April 20, 2017

Communications & Stakeholder Relations
(916) 795-3991
Brad W. Pacheco, Deputy Executive Officer
Wayne Davis, Chief, Office of Public Affairs
Contact: Amy Morgan, Information Officer

SACRAMENTO, CA - The California Public Employees' Retirement System (CalPERS) Board of Administration approved new pension contribution rates for fiscal year (FY) 2017-18 for the State of California and school employers that are up from the prior year, but generally less than originally projected. The changes in the rates are driven primarily by the lowering of the discount rate (assumed rate of return), last fiscal year's less than expected investment return, and member salary increases.

"We continue to examine how to balance the risks to the system, while creating a positive and sustainable fund for the future," said Rob Feckner, president of the CalPERS Board of Administration. "We recognize the increases are a concern to many of our employers, but today's decision reflects the reality that we are in a low-return economic climate that is expected to continue for the next five to 10 years."

Combined, the state and school employer's pension costs for FY 2017-18 are just under $8 billion. The state's contribution towards pensions is estimated to increase by $521 million from $5.4 billion to $5.9 billion from the previous fiscal year.

This is the first of the three-year phase-in for the discount rate change for the state. State contributions are increasing due to:

  • The normal progression of payments on the unfunded liability;
  • The change in the discount rate from 7.50 percent to 7.375 percent;
  • The less than expected investment return for FY 2015 -16;
  • Payroll growth of 3.7 percent over the previous year.

The schools pool contributions are estimated to rise by $342 million from nearly $ 1.7 billion to $2 billion. The main drivers of the cost increases are:

  • Payroll growth of 7.6 percent over the previous year at the cost of $76.1 million;
  • The less than expected investment return for FY 2015 -16;
  • The second year phase-in of the demographic assumptions that account for members living longer;
  • The normal progression of payments on the unfunded liability;

School districts will not see the impact of the discount rate change until FY 2018-19 to allow more time to prepare for the change in the contribution costs.

The CalPERS Board has taken several steps to strengthen the pension fund over the long term. In response to the low-return investing environment, the Board in December 2016 agreed to lower the discount rate, or assumed rate of return, to 7 percent from 7.5 percent over three years.

Earlier this year, the Board also began the Asset Liability Management (ALM) (PDF) review process, which takes a holistic view of assets and liabilities to help determine the future asset allocation mix of the portfolio. As part of the ALM cycle, the Board will next review the capital market and economic assumptions for the 2018-2028 period, which will also factor in wage and price inflation projections.

Cost savings achieved through the 2013 Public Employees' Pension Reform Act, or PEPRA, also help strengthen the fund. For FY 2017-18, nearly $67 million in savings will be realized through the reduction of required contributions as new employees who are hired on or after January 1, 2013, are placed into lower benefit levels, compared with employees hired earlier.

PEPRA also requires school members who meet the definition of "new member" to contribute more, from the current 6 percent to 6.5 percent beginning July 1, 2017. The state PEPRA member rate will remain unchanged from 6.50 percent for miscellaneous members and 11 percent for state peace officer and firefighter members for FY 2016-17.

Currently there are nearly 241,000 PEPRA members accruing lower benefits across all employers, representing almost 28 percent of the active public employee workforce.

"While we recognize that rates will rise due to the change in the discount rate, pension reform helps reduce the risk to the Fund and provides vital cost savings for our employers over the long-term," said Richard Costigan, chair of the Finance and Administration Committee. "As we continue to focus on costs and complexity, we are working closely with our employers and our members so they can fully understand the long-term cost of the benefits."

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.

The state pension plan is approximately 65.1 percent funded, while the schools plan stands at approximately 71.9 percent, as of June 30, 2016. The total CalPERS Fund is 69 percent funded as of June 30, 2016 and is estimated to be 65 percent funded to date.

The full 2016 state and school valuation reports will be available this summer. The valuation reports provide projected employer contribution rates for the next five fiscal years.

Read more about the State Valuation and Employer/Employee Contribution Rates (PDF).

Read more about the Schools Valuation and Employer/Employee Contribution Rates (PDF).

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 1.8 million members in the CalPERS retirement system and administers benefits for more than 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 $316 billion. For more information, visit www.calpers.ca.gov.