CalPERS Board Adopts New Contribution Rates

Change driven by lower assumed rate of return, salary increases, and weak investment returns

The California Public Employees’ Retirement System (CalPERS) has approved new pension contribution rates for fiscal year 2017-18, including raising the employer contribution rate to 15.531% from 13.888%, and boosting the member contribution rate to 6.5% from 6%.

“While we recognize that rates will rise due to the change in the discount rate, pension reform helps reduce the risk to the fund and provides vital cost savings for our employers over the long-term,” said Richard Costigan, chair of CalPERS’ finance and administration committee.

The CalPERS board of administration said its decision was spurred by the lowering of the assumed rate of return to 7.375% from 7.5%, a 3.7% increase in member salaries, and last year’s disappointing investment return. The investment return for the fiscal year ending June 30, 2016 was 0.6%, well below the assumed return. CalPERS said “the impact of this investment loss is being recognized for the first time, and will be phased in over five years in accordance with the board policy.”

Combined, the state and school employer’s pension costs for FY 2017-18 are just under $8 billion. The state’s contribution towards pensions will increase by $521 million from $5.4 billion to $5.9 billion from the previous fiscal year. Meanwhile, the schools pool contributions will rise by $342 million to $2 billion from nearly $1.7 billion.

“We recognize the increases are a concern to many of our employers,” said Rob Feckner, president of the CalPERS Board of Administration, “but today’s decision reflects the reality that we are in a low-return economic climate that is expected to continue for the next five to 10 years.”

CalPERS said that school districts will not see the impact of the discount rate change until fiscal year 2018-19 to allow more time to prepare for the rise in the contribution costs.

The California state pension plan is approximately 65.1% funded, while the schools plan is approximately 71.9% funded as of June 30, 2016. The total CalPERS Fund is estimated to be 65% funded to date. CalPERS is the largest defined-benefit public pension in the U.S., and its total fund market value is approximately $316 billion.

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