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Analysis of the 2005-06 Budget BillLegislative Analyst's Office
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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.
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 $2.5 billion to $2.7 billion in the budget year. This includes General Fund costs of $1.5 billion, an increase of $65 million. The final determination of 2005-06 contribution rates will occur in the spring. Figure 1 (see next page) shows these rates by classification since 1991-92.
Less-Than-Assumed Investment Performance Leads to Rate Increases. This continued growth in state retirement contributions to PERS primarily is caused by a string of less-than-assumed investment returns. Although investments earned nearly 17 percent in 2003-04, PERS still is recognizing previous losses in current retirement contribution rates through its actuarial smoothing process. The PERS's investment returns totaled just 4 percent for 2002-03. This followed a 6 percent loss for 2001-02 and a 7 percent loss for 2000-01, due primarily to the poor performance of the stock market in those years. By contrast, PERS assumes an 8 percent annual return over the long term for actuarial purposes.
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State Retirement Contribution Rates |
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1991-92 Through 2005-06 |
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Fiscal Year |
Misc. |
Misc. |
Industrial |
Safety |
Peace
Officer/ |
Highway Patrol |
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1991-92 |
11.8% |
4.0% |
13.4% |
17.4% |
17.4% |
21.7% |
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1992-93 |
10.3 |
3.4 |
12.0 |
15.7 |
15.6 |
17.1 |
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1993-94 |
9.9 |
5.0 |
11.8 |
15.5 |
15.2 |
16.9 |
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1994-95 |
9.9 |
5.9 |
10.6 |
13.9 |
12.8 |
15.6 |
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1995-96 |
12.4 |
8.3 |
9.0 |
14.2 |
14.4 |
14.8 |
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1996-97 |
13.1 |
9.3 |
9.3 |
14.7 |
15.4 |
15.9 |
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1997-98 |
12.7 |
9.8 |
9.0 |
13.8 |
15.3 |
15.5 |
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1998-99 |
8.5 |
6.4 |
4.6 |
9.4 |
9.6 |
13.5 |
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1999-00 |
1.5 |
— |
— |
7.5 |
— |
17.3 |
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2000-01 |
— |
— |
— |
6.8 |
2.7 |
13.7 |
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2001-02 |
4.2 |
— |
0.4 |
12.9 |
9.6 |
16.9 |
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2002-03 |
7.4 |
2.8 |
2.9 |
17.1 |
13.9 |
23.1 |
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2003-04 |
14.8 |
10.3 |
11.1 |
21.9 |
20.3 |
32.7 |
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2004-05 |
17.0 |
13.2 |
16.4 |
20.8 |
23.8 |
33.4 |
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2005-06a |
17.1 |
13.3 |
16.9 |
21.2 |
24.7 |
33.1 |
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a Public Employees' Retirement System estimates. |
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We withhold recommendation on 2005-06 state contribution rates for retirement benefits pending final determination of budget-year rates.
The current-year budget approved the borrowing of funds to pay a portion of state retirement contributions through a pension obligation bond. The bond has not been issued, as it has been challenged in court for the second year in a row. Previously, a Superior Court invalidated state issuance of a pension obligation bond in 2003-04 because the bond lacked voter approval.
Because of the delay, the administration plans to issue the pension obligation bond approved for the current year in 2005-06 instead (pursuant to the multiyear authority granted in the current-year budget package). As a result, the state would pay $1.9 billion in retirement contributions to PERS from operating funds in 2005-06, realizing savings of $765 million in the budget year. All of these savings would accrue to the General Fund. The administration has counted these savings as part of its overall budget solution.
Pending final determination of 2005-06 rates, we withhold recommendation on this item.