April 18, 2018

Communications & Stakeholder Relations
Contact: Amy Morgan, Information Officer
(916) 795-3991 - newsroom@calpers.ca.gov

Funded status improves for state and school plans

SACRAMENTO, Calif. – The CalPERS Board approved the recommendations by the CalPERS actuaries to adopt the state and school employer contribution rates for the upcoming fiscal year (FY) 2018-19. While the rates will increase compared to the previous FY, the funded status improved for both the state and school plan. The rate increases primarily are driven by the lowering of the discount rate (assumed rate of return), continued phase-in of the effect of investment losses during the two-year period ending June 30, 2016, and various demographic changes.

"We have laid the foundation and set a clear path to improve our funded status," said Scott Terando, CalPERS chief actuary. "The recent positive investment return and improvements to our cash flow will help pay pension benefits that our employer partners have promised."

In the last few years, CalPERS has taken several actions to ensure the long-term future of the fund, including:

  • Lowering the discount rate from 7.5 percent to 7 percent over three years;
  • Adopting a new strategic asset allocation that supports the 7 percent discount rate; and
  • Shortening the amortization period from 30-years to 20-years for employers to pay their prospective unfunded liabilities.

Discount rate changes are being phased-in over a three-year period with the final decrease to 7 percent occurring with the June 30, 2018 valuation for the state and the June 30, 2019 valuation for schools.  The state and school plans will not see the impact of the new amortization policy until FY 2020-21.

Combined, the state and school employers' pension costs for FY 2018-19 are approximately $8.8 billion.

The state's contribution toward pension costs is estimated to increase by $424 million from $5.9 billion to $6.3 billion from the previous FY. State contributions are increasing due to:

  • The normal progression of payments on the unfunded liability;
  • Various changes to actuarial assumptions including: 1) the second-year change of the discount rate for state plans from 7.375 percent to 7.25 percent; and 2) various demographic assumption changes based on the recent experience study that resulted in minor changes to life expectancy, retirement rates, and inflation; and
  • Payroll growth of 3.7 percent over the previous year, as compared to the payroll growth assumption of 3 percent.

The state plan also achieved a combined reduction to the required contribution of $277.1 million. This is primarily through the additional contributions made by Senate Bill 84, the 2013 Public Employees' Pension Reform Act, or PEPRA, and a higher than expected investment return for FY 2016-17 of 11.2 percent.

In 2017, Senate Bill 84 directed the state to pay an additional $6 billion in required pension contributions for FY 2017-18 that would pay down the unfunded liabilities and reduce debt for the state plan. This advanced payment reduced the required contribution for FY 2018-19 by approximately $177.3 million and is expected to save interest charges for taxpayers over the next 20 years.

The schools pool contributions are estimated to rise by $449 million from $2 billion to $2.5 billion. The main drivers of the cost increases are:

  • The normal progression of payments on the unfunded liability;
  • The first-year of the discount rate change for the school pool from 7.5 percent to 7.375 percent; and
  • Payroll growth of 5.1 percent over the previous year, at a cost of $53.6 million.

Generally, the schools pool provides retirement benefits to members working in school and community college districts in classified school positions. Teachers are covered under the California State Teachers' Retirement System.

The state pension plan is approximately 67.4 percent funded, up 2.3 percent from the previous FY, while the schools plan stands at approximately 72.1 percent, up by 0.2 percent as of June 30, 2017. The total CalPERS Fund also increased from 68.3 percent from June 30, 2016 to 71 percent funded as of calendar year 2017. The funded status doesn't include the $6 billion additional payment the state made under SB 84, but it will be reflected in the 2018 actuarial valuation that will be released next year.

"Adopting the actuaries' recommendations is prudent and are in line with our projections. These rates reflect the difficult decisions we've made to strengthen the fund and ensure a stronger bottom line," said Theresa Taylor, chair of the Finance and Administration Committee. "Lowering the expected rate of return on our investments, adopting a new asset allocation, and shortening the amortization period are positive financial moves toward our overall goal of becoming fully funded."

The full 2017 state and school valuation reports that set contribution rates for FY 2018-2019 will be available this summer. The valuation reports provide projected employer contribution rates for the next five FYs.

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

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

Learn more about our Solid Foundation for the Future.

About CalPERS

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 1.9 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 $357 billion. For more information, visit www.calpers.ca.gov.