Calpensions: CalPERS looks at long-term rate hike to cut risk

By Ed Mendel
June 1, 2015

CalPERS is considering small increases in employer and employee rates over decades to reduce the risk of big investment losses, a policy that also would lower an earnings forecast critics say is too optimistic.

The proposal is a response to the “maturing” of a CalPERS system that soon will have more retirees than active workers. From two active workers for each retiree in 2002, the ratio fell to 1.45 to one by 2012 and is expected to be 0.8 to 0.6 to one in the next decades.

As a result, investment losses will trigger bigger California Public Employees Retirement System employer rate increases. It’s a kind of “leveraging” effect as the investment fund becomes increasingly larger than the payroll on which rates are based.

The risk of big investment losses is a threat for other reasons. Funding could drop below 50 percent of the projected assets needed to pay future pensions — a fuzzy red line said to make returning to full funding nearly impossible, requiring onerous rates and unlikely investment returns.

“The concern that I have is that the volatility we have built into the funding system is such that it may cause such severe strain on the employers that they may not be able to make the contributions,” Alan Milligan, CalPERS chief actuary, told a board workshop on risk last month.

The new risk reduction policy is advocated by top staff who took office after CalPERS had huge investment losses in 2008: Milligan, CEO Anne Stausboll, Chief Investment Officer Ted Eliopoulos, and Chief Financial Officer Cheryl Eason.

It’s a sea change from the late 1990s when CalPERS cut employer rates to near zero for two years and sponsored a large retroactive pension increase for state workers, setting a benchmark for local police and firefighter pensions critics say is unsustainable.

Awash in earnings from a booming stock market and a funding level that briefly reached about 135 percent, CalPERS told the Legislature that, due to “superior” investment returns, SB 400 in 1999 would not increase state rates for “at least a decade.”

A 17-page CalPERS brochure on SB400 distributed to the Legislature quoted former CalPERS President William Crist: “This is a special opportunity to restore equity among CalPERS members without it costing a dime of additional taxpayer money.”

But after a market plunge, soaring CalPERS state rates were cited by former Gov. Arnold Schwarzenegger in 2005 as he briefly backed a proposal to switch new state and local government hires from pensions to 401(k)-style individual investment plans.

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