Upco Up comin ing g Cha hang nges es in Em in Emplo ployee - - PowerPoint PPT Presentation

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Up Upco comin ing g Cha hang nges es in Em in Emplo ployee e Retirem etirement ent Cos

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April 2011

PENSION COST ISSUES

 Significant pension cost increases expected starting in 2012/2013 budget year.  4 primary reasons for increases.  Widespread criticism of methodologies used by pension funds .  Impact of cost increases.

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Pension Cost Increases for Los Altos Agencies* (Percent Increase over Current Pension Costs)

Increase Each Budget Year from 2010 Costs

Agency

Current Pension Costs (2010) Additional Cost in Year 3: 2014-2015 2012- 2013 2013- 2014 2014- 2015

LASD $2,352,251 $1,853,173 28% 58% 79% MVLA $2,930,850 $2,222,857 27% 56% 76% FHDA $10,436,759 $8,321,615 28% 59% 80% City of Los Altos $2,021,040 $ 854,556 12% 31% 42%

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* The expected rate of increases calculated for CalPERS also have been used as estimates for increases by CalSTRS.

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 The Chief Actuaries of CalPERS and CalSTRS as well as their 2 actuarial consultants had recommended that necessary rate increases begin in in the upcoming fiscal year, 2011-2012.  Due to current state and local budget constraints, at their March decision meeting, the CalPERS Board of Administration decided to postpone the increases.  The increases now are expected to start in budget year 2012-2013 as part

• f a 3-year phase in. CalPERS and CalSTRS will probably officially adopt

these increases in March of next year (2012).1 __________________

• 1. In a conversation on April 1 with CalPERS Board member State Treasurer Bill Lockyer, he confirmed that he

expects the rate increases to start in 2012-2013.

Schedule for the Pension Fund Cost Increases

Required pension payments to CalPERS and CalSTRS have two components.*

• 1. Current year normal cost

The annual cost of service accrual for the upcoming fiscal year for active employees. The normal cost should be viewed as the long term contribution rate.

• 2. Current year payment

Needed to amortize the unfunded actuarial accrued liability (UAAL).

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* CalPERS – California Public Employees Retirement System CalSTRS – California State Teachers Retirement System

ACTUARIAL ASSUMPTIONS USED BY CALPERS/CALSTRS

TO CREATE THE ANNUAL CHARGES

1.Financial data

• Assumed rate of return on investments (ROI): 7.75%
• Assumed discount rate used to calculate present value
• f the liabilities: 7.75%
• Assets
• Funded Liabilities
• Unfunded Liabilities

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• 2. Economic actuarial assumptions
• Rate of Inflation: 3%
• Wage Inflation: 3.5%
• 3. Demographic Actuarial Assumptions
• Age at entry
• Age at retirement
• Post-retirement mortality by gender
• Marital status

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Actu tuaria arial l Assumptions ions Continu inued ed

• 4. Funding Methods and Policies
• Smoothing of excess achieved over assumed ROI: 5 years
• Amortization of unfunded liability: 30 years
• 5. Plan Provisions
• Specific retirement benefits of pubic agency
• Employee contributions, if required by public

agency

• 6. Participant Data
• Active members
• Retirees and beneficiaries
• Members who have terminated with a deferred vested benefit

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Actu tuaria arial l Assumptions ions Continu inued ed

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 The CalPERS rate increase is expected to be phased in over three years starting in 2012-2013.1  The CalPERS Board of Administration will probably make the

• fficial decision in March of 2012.

 The same percentages and phase-in are assumed in this study for the CalSTRS costs (teachers).2, 3

_________________________ 1. Webinar Presentation by David Lamoureux, Deputy Chief Actuary, CalPERS, December 7, 2010. 2. Actually, the CalSTRS actuarial consultant, Milliman Consultants, states that the CalSTRS rate increase needs to be double that of CalPERS (i.e., 15% vs. 7% for CalPERS). 3. CalSTRS is required by law to obtain the approval of the State Legislature to raise their rates.

Schedule of Impending Rate Increases

FOUR PRIMARY REASONS FOR THE BIG RATE INCREASE BY CALPERS.1

 CalPERS lost 25% of its investments in 2008-2009 – that loss will have to be made up.  CalPERS will lower its actuarial assumption for ROI from 7.75% to 7.5% (which lowers its projected revenues).  CalPERS has lowered the assumed age of retirement (which results in additional years of pension payments).  CalPERS has raised the post-retirement mortality age (which results in additional years of pension payments).

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_____________________

• 1. Webinar Presentation by David Lamoureux, Deputy Chief Actuary, CalPERS, December 7, 2010.

1. Financial economists and academics contend that the pension funds significantly understate their liabilities. They have calculated that the pension funds are seriously underfunded. 2. They also argue that the amortization period for liabilities should be significantly reduced from the current practice of 30 years. Some suggestions are that it be the average period of pension payment, i.e., 16 years.2 _________________

• 1. See References.
• 2. The average duration of pension payments is 16 years.

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THERE IS WIDESPREAD CRITICISM ABOUT 4 OF THE MAJOR

METHODOLOGIES USED BY CALPERS AND BY THE REST OF THE PENSION MANAGEMENT INDUSTRY.1

The New York Times reported on January 7, 2011, that CalPERS is under investigation by the SEC for understating risk of investments and for understating liability.

29% 29% 71% 71% 67% 67% 61% 61% 44% 44% 12% 12% 31% 31% 66% 66% 59% 59% 51% 51% 22% 22%

0% 0% 10% 10% 20% 20% 30% 30% 40% 40% 50% 50% 60% 60% 70% 70% 80% 80% Sur urplus lus Defi eficit >$0 Defi eficit >$50B Defi eficit >$100B Defi eficit >$250B Defi eficit >$500B+ B+

Probabil ilit ity y of Shor

• rtf

tfall

Cumulative Probability of Shortfall in 16 Years1

Cal CalPERS RS Cal CalST STRS RS

_____________________

• 1. Howard Bornstein et. al., Going for Broke: Reforming California’s Public Employee Pension Systems, Stanford

Institute for Economic Policy Research (SIEPR), April 2010.

• 2. CalPERS current stated UAAL is $35.1 billion and CalSTRS is $40.1 billion.
• 3. A Stanford study1, using a risk-based poisson analysis, concluded that in 16 years

CalPERS will have a:

• 61% probability of a shortfall (UAAL) greater than $100 billion; and
• 44% probability that it will be greater than $250 billion.
• 4. This would result in a funding deficit of 40% as opposed to their stated deficit of 14%. 2

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In Conclusion

City of Los Altos employee pension payments to CalPERS are estimated to add additional costs over the amount the City currently pays.  $300,000 in 2012-2013  $630,000 in 2013-2014  $850,000 in 2014-2015

 Palo Alto – estimated to start in 2012-2013  Sunnyvale – estimated to start in 2011-2012  Mountain View – estimated to start in 2012-2013  Los Gatos – estimated to start in 2011-2012  Burlingame –in current year budget.1

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THESE MUNICIPALITIES INCORPORATE THE UPCOMING EMPLOYEE PENSION COST INCREASES IN THEIR BUDGET FORECASTS

__________________________

• 1. Since Burlingame does not have multi-year budgets, the impending increases are discussed in significant detail in the current

year budget.

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Reference List for Pension Research

• 1. City of Los Altos
• a. Comprehensive Annual Financial Report for the Years Ended June 30, 2007, 2008, 2009.
• b. FY 2010-2011 Adopted Operating Budget, City of Los Altos.
• c. Responses to Findings & Recommendations of the Santa Clara County Civil Grand Jury, 7/27/ 2010.
• 2. CalPERS
• a. Actuarial Methods & Assumptions, Financial Final Report, 2009.
• b. Reportable/Non-Reportable Compensation, Procedural Manual.
• c. OPEB Assumption Model, 2010.
• d. Focus on Asset Allocation in Different Conditions, December 13, 2010.
• e. Webinair presentation by David Lamoureux, Deputy Chief Actuary, CalPERS Potential Changes to Your Employer

Contribution Rates, December 7, 2010.

• f. Public Agency Employer Contribution Rate Search, Los Altos, 2010.
• g. CalPERS Responds to Stanford Policy Brief on Public Pension Funds, Press Release, April 7, 2010.
• h. Comprehensive Annual Report for Year Ended June 30, 2009.
• i. State & Schools Actuarial Valuation As of June 30, 2008.
• 3. Governmental Accounting Standards Series, Preliminary Views, Pension Accounting and Financial Reporting

by Employers, Governmental Accounting Standards Board (GASB), 9/17/2010.

• 4. Perry Wong, I-Ling Shen, California’s Pension Shortfalls, Milken Institute California Center, 10/2010.

5 Barton Waring, The Financial Economics View for Measuring Public Pension Liabilities, Public Pension Symposium, Society of Actuaries, May 2009.

• 6. Barton Waring, Comments [to the GASB] on the Preliminary Views, Pension Accounting and Financial

Reporting, September 15, 2010.

• 7. Edward E. Burrows, Defined Benefit Plans Accounting and Funding: Financial Economics vs. Pension

Tradition, October 2004.

• 8. Howard Bornstein, Stan Markuze, Cameron Percy, Lisha Wang and Moritz Zander, Going for Broke:

Reforming California’s Public Employee Pension Systems, Stanford Institute for Economic Policy Research (SIEPR), April 2010.

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• 9. Joe Nation, The Funding Status of Independent Public Employee Pension Systems in California, Stanford

Institute for Economic Policy Research (SIEPR), November 2010.

• 10. Robert Novy-Marx and Joshua Rauh, The Crisis in Local Government Pensions in the United States, Kellogg

School of Management, Northwestern University, October 2010.

• 11. Robert Novy-Marx and Joshua Rauh, The Liabilities and Risks of State-Sponsored Pension Plans, Journal of

Economic Perspectives, Fall 2009.

• 12. Michael C. McDaniel and George Rebane, Unfunded Liabilities – Our Community’s Fiscal Time Bombs, Sierra

Environmental Studies Foundation, December 28, 2008.

• 13. Alicia Munnell, Richard Kopcke, Jean-Pierre Aubry, Laura Quinby, Valuing Liabilities in State and Local Plans,

Center for Retirement Research, Boston College, June 2010.

• 14. Keith Brainard, Public Pensions and Market Value of Liabilities, National Association of Retirement

Administrators, July 21, 2008.

• 15. Ed Mendel, CalPERS Local Rate: Up 55% Over Next Three Years, Calpensions,.com, November 11, 2010.
• 16. Ed Mendel, CalSTRS Funding Gap Grows: New Earning Forecast, 16Calpensions.com, December 3, 2010.
• 17. MVLA 2010-2011 Budget
• 18. LASD 2010-2011 Budget
• 19. Foothill-DeAnza Community College District, 2010-2011 Budget
• 20. Foothill-DeAnza Community College District, Comprehensive Annual Financial Report for Year Ending 6/30/10
• 21. CalSTRS Comprehensive Annual Financial Report for Year Ending June 30, 2010.
• 22. Cal STRS Staff Memo Adoption of the Investment Return Actuarial Assumption, November 5, 2010.
• 22. Milliman Consultants, Report to the Teachers’ Retirement Bd., Investment Return Assumption, 10/18/10.

Oct.18,2010.

• 23. Jason Dickerson, CA Legislative Analyst’s Office, Public Employee Pension & Retiree Health Costs in California.
• 24. California Legislative Analyst’s Office, Public Retirement Benefits: Options for the Future, Webinar

February 2, 2010.

References Continued

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CalPERS ERS --

• - Miscellane

ellaneous

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CalPERS Comprehensive Annual Report for Year Ended June 30, 2009 6/30/08 (PERF) Actuarial Value of Assets $233.3B Total Accrued Liability $268.3B UAAL: $ 35.1B Funded Ratio: 86.9% Participants 1,626,910 Total Agencies 3,033 Public Agencies 1,568 Cities and Towns 449 Los Altos Participants 176

CalPERS Investment Returns Past 20 Years

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CALSTRS -- MISCELLANEOUS FACTS

GENERAL 847,833 Membership and Beneficiaries 1,400 School districts, county offices of education and community college districts. 8.0% % of salary contributed by members (teachers)Employer Contribution – 8.5% % of salary contributed by school districts 2.017% % of salary contributed by the State. The State % contribution was dramatically reduced in 2000 from 4% to 2.017% FINANCIALS Assets: $141.3 B (as of November 30, 2010) Liabilities: $181.8 B (as of November 30, 2010) UAAL: $ 56.0B1 (was $22.5 billion a year ago) CalSTRS is seriously underfunded. CalSTRS does not have the authority to raise the contribution rate unless it obtains approval from the Legislature. Since 2003, the amount of money contributed has not been sufficient to fully fund the benefits. CalSTRS problem is 3-fold: a) The CA Constitution guarantees the core benefits to the members (whether at the same level or not, is not clear); b) CalPERS is not allowed to raise the rates to the school districts without the approval of the Legislature; and c) Though the State is required as a plan sponsor to make up the difference between contributions made and benefits paid, the State has not been doing that. And now t is not likely to with a $26B state deficit. CalSTRS actuaries project that the Defined Benefit Program will deplete its assets in 34 years (2044). Investment earnings alone are not enough to meet future obligations, CalSTRS has stated. As a result, the Board is planning to ask the state Legislature next year to approve an increase in the employer retirement contribution rate, currently 8.5% paid by 1,400 school districts, county offices of education and community college districts. (Long Angeles Times, December 2, 2010) _________________________

• 1. San Jose Mercury News, April 1, 2011

DETAILED WORKSHEETS ON ESTIMATED EMPLOYEE PENSION COST INCREASES

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 City of Los Altos  Los Altos Elementary/Middle School District  Los Altos/Mountain View School District  Foothill/DeAnza Community College District