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California Public Employees Must Pay More for Pensions

Investment policy changes at CalPERS, the giant state retirement system, have lowered its earning target by two-tenths of a percentage point, leading to increased charges for local governments and their workers.

(TNS) — Public employees in California will bear the brunt of an investment policy change the CalPERS board made Monday, contributing more toward their pensions while their employers enjoy a short-term reprieve thanks to last year's stock market boom.

The vote by the California Public Employees' Retirement System Board of Administration concluded a once-every-four-years review of the pension fund's assets, which were recently valued at $495 billion.

The approved changes, including added flexibility to borrow money, are aimed at adapting the fund to a shifting financial landscape in which stock market expectations decline and traditionally "safe" investments such as treasuries and bonds no longer earn nearly enough money to keep up with increasing pension costs.

The board adopted an annual investment return target of 6.8 percent, two-tenths of a percentage point lower than last year's 7 percent target. It follows the board's decision in late 2016 to drop its annual earnings target from 7.5 percent, a change that drove up costs for cities, schools and other government employers.

The new reduction to investment expectations means CalPERS will charge some local governments and employees more because the fund expects to earn less money from its portfolio.

The change will directly affect the paychecks of most local government employees hired after Jan. 1, 2013, who will have to contribute an average of 1.2 percent to 1.5 percent more of their pay toward their pensions.

The changes take effect for school employees — except for teachers — in July 2022. The new rates take effect for most other local government employees in July 2023. For state workers, pension cost changes are phased in through collective bargaining.

Effects will vary for the cities, counties, schools and other local government agencies who contract with CalPERS to manage pension benefits.

CalPERS set the new target just months after it reported a historic gain on its investments. It notched a 21 percent investment return in the 2020-21 financial year, driven by a booming stock market.

The windfall is going toward long-term debts that most local governments pay in addition to their regular pension costs. So while governments' regular pension costs are going up, the debt payments will go down, resulting in a slight drop in the median pension cost for local governments.

The median local government in California will be paying 15.1 percent of payroll toward employees' pensions after the changes, according to CalPERS projections.

Rising pension costs

Last year's rate also triggered an automatic reduction to investment return expectations through a policy known as risk mitigation. With its vote, the board opted to keep that target, of 6.8 percent, rather than increasing it back to 7 percent or reducing it further, to 6.5 percent.

Local government leaders told the board rising pension bills are making it increasingly difficult to pay for government services.

Cities have struggled to keep on top of pension increases the board approved in 2016, when it set the investment return target at 7 percent, said Sacramento Assistant City Manager Leyne Milstein.

"Additional changes at this time would impose significant burdens on cities," Milstein said, urging the board to adopt a rate of 7 percent or 6.8 percent.

Lori Sassoon, deputy city manager of Rancho Cucamonga, said the city's pension costs are at or near 50 percent of payroll. She said the retirement benefit costs put pressure on agencies to forgo raises for employees or even to try to reduce pay.

Employers were united with union representatives in wanting to keep the rate as high as possible. SEIU California lobbyist Terry Brennan urged the board on Monday to "at a minimum" hold the rate steady at 6.8 percent.

With 11 board members present, seven voted for the 6.8 percent rate and four against it. Those who voted against were Lisa Middleton, who is mayor pro tem of Palm Springs and a state Senate candidate; David Miller, a state scientist; State Controller Betty Yee; and Margaret Brown, a retired school administrator.

The changes were made as part of CalPERS' asset liability management process.

Reduced risk at CalPERS

The associated reallocation of the pension system's assets will shift more money to private equity while reducing the system's holdings in treasuries, stocks and mortgage-backed securities, among other changes.

Projections show the changes will improve local government finances over the years. The changes reduce the risks of serious losses during economic downturns and reduce the risks that governments will lose so much in assets that they will end up with less than 50 percent of what they'd need to pay long-term debts.

Projections showed that if CalPERS hadn't made those changes, its assets as allocated in 2017 would have returned 6.2 percent per year.

"It's simply not designed for the times," managing investment director Sterling Gunn told the board. " Times have changed since this portfolio was put together."

The board adopted the changes without a permanent chief investment officer. Former CIO Ben Meng abruptly resigned last year amid a conflict-of-interest investigation and the board hasn't yet hired a replacement.

(c)2021 The Sacramento Bee. Distributed by Tribune Content Agency, LLC.
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