California Gov. Jerry Brown’s revised state budget proposes a $6 billion supplemental payment to The California Public Employees’ Retirement System (CalPERS), which he says will save the state $11 billion over the next two decades.
The supplemental payment effectively doubles the state’s annual payment. It is intended to ease the effect of increasing pension contributions due to the state’s unfunded liabilities and the CalPERS Board’s recent decision to lower its assumed investment rate of return to 7% from 7.5%.
California currently has $282 billion in long‑term costs, debts, and liabilities; $279 billion are related to retirement costs of state and University of California employees, according to the revised budget.
“These retirement liabilities have grown by $51 billion in the last year alone due to poor investment returns, and the adoption of more realistic assumptions about future earnings,” said Brown in his budget.
As of June 30, 2016, CalPERS was only 65% funded, and reported unfunded liabilities of $59.5 billion. According to the revised budget, without the supplemental pension payment, the state’s contributions to CalPERS are on pace to nearly double by fiscal year 2023‑24. However, the additional $6 billion will reduce the unfunded liability, and help lower and stabilize the state’s annual contributions through 2037‑2038, assuming there are no changes to CalPERS’ actuarial assumptions.
According to the budget, contribution rates as a percent of payroll will be approximately 2.1 percentage points lower on average than the currently scheduled rates. For example, peak rates would drop from 38.4% to 35.7% for state miscellaneous (non‑safety) workers, and peak rates would drop from 69 percent to 63.9 percent for CHP officers.
The funding for the supplemental payment will be paid through a loan from the Surplus Money Investment Fund. Although the loan will incur interest costs of approximately $1 billion over the life of the loan, actuarial calculations indicate that the additional pension payment will lead to net savings of $11 billion over the next 20 years.
For 2017‑18, the state’s contribution to CalPERS is estimated at $5.8 billion ($3.4 billion General Fund). Without the supplemental payment, Brown says that the state’s contribution is estimated to reach $9.2 billion by 2023‑24, due to anticipated payroll growth, and the lower assumed rate of return. However, with the supplemental payment, the state’s 2023‑24 pension costs are projected to be $8.6 billion.