Pension Security

Issues Update

Pension Costs
September 23, 2009
Many factors contribute to employers paying more, not just our investment decline. Employer rates are based on a percentage of payroll and are adjusted every year. As State and local governments hire more people, pension costs go up. When workers get promotions or pay raises, contributions go up. The cost of pensions as a percentage of payroll is about the same today as it was in the mid-1980s. View details of State Miscellaneous Tier 1 Rates.

Benefit formulas are determined through the collective bargaining process by employers and employee representatives. CalPERS does not approve benefit changes. Memorandums of understanding for State formulas must be ratified by the Legislature and approved by the Governor. Local government benefit changes follow a similar process of collective bargaining and are restricted by parameters set by State law. 

Although the CalPERS investment horizon is long term, we recognize that returns over the short term fluctuate and lead to variable employer contribution rates. To counter volatility from year to year in employer rates, CalPERS uses a rate-smoothing process that spreads returns over a 15-year period. In addition, investment gains and losses are paid for over a 30-year period that resets annually.

We smooth rates because we expect these deviations from long-term averages to cancel each other out over time. 

For 2008-09 CalPERS had preliminary investment returns of negative 23.4 percent. We’ll release the final return in October after we finalize real estate and alternative investment returns later this fall. 

Such an extraordinary one-time event has put enormous strains on our economy, businesses, and individuals. Local and State government are no exceptions. While rate smoothing works well during normal economic cycles and has produced very stable rates, a unique event calls for a special approach.

To deal with this one time event, CalPERS Board approved an enhancement to the current rate-smoothing policy. CalPERS will use a three year phase in of the 2008-2009 investment loss and allow some time for the economy to recover. It will be achieved by temporarily relaxing the constraints on smoothed value of assets around the actual market value. By isolating the asset loss and paying for it with a disciplined fixed and certain 30 year amortization schedule, CalPERS can ensure it will be paid in full at the end of the 30-year period. In this way, CalPERS will not rely on future investment returns to pay for the 08-09 loss. 

This method will be the subject of discussion at the CalPERS Board meeting in December as it might apply to the State miscellaneous and safety plans. In the interim, CalPERS staff is providing the State with information on the methodology, with final action by the CalPERS Board in December.



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