California Passed A New Budget—Here’s What It Means For Pensions

Jerry Brown Oakland rally

California is a state known for its positive vibes, but those vibes have not historically extended to its financial condition. That’s changed just a bit in the last week, due to a string of financially sound (and therefore surprising) budget decisions on the pension front.

It happened last Tuesday, when Gov. Jerry Brown signed into law a section of the state’s new budget that addressed CALSTRS’ $74 billion shortfall by raising contributions rates from teachers, school districts and the state. The budget also addressed CalPERS’ underfunding by increasing the state’s 2014-15 contribution by a pretty sizeable amount.

An important note: it took Moody’s less than 24 hours to upgrade California’s credit rating after seeing this budget—from A1 to Aa3—and predictably, those pension provisions were a big reason why. That’s important, because states need all the positive reinforcement they can get when it comes to making these politically tough decisions.

And they were politically tough (albeit economically obvious) decisions—the California Teachers Association donated $290,000 to state politicians during the last election cycle, and put $4.7 million in Gov. Brown’s coffers to help elect him in 2010.

Okay, now the details of the budget.

The portion of the budget summary that addresses the state’s pension systems, which you can read here, leads with this line:

In its 101‑year history, contributions to CalSTRS have rarely aligned with investment income to meet the promises owed to retired teachers, community college instructors, and school administrators.

Indeed. That’s refreshingly honest, even if those issues only represent a fraction of California’s larger pension problems.

To be fair, the state’s recent pension reform law addressed some of these issues in 2012 by raising retirement ages and reducing benefits. But it wasn’t enough, and the budget says as much:

Even with those changes, and despite recent investment success, the viability of CalSTRS ultimately requires significant new money on an annual basis.

My god, the state budget has become self-aware! And it doesn’t matter if lawmakers are playing the part of Captain Obvious here. It’s still a positive sign to see this stuff, in writing, in the document that’ll be determining the state’s expenditures for the next fiscal year.

Onto the numbers: The budget directs an additional $276 million in contributions from teachers, schools and the state to the CALSTRS system in fiscal year 2014-15. That will be accomplished by:

  • Increasing teacher contribution rates from 8 percent of pay to 10.25 percent of pay, to be phased in over the next three years.
  • Increasing school contribution rates from 8.25 percent of payroll to 19.1 percent of payroll, to be phased in over the next seven years.
  • Increasing the state’s contribution rate from 3 percent of payroll to 6.3 percent of payroll over the next three years.

The budget gives the CALSTRS Board the authority to increase school and state contributions if they see fit. On the other hand, the Board gets the authority to reduce them, too.

CalPERS is also set to receive a big contribution from the state, which is good news because California was consistently lagging behind in that department before modestly increasing its contribution last year. But 2014 represents a big step forward, as the state increases its contribution by 20 percent.

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This coming fiscal year (2014-15) will also represent the 7th straight year California has increased its contribution to CalSTRS. All told, the plan is to fully fund CALSTRS in 30 years.

Of course, that projection is contingent on CalSTRS meeting its investment return assumptions, which currently sit at 7.5% annually. How likely is it to meet that target over the next 30 years?

“Highly unlikely,” said Gov. Brown at a press conference back in May.

He’s right. And it’s important to maintain perspective.

This is but a small step on the road to responsibly managing the state’s pension funds. Declaring victory now is like buying a house on a 30-year mortgage, making the first payment without a hitch and then proclaiming, “We did it!”

All the same, it is a step forward, and you need to crawl before you can walk. Let’s hope California learns how to run sooner than later.

 

Photo by Steve Rhodes via Flickr CC License

CalPERS votes in favor of rate hikes

Retirees are living longer—and that’s bad news for the many pension funds that are already suffocating under the weight of their unfunded liabilities.

But one of the world’s largest pension funds has taken a step to counteract the soaring expenses that accompany longer life spans: the CalPERS board voted today to incorporate retirees’ longer lives into the formula used to determine taxpayer contributions to their fund.

The result will be higher contribution rates to the fund by the state and local governments of California; the state, starting July 1, will be expected to contribute $5 billion over three years to the fund, an increase from $3.8 billion previously.

Local governments will not see their contribution rates increase until 2016, in an effort curb some stress on the state’s cities, some of which are going through bankruptcy proceedings.

The CalPERS board took into account projections that by 2028, men are expected to live 2.1 years longer and women an average of 1.6 years longer. Such an increase, if not addressed, would lead to the state’s pension expenses ballooning by $1.2 billion, or 32%, annually.

California Governor to CalPERS: Hike contribution rates now or pay more later

California Governor Jerry Brown (D) is urging CalPERS officals increase the contribution rates it requires from states, cities and employers to account for the costs associated with the increasing life span of retirees.

Brown sent a letter to the board that oversees CalPERS, the second largest public pension system in the United States, asking that the board members incorporate longer life spans of retirees into the formula used to calculate the rates of taxpayer contributions to the fund.

The CalPERS board is meeting later this month and is expected to vote on the proposal. CalPERS staff had recommended in December that contribution rates be increased, but not until 2016.

But Brown said in his letter that waiting until 2016 could cost the state $3.7 billion over the next 20 years.

From Gov. Brown’s letter:

“Since CalPERS last faced this issue in 2010, there have been dramatic changes in life expectancy: by 2028, men retiring at age 55 are projected to live an average of 2.1 years longer and women 1.6 years longer. For the state, these changes mean that pension costs will be much greater than previously thought and state costs will increase $1.2 billion annually – about 32 percent greater than today.”

CalPERS released their own statement today in response to Gov. Brown’s letter.

“We appreciate the Governor’s attention to this important matter,” the statement read. “We share a mutual goal to ensure that our fund is financially sound for the long-term.”

California pension database goes public

After a year of gathering data from public entities, a California group launched this week the largest assemblage of California pension data ever constructed.

The database currently contains data from 37 California public pension funds, including CalPERS, the second largest public pension fund in the country. Available data includes retirees’ names, their annual pension payments, years of service, the year of their retirement and their last employer.

The database, which can be found at Transparent California, was built in response to a 2011 state court ruling that made public pension information under the California Public Records Act.

The California State Controller’s Office had previously launched a database of public pension information, but the data was not as expansive as some pension watchdog groups had hoped.

Ed Ring of the California Public Policy Center highlights the need for the new database:

What level of public employee pay and benefits are affordable and appropriate is a difficult but necessary discussion. And missing too often from this discussion is good data on just how much, on average, public employees are currently making. In California, the State controller has made available a database of public employee compensation, organized by agency, that includes every city, county and state worker.

One of the biggest weaknesses inherent in the State controller’s “Government Compensation in California” database is that the summary information provides averages that take into account positions that were part-time, or only occupied by the employee for part of the fiscal year.

Last year, CalPERS considered the idea of posting a database of its pension data on its own website. But the idea has been delayed after members of the CalPERS system protested the public database. The system’s staff is now considering cancelling the project altogether.