The California Public Employees' Retirement System Board of Administration approved new actuarial policies that are anticipated to raise costs for the already-strapped municipalities that participate in the pension fund.
The goal of the new policies is to return the system to fully-funded status within 30 years.
"This was one of the most difficult, yet most important decisions we have had to make," Rob Feckner, CalPERS board president, said in a statement. "Moving our plans more swiftly toward full funding will ensure a sustainable pension system for our members, employers and ultimately taxpayers over the long-term."
Two cities in the bankruptcy process, Stockton, which recently had its eligibility to be in bankruptcy affirmed by the judge, and San Bernardino, which is going through preliminary hearings that will lead to such a determination, have CalPERS listed as a creditor.
San Bernardino began battling with CalPERS shortly after announcing plans to file for bankruptcy in August 2012. The pension fund filed a motion asking the judge to lift the automatic stay that protects debtors in bankruptcy so that it could sue San Bernardino for missed payments, but the judge ruled against the motion. San Bernardino Mayor Pat Morris said recently that while the city plans to restart payments to the pension fund beginning July 1, it is unlikely it will be able to catch up on missed payments from August 2012 through July 2013 and will likely have to impair the pension fund.
Bond insurers have sued Stockton because it has continued payments to CalPERS throughout its bankruptcy, and insurers contend that the pension fund should be treated like any other creditor. Stockton has opted instead to distribute most of the pain from its insolvency to bondholders.
CalPERS' new policies include a rate-smoothing method with a 30-year fixed amortization period for gains and losses, according to the pension fund. The amortization would have a five-year ramp-up of rates at the start and a five-year ramp-down at the end.
At the board's request, officials said the actuarial staff examined various alternatives to the adopted method to mitigate some impact of rate increases in the first several years of implementation. It was determined that although alternatives did provide lower rates up front, rates would be higher over time. However, the board did delay the implementation of the new policy until 2015-16 for the state government, schools and all public agencies.
In addition to closing the funding gap in 30 years, the new method will also help avoid large increases in employer contribution rates in extreme years, while maintaining a reasonable level of change in normal years, according to the pension fund.
"While this was a tough decision, it was the right thing to do for CalPERS," said Priya Mathur, Pension & Health Benefits Committee chair. "Though rates will initially be higher in the short term, we can now provide better transparency and greater rate predictability, which our employers need for budgeting purposes."
Based on investment return simulations performed for the next 30 years, increasing contributions more rapidly in the short term is expected to result in almost a 25% improvement in funded status over a 30-year period.
CalPERS is the largest public pension fund in the U.S. with approximately $256 billion in assets. The retirement system administers retirement benefits for more than 1.6 million current and retired California State, public school and local public agency employees and their families on behalf of more than 3,000 public employers in the state, and health benefits for 1.3 million enrollees.