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CalPERS Raises Employer Rate Significantly to Stabilize Fund

Cities Will See Rate Increases in FY 2015–16

April 17, 2013
Earlier today, the CalPERS Board of Administration voted to make significant changes to actuarial policies, increasing the rate that state and local government employers pay for their pension plans.
Today’s vote occurred after CalPERS Pension and Health Benefits Committee approved the policies on Tuesday. The adopted recommendations modify both smoothing and amortization policies and implements these changes going forward with an impact to employer rates beginning in FY 2015–16. The smoothing period now changes from a 15-year rolling period to a five-year direct smoothing rate. The amortization period goes from a 30-year rolling period to a 30-year fixed rate.

The League testified yesterday recommending that the committee should consider at least a one-month delay in the adoption of the proposal because cities needed more time to comprehend and evaluate the impact of these changes on their employer rates and provide feedback. Although this was discussed extensively, the committee adopted the policy without any delay.
The changes approved today require the 2,200 state and local governments and school districts that are part of CalPERS to pay significantly more into the system. It’s been estimated that the system now has an unfunded liability of $87 billion. Bloomberg News reported on Monday that CalPERS now has 74 percent of the funds it needs to cover benefits over 30 years. This number had dropped as low as 61 percent in 2009 at the height of the Great Recession. The policies approved today are designed to enhance the long term stability of the fund.
CalPERS estimates that a medium public agency employer contribution rate for the next 10 years for a sample miscellaneous plan will increase by 6.3 percent from 17.8 percent to 24.1 percent. Under this example, the actual cost for this rate increase will be approximately 35 percent to the employer. The employer rate under a sample public agency safety plan will increase by 10.5 percent, from 30.8 percent to 41.3 percent, and will cost the employer in this model 34 percent more in 10 years than it costs them today. In the first year of implantation, employers will see the highest increase, with slight increases in year seven and 10. These increased rates will remain at those levels from 2020 on for decades. CalPERS estimates that these increases will result in the unfunded liability being paid down by 2045.

In addition to these increases, the CalPERS actuary is considering discount rate changes (assumed rate of return) and actuarial assumption changes relating to mortality assumptions. The adoption of these changes is under consideration and is not certain. However, CalPERS is advising employers to brace themselves for continued changes. The mortality assumption change could be an increase of 2–4 percent of payroll phased in over a period of time and the discount rate change could be 2–4 percent change phased in over time. These additional increases, if adopted, would be on top of the smoothing and amortization policy changes that were adopted today. The mortality assumptions and discount rate changes will be discussed further in spring 2014.

The CalPERS agenda and resolution can be viewed on the League website.

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