Two California state lawmakers introduced pension bills as its largest public pension fund decided to shorten its amortization period to 20 from 30 years for all investments gains and losses.
The new actuarial policy the California Public Employees' Retirement System adopted last week would raise employer contributions starting in 2021.
It comes on top of a series of rate increases since 2012. The largest came last year when the pension fund's earnings forecast was dropped to 7% from 7.5%, but it won’t be fully phased in until 2024.
CalPERS' actions enhance its long-term sustainability, but are “likely to precipitate short-term pressure to some governmental budgets,” Fitch Ratings said in a Friday report.
“Potential cost pressures will vary by locality and may depend on legal decisions going forward, but local governments in California will be especially challenged given their limited ability to raise revenues and a history of judicial decisions protecting existing pension arrangements,” Fitch analysts wrote.
The League of California Cities did not take a position on the latest change, because it received a mixed reception from the cities it represents.
Cities citing extreme financial hardship raised concerns that reducing the amortization schedule will increase their employer contribution rates even beyond what they can afford, according to the League. But some cities support the change because they believe it is prudent to shore up the fund and pay down the unfunded accrued liability faster instead of pushing the financial burden to future employees, employers and taxpayers, the League said.
Sen. John Moorlach, R-Costa Mesa, introduced three pension reform bills, revising two he floated last year that died in committee ahead of the pension fund's announcement. Moorlach's GOP holds only 13 of the 40 state Senate seats.
Senate Bill 1031 would allow public employers to freeze cost of living adjustments for retirees if the pension fund isn’t 80% funded, while SB 1032 would make it easier for local governments to exit CalPERS without paying termination fees.
CalPERS' unfunded liability is currently estimated at $140 billion and it only has about 68% of the money needed to fulfill its obligations.
A third bill, SB 1033, would shift the burden of increased pension costs to the last city that hired an employee. Moorlach said that often a small city will train a police officer, who is then hired by a larger city and given a significant raise. The smaller city is then responsible for paying higher pension costs for the years the officer worked there.
Moorlach said he thinks the best approach is to tackle the issues incrementally. If Gov. Jerry Brown, in his last year in office, decides to create a trailer budget bill proposing more wholesale changes, Moorlach said he would support such an effort.
“It depends on how aggressive he wants to get this year and whether he has the juice or he’s a lame duck,” Moorlach said. “He has already done an amicus brief saying the California Rule has to be removed.” Moorlach is referring to a case before the state Supreme Court challenging the legal assumption that it is impossible to reduce future benefits accruals for current state and local government employees.
Sen. Steve Glazer, D-Orinda, introduced SB 1149 last week, which would offer new employees the option of choosing a more portable 401(k)-style plan and opt out of CalPERS. Moorlach is a co-sponsor.
Under Glazer’s bill, new employees’ contributions would be fully matched by the state, at the same level the state now contributes to CalPERS.
The main difference is that workers who leave state employment would be able to take with them the entire balance in their retirement plan, including both the employee and employer contributions and investment gains.
Currently, public employees have to stay in the job for five years before they vest into CalPERS or the California State Teachers’ Retirement System. If they leave before vesting, they do not receive pensions and they are not able to keep money their employers pay into the pension funds on their behalf.
“This pension reform idea would be good for employees and provide a more stable fiscal foundation for the state,” said Glazer, adding it would be especially attractive to younger workers who do not intend to work for the government their entire lives.
The change would make the state’s pension obligations more predictable, because the state would no longer be at risk of an unfunded liability for employees, who choose the new option, according to the legislation.
Glazer’s proposal is modeled after a University of California option that has been offered to new employees since 2016. More than a third of eligible UCLA employees hired since 2016 have chosen the 401(k)-style plan over the traditional pension system, according to the university.