About a week ago, The California Policy Center published a column by Edward Ring, a political consultant for California Prosperity Alliance, that stirred some debate about hiking pension payments due to catch-up provisions for underfunded plans. Ring cited what could become 99% increases in some city and county pension payments by 2024, and claimed CalPERS is using “tricky accounting gimmicks” to appease unions and politicians. CalPERS believes the columnist didn’t account for investment returns and other savings programs.
In his column, Ring presented the top 20 cities that are predicted to face the steepest pension cost increases by 2024, using research done in partnership the Reason Foundation and the California Policy Center, which compiled data for the agency clients of CalPERS, including 427 cities and 36 counties. (In the summary, data has been distilled to present two sets of numbers—payments to CalPERS for the 2017-2018 fiscal year, and officially estimated payments to CalPERS in the 2024-25 fiscal year.) “In calculating these results, the only assumption we made (apart from the assumptions made by CalPERS), was for estimated payroll costs in 2024. We used a 3% annual growth rate for payroll expenses, the rate most commonly used in official actuarial analyses on this topic,” Ring wrote.
By 2024, due to catch-up costs on the city’s unfunded liability, the research predicts that Millbrae will have the highest total pension payments of the cities in the CalPERS system. Not including employee withholding pay, Millbrae currently contributes 59 cents for each dollar in active employee base wages to CalPERS. By 2024, the research estimates the contribution will hike to 89 cents. The catch-up provision will be “six times as much as their normal contribution, and “in just six years Millbrae’s payment on its unfunded liability will increase by 99%, from $2.9 million today to $5.8 million in 2024,” Ring wrote.
Also topping the list is Pacific Grove, with payments to CalPERS, estimated by Ring to spike from 40 cents per dollar to 75 cents, mainly due to the catch-up provision increase from $1.7 million to $4.4 million.
Ring went on list four reasons why the increases are “outrageous.” “Virtually every pension “reform” over the past decade or so has exempted active public employees from helping to pay down the unfunded liability via withholding,” he penned. He also claimed the normal costs are based on “financially optimistic projections” in which actuaries juggle lifespans and investment earning predictions in order to keep costs lower, insinuating it was a ploy to please unions and cajole elected officials. He wrote, “because cities and counties couldn’t afford to pay down the growing unfunded liabilities attached to their pension plans, tricky accounting gimmicks were employed, where minimal catch-up payments were made in the present in exchange for bigger catch-up payments in the future.” He adds, “The closest financial analogy to what they did would be the “negative amortization” mortgages that were popular prior to the housing crash of 2008.”
Yet, CalPERS said the column failed to mention quite a few important factors, including investment returns, which are continuing to grow the fund. CalPERS investments gained 11.2% last fiscal year, with gains led by its public equity program, which returned 19.6%.
Since July, the fund has grown another $30 billion to more than $355 billion.
“As a long-term investor, we’ve averaged an 8.4 % annual return over the past 30 years, well above our current 7% discount rate,” CalPERS spokeswoman Amy Morgan told CIO. “We’re careful to balance our positive returns with the other risks to the system so the fund will be sustainable for generations.”
Ring’s opinion piece also failed to point out the savings generated by 2013’s Public Employee Pension Reform Act, or PEPRA, CalPERS said. “Over the next 30 years, PEPRA will save as much as $38 billion. In fact, more than 285,000 public employees, or 32% of the active public employee workforce, already are accruing benefits under the lower PEPRA formula,” Morgan said.
She added, “Ring’s flippant claim of ‘tricky accounting gimmicks’ is false. Our professional actuaries fully comply with industry standards and best practices so that financial risks to the system can be better understood, communicated, and managed.”
She noted CalPERS has “a clear path to full funding” which is built on three strategies: “addressing the financial challenges, operating efficiently to contain costs, and following sound investment principles.”