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CalPERS Adopts Critical Rate of Return and Demographic Assumptions

Majority of League Recommendations Approved, Development of a Workable Waiver Policy Planned

February 19, 2014
Yesterday after extensive hearings, workshops and stakeholder engagement, the PERS Board of Administration voted to retain its current long-term assumed rate of return at 7.5 percent and adopted separate actuarial assumptions for the mortality of state and local employers.
While the rate of return decision is not expected to influence employer or employee rates, CalPERS estimates that the new mortality assumptions will cost local agencies an average of up to 9 percent of payroll for safety classifications and up to 5 percent of payroll for miscellaneous employees by year five of the phase in. Some city officials believe these estimates may be low because of the continued decline in the local government workforce in many cities, reducing the number of active employees contributing to CalPERS.

CalPERS staff had recommended for both the state and local employers that the cost of the new mortality assumptions be phased in over five years starting in FY 2016–17 and amortized over 20 years. In response to Gov. Jerry Brown’s strong urging, the board voted to speed up implementation of the increased cost of the new mortality assumptions on the state only to begin in FY 2014–15 and to complete the phase in over three years instead of five.
Recognizing that many local agencies have different fiscal capacities than the state, however, the board voted to adopt the staff recommendation of a five-year phase in beginning in FY 2016–17 and amortized over 20 years with a ramp down afterwards.
During the hearing, League Executive Director Chris McKenzie, Pico Rivera City Manager Ron Bates, Sacramento Finance Director Leyne Milstein and other local government and labor representatives spoke in favor of the staff recommendation as a default, but also urged the board to approve both a pre-funding option (i.e., a shorter phase in) and a seven-year phase in option for local agencies whose governing bodies adopt a resolution making the request. McKenzie had earlier submitted a letter outlining this recommendation and the results of a League member survey on this issue.
CalPERS Chief Actuary Alan Milligan informed the board that his staff was already working on implementing the League’s request for a more aggressive pre-funding option in the form of a three-year phase in option for those local agencies that could afford to pre-pay and that he would work with any local agency to customize a different pre-payment plan.
After a motion by board Vice President Priya Mathur to support the seven-year phase in option was seconded, the board had extensive discussion about the proposal and whether it provided substantial relief to those local agencies that may need it. Ultimately the board adopted a substitute motion to approve the staff recommendation with a five-year phase in. From the League’s perspective this was vastly preferable to a three-year phase in that the board approved for the state, which one director indicated during debate that he had initially considered proposing as mandatory for local agencies as well.
CalPERS Director Bill Slaton questioned Alan Milligan about the availability of a “hardship exemption” for those local agencies that may feel they cannot manage the cost of the five-year phase in. Milligan said the existing hardship exemption policy was essentially unworkable. After the board meeting, League and CalPERS staff discussed working in the near future on the development of a workable waiver or exemption policy that would for those local agencies that can demonstrate a documented need. A number of directors also expressed interest in considering such a policy in the near future.
The League expresses appreciation to all the cities that responded to its recent survey on this subject. More information will be provided by CalPERS and the League on this issue in the near future. For further information, the comprehensive PERS staff report on Agenda Item 3a is available on the CalPERS website. The contribution rate impacts of recommended assumptions using current board amortization policy are also available online.
The full meeting agenda is also available on the CalPERS website.

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