Legislative Analyst's Office Analysis of the 2003-04 Budget Bill

Control Section 3.60

This control section specifies the contribution rates for the various retirement classes of state employees in the Public Employees' Retirement System (PERS). The section also authorizes the Department of Finance to adjust any appropriation in the budget bill as required to conform with changes in these rates. In addition, the section requires the State Controller to offset these contributions with any surplus funds in the employer accounts of the retirement trust fund.

State Contribution Rates to Jump. . .

Under current law, PERS is responsible for developing employer contribution rates each year based on actuarial analyses. The PERS has estimated that retirement costs would increase from the current-year level of $1.2 billion to $2.2 billion in the budget year. This includes an increase in General Fund costs of $543 million. The final determination of 2003-04 contribution rates will occur in the spring.

Negative Return, Actuarial Methods Cause Rates to Jump. This large jump in state retirement contributions to PERS is primarily caused by two factors:

• The poor performance of the stock market resulted in a 6 percent loss for pension funds for 2001-02. This follows a 7.2 percent loss for 2000-01. In contrast, PERS assumes an 8.25 percent annual return over the long term for actuarial purposes.
• Under its actuarial methods, PERS will recognize a greater share of recent losses than usual for 2003-04. This keeps the actuarial value of the investment fund—which typically "smooths out" the recognition of gains and losses to reduce dramatic fluctuations in contribution rates—within an established "band" of proximity to the fund's actual market value.

. . .But Governor's Retirement Proposal Would Zero-Out 2003-04 Contributions

We withhold recommendation on 2003-04 state contribution rates for retirement benefits pending (1) the outcome of the proposed retirement package and/or (2) final determination of budget-year rates.

As we discuss in the "Crosscutting Issues" section of this chapter, the Governor's budget proposes to borrow the funds to pay state retirement contributions through (1) pension obligation bonds or (2) a loan agreement with PERS. In either case, the state would not make any retirement contributions to PERS from operating funds in 2003-04. Thus, the state would realize savings of up to $2.2 billion ($1.2 billion General Fund) in the budget year.

If the Legislature, however, does not approve the proposed retirement package, then 2003-04 contribution rates would rise from their present level, as noted above. As a result, pending the outcome of the proposed retirement package and/or final determination of 2003-04 rates, we withhold recommendation on this item.