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2010

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Recommendation for Legislative Budget Committees. We previously recommended that Control Section 3.60—the section of the budget bill establishing state employer pension contribution rates—be sent to conference committee, given the unexpected delay of the Board of Administration of the California Public Employees’ Retirement System (CalPERS) to set state pension rates for 2010-11. In addition, conference committee will need to consider the amount to be assumed in several non-budget-act spending items related to Control Section 3.60.

Below, we provide more information on CalPERS’ delay, including additional recommendations and findings.

CalPERS Delays Action on Needed State Pension Rate Increase. The Board of Administration of CalPERS chose on May 19, 2010, not to approve a recommended increase in state pension contribution rates for 2010-11 at this time. The increase had been proposed by actuaries based on the board's previously approved rate-setting methodology, which itself had already sought to relieve costs for the state and local governments in 2010-11. The board will be considering the state's 2010-11 rates further at its June meeting. By delaying this decision, the board gives the Legislature much less time (or no time) before the constitutional deadline for passing the budget to account accurately for the pension contribution requirements that eventually will be set by the system.

Not Increasing Rates in 2010-11 Likely Will Cost the State Even More Later. The state's pension plans face huge unfunded actuarial accrued liabilities that will pass significant and increasing annual costs onto future taxpayers. Delaying implementation of needed rate increases to 2011-12 or beyond will pass more of these costs to future years and probably will result in even higher costs for taxpayers, given the lost opportunity of CalPERS to invest those contributed funds sooner. In effect, delaying implementation of rate increases will result in the state’s General Fund and other funds borrowing hundreds of millions of dollars for one or more years at an assumed annual interest rate of 7.75 percent (CalPERS’ assumed annual investment return). We recommend that the Legislature request that CalPERS provide a detailed estimate of how any delay in implementing needed contributions will increase future state costs and describe how any delay of this type is consistent with the fiduciary and constitutional responsibilities of the CalPERS board.

Likely That 2010-11 State Payments Would Be Lower Than Estimated by Actuaries. Actuaries of CalPERS used accepted actuarial techniques in developing their proposals to the board, and we take no issue with those techniques. Actuarial models for developing pension contribution rates, however, do not translate easily into dollar estimates suitable for state budgeting purposes.

We continue to believe that CalPERS actuaries overstated somewhat the dollar amount of likely state contributions in 2010-11 under their recommended state contribution rates (the rates that the board has chosen not to adopt at this time). This is because actuarial methods include a standard assumption that payroll growth will occur each year even though, for state budgeting purposes, such payroll growth almost certainly will not occur in 2010-11. It also appears that 2009-10 state pension contributions may be far below the estimated amount assumed by actuaries under their methodology (due to the furlough program and its temporary lowering of state employee pay). These issues mean that the data provided by the actuaries do not translate easily into data to be included in the state budget. Moreover, the Governor's January budget package already included baseline increases in state spending for pension contributions totaling $390 million, including $130 million of increased pension contributions from the General Fund.

In any event, it is important for the Legislature to understand that the widely quoted CalPERS actuarial estimate of a $600 million state payment increase in 2010-11 is (1) going to be borne largely, but not entirely, by funds outside of the General Fund and (2) almost certainly not going to increase the already identified General Fund budget problem in 2010-11 by a full $600 million.

On May 27, our office indicated to the Senate Budget and Fiscal Review Committee that the CalPERS actuaries' rate plan likely would increase the state's 2010-11 General Fund budget problem by a net amount of about $100 million by increasing baseline state pension costs above those already assumed in the Governor's budget package. This estimate is preliminary. We will continue to review system and administration estimates to provide the conference committee with a calculation of possible General Fund cost increases under the rate plan that is finally adopted by the CalPERS board.

Judges' Retirement System (JRS) Provisions of Control Section 3.60. As described in this separate analysis, the provisions of Control Section 3.60 related to JRS II employer contributions in 2010-11 also will need to be modified to reflect the required rates set by CalPERS. Unlike the rates for other state employees described above, the actuaries' recommended JRS II employer contribution rates were approved by the CalPERS board. at its May 19 meeting.