SAN FRANCISCO — A recent decision by the California Public Employees' Retirement System will raise funding pressures on public employers, according to a report from Fitch Ratings.
The CalPERS board voted on Aug. 20 to count nearly 100 additional types of extra pay toward how pensions are calculated for public employees hired after Jan. 1, 2013.
"The state, school districts and local governments are already facing materially higher projected contributions caused by past investment results and recent actuarial changes intended to improve the sustainability of the plans over time," Fitch analysts said in the report released Aug. 22. "We expect legal and institutional battles to continue given the high stakes of pension reform for both public employers and employees."
The actuarial value of CalPERS' unfunded pension liabilities was $57.4 billion, as of the most recent valuation date.
The change in retirement calculations will allow temporary and special assignment payments, among numerous categories of compensation outside of workers' base pay, to be included along with base pay in pension calculations.
"The expanded definition of pensionable compensation exposes public employers to higher pension liabilities and contribution expenses, and appears to be a step backward from recent reforms," Fitch said.
The Public Employees' Pension Reform Act of 2013, backed by Gov. Jerry Brown, was passed in 2012 with the aim of reducing pension costs for newly hired workers by narrowing the definition of pensionable compensation.
It was intended to end the practice of "pension spiking," where employees inflate their compensation in the years immediately preceding retirement in order to receive larger pensions.
Fitch said the CalPERS decision is in apparent conflict with PEPRA and will increase pension costs for employers, if implemented.
"The magnitude of impact from this decision is not yet clear, but it raises more questions about the sustainability of California's pension reform efforts, which continue to face legal and institutional challenges," analysts said. "Particularly worrisome to Fitch is the absence of detailed information on the analysis of its projected costs."
