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Analysis of the 2004-05 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 $2.2 billion to $2.6 billion in the budget year. This includes an increase in General Fund costs of $193 million. The final determination of 2004-05 contribution rates will occur in the spring. Figure 1 shows these rates by classification since 1991-92.
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State Retirement
Contribution Rates |
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1991-92 Through
2004-05 |
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Fiscal Year |
Misc. |
Misc. |
Industrial |
Safety |
Peace
Officer/ |
Highway |
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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 |
- |
13.3 |
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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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2004-05a |
16.5 |
11.9 |
13.1 |
23.4 |
23.2 |
35.4 |
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a
Public Employees' Retirement System estimates. |
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Less-Than-Assumed Return Leads to Rate Increases. This jump in state retirement contributions to PERS is primarily caused by less-than-assumed returns. The PERS' investment returns totaled just 3.9 percent for 2002-03. This follows a 6 percent loss for 2001-02 and a 7.2 percent loss for 2000-01, due primarily to the poor performance of the stock market in those years. In contrast, PERS assumes an 8.25 percent annual return over the long term for actuarial purposes.
We withhold recommendation on 2004-05 state contribution rates for retirement benefits pending (1) the outcome of the proposed retirement package and (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 funds to pay a portion of state retirement contributions through pension obligation bonds. As a result, the state would pay $1.6 billion in retirement contributions to PERS from operating funds for 2004-05, realizing savings of $929 million in the budget year. All of these savings would accrue to the General Fund.
If the Legislature, however, does not approve the proposed retirement package, then 2004-05 contributions would rise from their present level, as noted above. As a result, pending the outcome of the proposed retirement package and final determination of 2004-05 rates, we withhold recommendation on this item.