made, the people said.

The move, however jarring, wouldn’t be out of step with other recent investment decisions by CalPERS. The fund has shown a willingness to exit large investments it considers risky. From Wall Street Daily:

CalPERS’ potential retreat from riskier investments is evidence that it’s trying to simplify its portfolio and guard against losses during the next market downturn.

In a sense, CalPERS is turning to a bit of a “risk off” mode in this time of uncertainty.

Ultimately, with the realization that we’re in the midst of the Fed’s continued tapering, talk of interest rates hikes, and geopolitical unrest from the Middle East to the Ukraine, it may be time to dial down risk and play it safe.

In fact, this move is reflective of last fall, when CalPERS hinted at a shift away from complex investments, warning that the fund “will take risk only where we have a strong belief we will be rewarded for it.” This decision came after it had approved a new set of investment goals that reduced future exposure to equities and private equity, while increasing allocations to bonds and real estate.

A similar move by CalPERS also took place at the end of 2012, when the fund chopped commodities investments by more than half – prompting reports that it was shifting from commodities to inflation-linked bonds.

And in both incidences, the commodities markets experienced corrections.

CalPERS is weighing several other ideas, including whether forgo individual stocks in favor of securities that track broader industries.

CalPERS also made headlines last month when it announced it would cut its hedge fund allocation by 40 percent.

Photo by Terence Wright via Flickr CC License

California Governor Calls Out CalPERS On Pension Tweak

Today CalPERS approved 99 types of “special pay”, or additional income that can be included in calculating a worker’s pension.

California Governor Jerry Brown was receptive to most of the “special pay” items—except for one. But it was enough to compel him to send a letter to CalPERS urging the board not to approve the pending changes.

At issue is a section of the CalPERS proposal that allows pension benefits to be increased based on temporary pay increases and ad hoc payments.

That contradicts a section of Jerry Brown’s 2012 reform law which states that pension benefits can only be based on “normal monthly pay”, and not “short-term” pay increases. From Reuters:

Although Calpers approved 99 types of extra pay that can be factored in to a worker’s income when calculating their pension, Brown only objected to one of those: allowing temporary upgrade pay to be counted as permanent, pensionable income.

Brown, a Democrat, sent a letter to Calpers last week asking them not to allow temporary upgrade pay to count toward pensions.

On Wednesday, the Calpers board rejected Brown’s opposition and voted to pass all 99 pay provisions, including that temporary pay hikes can be factored into a final pension.

“Today Calpers got it wrong,” Brown said in a statement. “This vote undermines the pension reforms enacted just two years ago. I’ve asked my staff to determine what actions can be taken to protect the integrity of the Public Employees’ Pension Reform Act.”

Read the full letter below, courtesy of the Sacramento Bee:

[A quick PSA, in case you don’t live in California: Edmund is the legal first name of Gov. Jerry Brown.]

CalPERS Is Proposing 98 Ways To Boost Member Pensions

CalPERS is drafting new regulation that could boost worker pensions, but critics say the rules would fly in the face of much of Gov. Jerry Brown’s 2012 reform efforts. CalPERS is holding a public hearing on the issue tomorrow (Tuesday August 19) to seek the public’s feedback.

The new regulations could increase pension benefits for many workers by adding 98 new types of “pensionable compensation”—or, in other words, types of pay that can be counted toward pension benefits.

For example, workers would receive pension boosts for holding various professional certifications, for being bilingual or for working at the same job for a long period of time.

[Read the full list of types of pensionable compensation at the bottom of this post].

From a CalPERS press release:

The proposed new regulation is intended to clarify the types of pensionable compensation items that state, public agencies, and school employers report to CalPERS as part of a new member’s retirement benefit. The most common items excluded as pensionable for new PEPRA members are bonuses, uniform allowance, and any ad hoc payments. Members who were hired on or after January 1, 2013 are considered new members under PEPRA.

Compensation that is reportable for classic members is unaffected under the new regulation.

One category of pensionable compensation would be Incentive Pay.

A few other interesting special pay items:

As the CalPERS released indicates, these changes would only apply to new hires. But critics say the new rules would directly undermine California 2012 pension reforms, which also only dealt with new hires. From a LA Daily News editorial:

At issue is what counts as income on which pensions are calculated. The 2012 law was clear: Pensions for new employees should be based on their “normal monthly rate of pay or base pay.” Whereas current employees can boost their pension calculations by also including “special compensation” for “special skills, knowledge, abilities, work assignment, workdays or hours, or other work conditions,” the Legislature didn’t include those sorts of extra pay items for new employees.

The hearing over the draft regulations will be held on Tuesday at 9:30 am pacific time.

It will also be live-streamed at www.calpers.ca.gov.

[iframe src=”<p style=” margin: 12px auto 6px auto; font-family: Helvetica,Arial,Sans-serif; font-style: normal; font-variant: normal; font-weight: normal; font-size: 14px; line-height: normal; font-size-adjust: none; font-stretch: normal; -x-system-font: none; display: block;”> <a title=”View Proposed Adoption Pensionable Compensation on Scribd” href=”http://www.scribd.com/doc/237135073/Proposed-Adoption-Pensionable-Compensation” style=”text-decoration: underline;” >Proposed Adoption Pensionable Compensation</a></p><iframe class=”scribd_iframe_embed” src=”//www.scribd.com/embeds/237135073/content?start_page=1&view_mode=scroll&show_recommendations=true” data-auto-height=”false” data-aspect-ratio=”undefined” scrolling=”no” id=”doc_62392″ width=”100%” height=”600″ frameborder=”0″></iframe>”]