Bloomberg News

Brown Criticizes California Pension’s Phased Rate Boost

May 17, 2012

Governor Jerry Brown said a decision by the California Public Employees’ Retirement System to phase in a higher contribution rate after record losses would cost taxpayers $146 million over 20 years.

Calpers, as the largest U.S. pension is known, decided to cushion local governments against the increase by spreading it over two years instead of one. Brown, elected on a pledge to fix the state’s persistent deficits, said the move irresponsibly delays making painful choices.

“Your decision today to institute a phase-in period reinforces the same practice of prior years -- to not pay our pension bills when due,” Brown said in a letter to the fund’s board yesterday.

The $232.5 billion fund is still recovering from the recession, when it lost 23 percent in fiscal 2009, its worst one-year decline on record. The increase stems in part from the investment loss and from a lower assumed rate of return adopted in March, trimming the presumed annual gain to 7.5 percent from 7.75 percent.

The rate is used to calculate how much money the plan will need to cover promised benefits, and what employers must pay. The board agreed to phase in half the amount of the increase for the year that begins July 1 for state agencies and school districts, and in July 2013 for local governments. The second half would take effect in the following year.

‘Pick Up Check’

“We voted for the phase-in option to make things less painful for all employers during these difficult economic times,” Rob Feckner, the president of the Calpers board, said in a statement. “If the governor feels the state can make the payment in full, then I’ll be happy to have someone come pick up his check today.”

The pension fund’s governing board agreed to boost the state contribution by 5.7 percent, or $213 million, next year. California would pay $3.7 billion, or about 4 percent of its budget, for retiree benefits in the year beginning July 1.

If the state were to phase in the change and pay interest on the deferral, the cost would increase $146 million over 20 years, Brown said.

“In essence, phasing in the change would be the equivalent of the state taking a 20-year loan at 7.5 percent interest --not a prudent decision,” Brown said.

Calpers earned 1.9 percent in the three quarters ending March 31, according to a performance summary on its website. That follows 20.7 percent in fiscal 2012, its best result in 14 years, led by stocks and private equity gains.

Underfunded Pensions

California’s state pensions in 2010 had about 81 percent of what they need to cover the benefits they’ve promised, down from 87 percent in the preceding year, according to an annual study by Bloomberg Rankings. The median for all states was 75 percent, the data show.

Brown last year proposed changes to public pensions that would ask government workers to retire later and contribute more. Democrats have balked at the plans, while Republicans are seeking a voter initiative to enact them.

“Given the outlook for long-term investment performance, the system may well choose to lower its return assumption again in the near term,” Brown said in his letter. “Whether Calpers implements a phase in or not, its is my intent that the state fully pay for the change in investment return assumptions this year.”

To contact the reporter on this story: Michael B. Marois in Sacramento at mmarois@bloomberg.net

To contact the editor responsible for this story: Stephen Merelman at smerelman@bloomberg.net


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