Some California public employees will pay more to pension funds

By MADISON HIRNEISEN
THE CENTER SQUARE STAFF REPORTER

(The Center Square) – Some California public employees will soon have to contribute more of their retirement pay after a change in the investment policy of California’s public employee retirement system.

The CalPERS board of directors voted on Monday to select a portfolio with a yield of 6.8% and an expected volatility rate of 12.1%. This expected rate of return is two tenths of a percentage point lower than last year’s target of 7%. The vote concluded a review of the pension fund’s assets, which takes place once every four years.

This expected reduction in the rate of return means that some employees will have to contribute more to their pension fund because the fund expects to earn less from its investment portfolio.

For employees hired after the implementation of the Public Employees Pension Reform Act in January 2013, CalPERS estimates they will contribute an average of 1.2% to 1.5% more to their pensions. These changes will come into effect for school employees, excluding teachers, in July 2022 and will be enacted for most other local government employees in July 2023.

“We understand that the law will affect the dues that PEPRA employees pay, and we will make sure to communicate this information accurately so that they fully understand the change,” CalPERS CEO Marcie Frost said in a statement. “And we know that even the smallest change to our portfolio can impact employers’ bottom line, especially as they recover from a global health and economic crisis. We are committed to working with our employer partners to ensure they have the resources they need to plan their budgets and prepare for the future.

CalPERS is the nation’s largest public defined-benefit pension, with a current total fund market value of $495 billion. The pension fund serves more than two million members and manages benefits for approximately 1.5 million members through its health program.

Yet despite being the largest pension fund in the nation, it is California’s least funded pension program, according to 2020 data from Truth in Accounting, a nonpartisan think tank. While promising about $531.2 billion in earnings, CalPERS is only about 70% funded, meaning the fund has pledged more than $158 billion that the projected assets could not cover.

Bill Bergman, director of research at Truth in Accounting, said CalPERS’ decision to require an increase in employee dues is a marginal solution to a much bigger problem.

“CalPERS remains primarily invested in risky assets to justify its rate of return and discount rate assumption, and this poses a threat to California taxpayers (and others) that deserves broader awareness and concern,” said Mr. Bergman at The Center Square. “The increased contribution requirements faced by government employees are only marginal and fall far short of what is needed for CalPERS to dig the hole it has dug.”

Monday’s board decision came just months after CalPERS announced historic gains in investment returns in the 2020-21 fiscal year. The organization reported a net return of 21.3% between June 2020 and June 2021.

The windfall profits will go towards long-term debt that local governments are paying in addition to retirement costs, the Sacramento Bee reported. This means that debt payments will decrease for local governments while ordinary pension prices will increase, resulting in a slight decrease in the average cost of pensions for local governments.

Madison Hirneisen covers California for The Center Square.