“CalPERS, the big state pension fund, has effectively slammed the door on cities thinking of getting out of the guaranteed pension business.
Last month, the fund’s board decided to recalculate the unfunded liability of any agencies that want to leave the system, using a discount rate of 3.8 percent instead of 7.75 percent
That means that a city that believes it owes a bajillion dollars will be told it owes something closer to four bajillion if it tries to leave.
So the door is not officially closed – it just got real expensive to open.
The board’s move comes as mounting pension debts are getting more attention from local governments and the media.
Ten Orange County cities now have unfunded liabilities with CalPERS of more than $100 million, the Register recently reported….
Earlier this year, the Costa Mesa City Council asked CalPERS how much it would cost to settle accounts. They were told that a pension liability they thought was $130 million amounted to $221.7 million in exit costs.
Financing that exit payment over 10 years would bring the total to $315 million, CalPERS actuary Rick Santos told them.
(BUT) Under the new statewide policy (just adopted by CalPERS), Costa Mesa would need to pay between $444 million and $514 million up front, according to formulas provided by two experts.
Financing that over 10 years would cost $63 million to $73 million per year; the city’s general fund budget is just $93 million.
Costa Mesa is not unique….
HOW WE GOT THESE NUMBERS
The Watchdog contacted two experts to make sure we got the math right: John Bartel, a member of the state’s independent actuarial board, and Stanford University professor Joe Nation, whose students got a lot of attention last year by calculating that CalPERS’ liabilities were 72 percent higher than previously reported.
They gave us a similar shortcut for calculating termination unfunded liability. If you like pension math (and who doesn’t?), you can read the rest of the article to get an idea of why the shortcut works.
Bartel said his rule of thumb is to multiply liabilities by 1.5, then subtract current assets. Nation’s formula works out to a multiplier of 1.66.”
John Bartel is the very same actuary that presented the disturbing picture of Pleasanton’s pension problems during a council meeting three weeks ago. This is a good article: Web Link
CalPERS investment team and their independent consultants recommended lowering the assumed rate of return, or discount rate. The investment team recommended lowering that rate from 7.75%, to 7.35- 7.5%, while the independent consultant told them they would be lucky to return 6% over the next decade. The union dominated board rejected the numbers from staff even though the people responsible for earning those returns projected a 7.4% rate of return for the next decade, which many feel is overly optimistic.
They did this because lowering the discount rate increases the cost cities will have to pay (even though it increases the unfunded liability). Lowering the discount rate to 7.35% would increase the pension cost for public safety by 6% of payroll. Their fear was/is that if pension costs increase even more rapidly than they already are the union members would see increased pressure to lower compensation. Maintaining the status quo, as unrealistic as it was/is, at least defers the debt which doesn’t show up on the balance sheet; the unions were/are OK with that. That is about to change with the new GASB rules (public pension accounting rules) that will soon come into play.
How reliable are CalPERS projections? CalPERS made 10 year projections when they introduced the 3@50 pension formula in 1999 (SB 400). They claimed cities would pay little or nothing for the next ten years because CalPERS was Superfunded and the investment staff was projecting a DOW of 25,000, by 2009. I rest my case.
CalPERS has been embroiled in one scandal after another, they’ve written off real-estate investments at 1 billion per clip for several projects, including the Mountain House project, and they have lost site of their role as an independent state agency.
While Act 37 pensions plans (essentially county & city pension plans that are not CalPERS) like the Contra Costa County pension system have abused taxpayers to know end by allowing for every pension spiking gimmick imaginable, CalPERS has taken a different approach. The Nations largest pension plan has morphed from an independent State Agency into the role of Union Advocate while advocating for increased union benefits, increased union control, and there recent effort of placing union friendly executives on the Board of Directors of our country’s largest corporations, like Apple. This is not their role nor was their advocacy, at the request of the unions, to advocate for SB 400 which increased both pension benefits and costs.
CalPERS, and the unions control of the CalPERS Board, is a BIG part of the problem. People need to pay attention to what is going on with this corrupt organization - CalPERS.