The state’s annual contribution to its massive pension fund is about to go up substantially, and much sooner than expected.
In a victory for Gov. Jerry Brown and his get-tough approach, the CalPERS board on Tuesday set the stage for a rate increase that will cost the state treasury around $400 million beginning July 1. The increase will be phased in over three years and will ultimately cost the state an extra $1.2 billion a year. That will bring the state’s annual payout to CalPERS to around $5 billion.
The CalPERS board also approved higher rates for school districts and local governments, but opted to start them later and phase them in more gradually.
Driving the higher rates: new studies showing longer life expectancies for retirees.
CalPERS’ actuarial staff had been warning for some time that rates needed to rise to pay for retirees living longer, and there was almost no doubt that the pension fund’s board would go along with the recommendation. The only drama was over timing.
The CalPERS staff proposed delaying the increases until July 2016, and phasing them in over five years. Brown called that “unacceptable” and urged the CalPERS board to act more aggressively, saying delays would actually cost the state billions of dollars more in the long run.
The governor’s stance put CalPERS in a tough spot. The fund, whose board tilts toward union interests, is wary of squeezing government for more money because it inflames the political backlash against public employee pensions. At least two California cities are already bankrupt, and the mayor of San Jose is pushing a ballot initiative to give governments more power to roll back pension costs.
At the same time, CalPERS, which is already facing a $100 billion long-term shortfall, has been adamant about creating a path toward fully funding the pension system eventually.
In the end, board member Steve Coony, representing state Treasurer Bill Lockyer, pushed for a payment plan that reflected Brown’s speeded-up proposal. His motion passed 7-4.
“They understand the governor’s point of view,” said board President Rob Feckner, referring to fellow board members. “If the state thinks they have the money, more power to them.”
After years of deficits, the state is currently in the black.
“The state is in a reasonably good financial situation,” said board member George Diehr, a business professor at California State University, San Marcos.
The increase will cost the state approximately $400 million extra in the upcoming fiscal year, which begins July 1. In year three, starting in July 2016, the increase will come to about $1.2 billion. CalPERS currently gets $3.8 billion a year from the state.
Brown applauded the decision, saying the CalPERS board “took important and responsible action to strengthen California’s pension system.”
But board member J.J. Jelincic, a CalPERS employee who voted against the accelerated plan, said Brown should focus instead on pumping more money into CalSTRS, the teachers’ pension fund, which is facing severe long term stress.
“If the state has extra money, the fund across the river is in far worse shape,” said Jelincic, a long-time union activist, referring to CalSTRS’ headquarters in West Sacramento. Unlike CalPERS, the teachers fund can’t raise contribution rates without the Legislature’s approval.
While the CalPERS board bowed to Brown’s wishes in accelerating the rate hike on the state treasury, it took a softer line with thousands of local governments and school districts. Their increases won’t begin until July 2016, and will be phased in over five years instead of three, as recommended by the CalPERS staff. Although teachers belong to CalSTRS, school districts contribute to CalPERS for their other employees.
It wasn’t immediately known how much extra the schools and local agencies will ultimately pay; they currently contribute an aggregate of about $4 billion a year to CalPERS.
Some representatives of school districts and local governments appealed to the CalPERS board for even more time, saying they should get the flexibility to phase in the rate hike over seven years instead of five if they desire.
Leyne Milstein, the city of Sacramento’s finance director, said the lack of flexibility could force even more staff cutbacks in a city that has seen scores of layoffs in recent years. “You name it, we’ve cut it,” she said.
The rate hike is expected to cost the city an additional $12 million a year, she said.
The board was unmoved, voting 8-3 to go with the five-year phase-in.
“To me, seven years is a lifetime,” said board member Richard Costigan, representing the State Personnel Board. “Pushing it out seven years is not addressing the issues.”
Feckner, the board president, said CalPERS didn’t want to create additional stress for local governments and school districts, but believed five years is an adequate phase-in period. “Five years is a pretty good amount of time for someone to get their business plan in order,” he said.