12/02/2021

Cities face seven years of growing CalPERS costs

Cities jolted by a new CalPERS rate increase laid out in their annual pension reports this fall are finding few options for cost relief. Basically, they can pay more now to avoid higher costs later or curb the growth of employees and their pay.

As rising pension costs squeeze funding from government services, a big change could come from a state Supreme Court decision. Two unanimous rulings by appellate court panels allow cuts in pensions earned by current employees in the future.

Appeals of the two rulings have yet to be heard by the Supreme Court. How the high court will rule, and what might follow if the groundbreaking appellate rulings are upheld, is far from clear.

The California Public Employees Retirement System, like many public pension plans, has not recovered from huge investment losses a decade ago. Last year CalPERS only had 68 percent of the projected assets needed to pay future pension costs.

The funding level now is several percentage points higher. Investment earnings in the fiscal year ending in June, 11.2 percent, exceeded the 7 percent target. A $6 billion extra payment for state workers is expected to save $11 billion over two decades.

But a lengthy bull market that began in 2009 after a stock market crash may be coming to an end. And CalPERS is forecasting that its investment portfolio, valued at $340 billion last week, will earn a below-target 6.2 percent during the next decade.

The failure to recover from big investment losses, as CalPERS has done in the past, leaves no cushion to absorb large losses. A downturn could drop the funding level below 50 percent, a red line experts think makes a return to 100 percent unlikely.

“Frankly, if it falls below 50 percent it’s a hole that’s almost impossible to get out of,” Brad Pacheco, CalPERS deputy executive, told the Salinas city council on Sept. 26. “So we needed to inject cash into the system, and that’s one of the reasons they lowered the discount rate.”

The CalPERS investment earnings forecast used to offset or discount the cost of future pensions was lowered from 7.5 percent to 7 percent last December. The resulting employer rate increase for local governments begins next year and won’t be fully phased in until 2024.

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