CalPERS Board Approves New Rates for State and School Employers
April 20, 2016
Communications & Stakeholder Relations
Brad W. Pacheco, Deputy Executive Officer
Wayne Davis, Chief, Office of Public Affairs
Contact: Amy Morgan, Information Officer
Long-term fund sustainability efforts focus on less volatility for employer contribution rates
SACRAMENTO, CA - The California Public Employees' Retirement System (CalPERS) Board of Administration today approved new pension contribution rates for the State of California and school employers that are less than originally projected, but up from the Fiscal Year (FY) 2015-16. The changes in the rates for the FY 2016-17 are driven primarily by retirees living longer, salary increases, and an increase in the number of state and school employees.
"Our focus is to address the risks in the System, so our employers can plan for the future and have more rate predictability," said Rob Feckner, President of the CalPERS Board of Administration. "Today's action, while difficult, is a balance of factoring in the ever increasing demographic shift of an aging workforce and taking the necessary steps to ensure the Fund's long-term sustainability."
The Board has taken many bold steps to sustain the Fund, including:
- 2015 - Adopted a Funding Risk Mitigation Policy that will lower the discount rate in years of good investment returns and also reduce risk and volatility in the System.
- 2014 - Adopted new Demographic Assumptions that account for public employees' living longer.
- 2013 - Adopted an amortization and smoothing policy to spread the rate increases or decreases over a 5-year period.
These actions are all components of CalPERS' Asset Liability Management review cycle (PDF) that takes a holistic and integrated view of our assets and liabilities.
Another measure that will reduce costs is pension reform that took effect in 2013. The Public Employees' Pension Reform Act (PEPRA) requires new employees that are hired on or after January 1, 2013 to be placed into lower benefit levels, which will save more than $50 million in state and school contributions. PEPRA employees working for the Legislature, California State University (CSU), or the judicial branch will also see an increase in their contributions of 0.75 percent to 6.75 percent effective July 1, 2016.
The state's contribution towards pensions is estimated to increase by $602 million from $4.8 billion to $5.4 billion from the previous fiscal year. For perspective, pension costs represent about 3.2 percent of total state spending in the current proposed state budget for Fiscal Year 2016-17 (PDF). Thirty percent of the total state budget is earmarked for public education, 8.5 percent for higher education, and 6.2 percent is for corrections.
The state contributions are increasing due to the third and final year of the phased-in demographic assumptions, normal progression of debt payments, the less than expected investment return for FY 2014 -15, and because of payroll growth of new state employees by 6 percent.
The schools pool contributions are estimated to rise to $342 million from over $1.3 billion to nearly $1.7 billion. This is the first year that the demographic assumptions are phased-in and account for the more than half of the contribution rate increase of $177 million. Payroll growth of new school employees grew by more than 7 percent over the previous year at the cost of $61.3 million. Generally, the schools pool provides retirement benefits to members working in school and community college districts and not teachers, who are covered under the California State Teachers' Retirement System (CalSTRS).
"Over the long-term we anticipate that the costs will level out for our employers as our recent actions to reduce risk are implemented," said Richard Costigan, Chair of the Finance and Administration Committee. "In this new era of financial market unpredictability, we will continue to look for innovative and well-balanced measures that minimize the impact on contribution rates."
The state pension plan is approximately 69 percent funded, while the school plan stands at approximately 77 percent, as of June 30, 2015. The total CalPERS Fund is estimated at 73 percent funded as of June 30, 2015.
The full 2015 state and school valuation reports will be available this summer. The valuation reports provide projected employer contribution rates for the next five fiscal years.
View a brief interview (video) on the state and school contribution rates with our Chief Actuary Alan Milligan.
For more than eight decades, CalPERS has built retirement and health security for state, school, and public agency members who invest their lifework in public service. Our pension fund serves more than 1.7 million members in the CalPERS retirement system and administers benefits for nearly 1.4 million members and their families in our health program, making us the largest defined-benefit public pension in the U.S. CalPERS' total fund market value currently stands at approximately $296 billion. For more information, visit www.calpers.ca.gov.
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