When it was finally time for the CalPERS (California Public Employees’ Retirement System) board to come down with the hammer, they padded it up. While their chief actuary had recommended a half percent cut in the projected forecasts, the board went with half of that, and stayed the impact until 2013-14.
According to their press release, the board also directed Chief Actuary Alan Milligan to analyze and bring back an option for consideration to phase in the increased pension costs to employers over a 2-year period.
“This was a difficult, but important, decision for the Board to make. We understand the impact this will have on our employers in meeting contribution requirements,” said Rob Feckner, Board President. “However, current economic conditions impelled us to make this change now, and our actuaries will continue to evaluate the discount rate in the coming years.”
Last year, CalPERS resisted recommendations from their chief actuary to reduce the rate. However, earlier this year, CalSTRS (California State Teachers’ Retirement System) lowered their rate. In the previous year, the fund only grew 1.1%. And when their chief actuary this time recommended a half percent cut, they basically had little choice.
“Once STRS lowered theirs, they had to do it,” Davis City Manager Steve Pinkerton told the Vanguard Wednesday night.
The impact on the City of Davis will not be nearly as large as originally feared.
They have stayed the impact until 2013-14 to minimize the impact on this year’s budget. “They said they would do a little smoothing as well,” Mr. Pinkerton said.
“I’m guessing, depending on the actuarials, it’s probably not going to be more than half a percent to a percent in 13-14,” he said. “Probably the maximum [impact on the city budget] is somewhere between $200,000 to $400,000 in 13-14.”
Steve Pinkerton downplayed any impact this would have, noting that these things are already being factored into the negotiation for the bargaining unit MOUs.
He still expects that CalPERS will eventually cut the rate to 7.25%.
“I still think that, at the opportune time, I don’t know when, there might be a better year for the budget where they’re not feeling pressure from the state,” he said. He said it would also depend on what happens with the governor’s tax increase, where the governor announced a major new deal yesterday with the California Federation of Teachers, to consolidate the two tax proposals into one.
The discount rate for the Public Employees’ Retirement Fund was last changed 10 years ago when it was lowered to 7.75 percent from 8.25 percent. One year ago, the board voted to keep the discount rate at 7.75 percent with the condition of another review in 2012.
One of the big reasons for the change has been the decline in inflation over the last 25 years.
The discount rate is calculated based on expected price inflation and real rate of return. “As a result, CalPERS Actuarial Office recommended a reduction in the price inflation from 3 to 2.75 percent. When added to the current real return assumption of 4.75 percent, this produces a discount rate of 7.5 percent,” according to the press release.
It continued, “CalPERS actuaries offered the Pension and Health Benefits Committee two options to protect the soundness of the pension plan: a 7.25 percent discount rate that includes an adjustment to add an element of conservatism to further protect against lower returns, or a 7.5 percent discount rate without such an adjustment.”
Davis Enterprise columnist Rich Rifkin explains some of this in his column this week.
He writes that Chief Actuary Alan Milligan’s recommendation to reduce the forecasted earning is based largely on research done by outside consulting firm Gabriel, Roeder, Smith & Co.
He writes, “The GRS report says the retirement fund should be able to continue to make the same real rate of return as it has in the past. However, because of lower expectations for inflation, the nominal rate of return ought to be lowered.”
The bottom line is that, while the current inflation estimate is 3 percent, “The GRS study agues a more realistic inflation number is 2.75 percent. Over the past 10 years, the average CPI increase has been 2.33 percent. Over 20 years, the average is 2.43 percent.”
Another key component is the expected increase in employee salaries.
Write Mr. Rifkin, “If general price inflation goes up more slowly, it is logical to think public employee salaries should inflate more slowly also, saving agencies money and reducing future pension costs. However, GRS thinks otherwise.”
He continues, “Currently, PERS expects employee salaries to grow 3.25 percent per year, which is 0.25 percent higher than its CPI assumption. GRS advises that, despite financial pressures on local governments, a more realistic assumption is that employee salaries will grow 0.50 percent faster than the CPI.”
“Over the past 10 years, many public employees saw their salaries inflate at twice the rate of inflation,” he writes. “So if the new CPI figure is 2.75 percent, PERS should expect salaries of public employees to grow 3.25 percent per year, exactly what is now assumed.”
“It is important that we periodically review our assumptions to ensure that we remain focused on the long-term health of the Fund in order to protect the benefits that our members and employers rely on us to provide,” said Committee Chair Priya Mathur. “This new discount rate reflects our expectations of what the markets will deliver in the future.”
The discount rate will impact members and employers as follows:
- State and schools employer contributions will increase by 1.2 to 1.6 percent for Miscellaneous plans and 2.2 to 2.4 percent for Safety plans beginning Fiscal Year 2012-13. According to staff estimates, the change in the discount rate is expected to cost the State $303 million, of which approximately $167 million would come from the State’s general fund. The school increase would be approximately $137 million.
- Public Agency contributions will increase by 1 to 2 percent for Miscellaneous plans and 2 to 3 percent for Safety plans beginning Fiscal Year 2013-14.
- The new discount rate will apply to new service credit purchase requests postmarked, faxed or delivered on or after March 15, 2012. Costs will increase between 5 and 13 percent depending on the individual circumstances of members. Members who have submitted a request prior to March 15 will be honored with the factors in effect as of the request date.
- Retirement applications with a retirement date on or after March 15, 2012 will have the amount of their benefits under any optional form be calculated with the new discount rate. Members who choose optional benefits – leaving some part of their benefit to a spouse or beneficiary after their death – will experience approximately a 2 percent increase in cost.
The impact, then, on Davis is not nearly as bad as we feared. Nevertheless, it should serve as impetus to re-structure city contracts for its employees in a way that eases the burden on the taxpayer to provide post-employment benefits like pensions, health care and cafeteria cash-outs.
As our column on Sunday indicated, Davis enters a crucial phase in determining its future. If we make the wrong choices, as Mr. Rifkin notes, “crucial services will be cut and people will lose their livelihoods.” If we make the right decisions, Davis can be on solid and more sound fiscal footing.
—David M. Greenwald reporting
Based on the actual change made to 7.5%, the City of Davis (and/or its employees) will be required to pay at least $400,400 more to cover the “employer contribution” in 2013-14 and as much as $697,600 extra, assuming that between now and then the total base payroll, which this year is $29,720,000 does not increase. It seems likely to me that it will increase.
According to what was written in the PERS staff report, a change from 7.75% to 7.50% will require member agencies to increase their contributions by 1% to 2% of payroll for non-public safety employees and by 2% to 3% for police and fire employees.
Before this change in assumed rate of return was made, in 2013-14 PERS had told its agencies that to fund a public safety pension, it would cost them 30.30% of their safety payroll. In other words, for a cop making $100,000 a year in base salary (not counting overtime), the City of Davis must send PERS $30,300 for its employer share*. Another $9,000 is deducted from the officer’s paycheck to fund the “employee share.” Due to this change, that $30,300 figure will rise to somewhere from $32,300 to $33,300, an increase of $2,000 (2%) to $3,000 (3%).
Before this change in assumed rate of return was made, in 2013-14 PERS had told its agencies that to fund a miscellaneous pension, it would cost them 21.20% of their non-safety payroll. In other words, for a desk-worker making $100,000 a year in base salary (not counting overtime), the City of Davis must send PERS $21,200 for its employer share. Another $8,000 is deducted from the officer’s paycheck to fund the “employee share.” (Most of the employee share is paid by the City of Davis, not the employees.) Due to this change, that $21,200 figure will rise to somewhere from $22,200 to $23,200, an increase of $1,000 (1%) to $2,000 (2%).
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*Under the current contract, police officers in Davis pay all 9% of their employee share and they pay an additional 3% of the “employer share.” So a cop making $100,000 in base salary has $12,000 deducted for his pension.
I ran the numbers and found that [b]Yolo County[/b] will be required to pay at least $1,015,108 more to cover the “employer contribution” in 2013-14 and as much as $1,830,368 extra, assuming that its total base payroll, which for 2011 was $81,526,013 does not increase. It seems likely to me that it will increase.
The PERSable miscellaneous payroll in Yolo County was $61,541,271 for the calendar year 2011. The PERSable public safety payroll in Yolo County was $19,984,742 for the calendar year 2011.