By Carolyn Schuk
Big jumps in payments into the California Public Employees’ Retirement System (CalPERS) system is one of the factors driving Santa Clara's "systemic" budget deficit over the next five years.
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Santa Clara's CalPERS pension fund contributions will double over the next five years, both in absolute terms and as a percent of the City's revenue. As a percent of the City's operating budget, it grows more slowly |
Started in 1932, the California Public Employees' Retirement System (CalPERS) manages pension, disability and retirement medical benefits for California's public employees. The largest public pension fund in the United States, CalPERS manages about $180 billion in assets.
All of Santa Clara's permanent full-time and part-time employees must participate in CalPERS, and contribute either 8 percent – Miscellaneous plan – or 11.25 percent – Public Safety plan – of their salaries to the fund. The City contributes the remaining amounts needed to pay the promised benefits, based on CalPERS calculations. Contribution rates are set by state law and can only be changed with contract changes.
Because CalPERS is a "defined benefit" plan, benefits are determined by a formula based on salary and years of service – regardless of fund value. The other type of pension is a "defined contribution" plan, such as a 401K. These plans calculate benefits based on the value of individual accounts at retirement. Defined contribution plans have largely replaced defined benefit pensions in the private sector.
CalPERS expects its payouts to rise dramatically in the next few years for several reasons. First, the giant fund is coping with $68 billion in investment losses over the last two fiscal years. At the same time baby boomers are nearing retirement, workers are retiring younger, are living longer and are making more money. As a result, CalPERS payouts are likely to exceed projected contributions and earnings, and employers must cover their commitments.
In 2010-2011, the City's contribution for the Miscellaneous and Safety plans are 18 percent and 27 percent, respectively. By 2016, the City's budget forecasts those contributions to grow, respectively, to 28 percent and 42 percent.
That adds up to a growing piece of the budget pie. In 2009-2010, Santa Clara's CalPERS contribution was $17 million. It's projected to double – both absolutely and as a percentage of the City's budget – to $34 million by 2015-2016.
One short-term step that the City is taking is to refinance its CalPERS liability for 30 years at a lower interest rate, which will save $225,000, according to City Finance Director Gary Ameling. However, while this lowers the City's annual costs, like refinancing a mortgage, the clock starts ticking again for a new 30-year term.
big hit during the "Great Recession", after the years of experiencing great growth in the 80's and 90's. At one time in the 'good years' PERS informed its members the PERS fund was "super funded", meaning the fund has greatly exceeded PERS projections for what was needed to fund all future retirements. PERS asked both the public agencies, and the employees what to do? Should PERS continue collecting at the then current rate, or did the contributors want to make a change? Both the public agencies and employees decided to keep their money, and reduce their payments into PERS to actually zero for several years.
ReplyDeleteHard to believe many of the public agencies, including the City of Santa Clara's, employer's input into PERS which was once 8% became 0%, and now needs to be 27% or more!?! A very bad call comes home to roost. Reminds me of a story about an ant and a grasshopper...
big hit during the "Great Recession", after the years of experiencing great growth in the 80's and 90's. At one time in the 'good years' PERS informed its members the PERS fund was "super funded", meaning the fund has greatly exceeded PERS projections for what was needed to fund all future retirements. PERS asked both the public agencies, and the employees what to do? Should PERS continue collecting at the then current rate, or did the contributors want to make a change? Both the public agencies and employees decided to keep their money, and reduce their payments into PERS to actually zero for several years.
ReplyDeleteHard to believe many of the public agencies, including the City of Santa Clara's, employer's input into PERS which was once 8% became 0%, and now needs to be 27% or more!?! A very bad call comes home to roost. Reminds me of a story about an ant and a grasshopper...
big hit during the "Great Recession", after the years of experiencing great growth in the 80's and 90's. At one time in the 'good years' PERS informed its members the PERS fund was "super funded", meaning the fund has greatly exceeded PERS projections for what was needed to fund all future retirements. PERS asked both the public agencies, and the employees what to do? Should PERS continue collecting at the then current rate, or did the contributors want to make a change? Both the public agencies and employees decided to keep their money, and reduce their payments into PERS to actually zero for several years.
ReplyDeleteHard to believe many of the public agencies, including the City of Santa Clara's, employer's input into PERS which was once 8% became 0%, and now needs to be 27% or more!?! A very bad call comes home to roost. Reminds me of a story about an ant and a grasshopper...
Great point!
ReplyDeleteThen has the employee contribution rate now increased as has the public agencies?
ReplyDeleteDid the employees contribution go from 8% to 0%? Was that a collective bargaining decision made at the end of a prior agreement?
Did staff make a recommendation regarding the decision to hold on the City's contribution?
How is the decision to pay at the higher rates made? Who makes that decision?
Are the forecasted higher contribution rates based upon an assumption of market performance (besides the earlier retirements, longevity and higher salaries?
In a capatilistic society, you can't have a fixed payout formula on something that's value is based on outside market influences. If you could, Vegas would be out of a job. Sounds like a new form of a derivative security...yikes! As much as everyon in PERS does not want to see promised benefits change, they have to now encorporate a performance factor into the equation. If the budget is at 68% planned levels, the payout needs to be at 68%. If the economy is booming, great, 100% payouts and everyone is happy. If there is a recession, those same funds need to adjust accordingly since they are based on assets in the public domain.
ReplyDeleteI know, not very popular with the current receivers of the benefit, but how else do you build in a system to preserve it?
In a capitalistic society, you can't have a fixed payout formula on something that's value is based on outside market influences. If you could, Vegas would be out of a job. Sounds like a new form of a derivative security...yikes! As much as everyone in PERS does not want to see promised benefits change, they have to now incorporate a performance factor into the equation. If the budget is at 68% planned levels, the payout needs to be at 68%. If the economy is booming, great, 100% payouts and everyone is happy. If there is a recession, those same funds need to adjust accordingly since they are based on assets in the public domain.
ReplyDeleteI know, not very popular with the current receivers of the benefit, but how else do you build in a system to preserve it?