Can Calpers keep its promises?

Can CalPERS keep its Promises?

San Francisco, Reuters, Oct. 23, 2009

Jim Christie, Reporting and Analysis

This article reports that CalPERS lost more than $56 billion in its most recent fiscal year. Most likely contributions will increase significantly, at least by 2011-12. 

But the choices are hard: 

      increasing contributions by public workers to their retirement plans, potentially by up to 50% for some employees; 

      raising taxes to cover higher contribution rates absorbed by government agencies, which may also jump by 50%;

      cutting public services and payrolls to shift money to retirement plans;

      a combination of all of the above because existing pension benefits are "vested rights" guaranteed no matter their cost.

And none of these options will be popular with public employee unions or taxpayers.

State Treasurer Bill Lockyer told Reuters that "local entities have to accept some of the responsibility for benefit increases they voted for," because "We have an obligation to keep the promises made to those employees."

Read the entire article at   http:/www.reuters.com/article/newsOne/idUSTRE59M23U20091023

The Troubles at UCRP

1. Under normal circumstances, 17.02% of covered compensation (your base salary) is the annual contribution required to maintain a healthy pension fund. For all of UC, this amounts to $1.3395 billion. The Regents’ 2010-2011 proposed budget funds UCRP at just over one third this amount. Thus, the Regents’ plan will underfund UCRP by $867 million in the academic year 2010-2011.

2. Circumstances are not normal: UCRP is no longer a fully funded pension plan. Part of this problem arose because of poor market returns, but most of the shortfall can be attributed to the 20 year hiatus in contributions: there were no contributions into UCRP for a period of 20 years up to and including today. Contributions will resume on April 15, 2010. As of September 30, 2009 (after a spectacular rise in the domestic and international stock markets in the third quarter of 2009), UCRP had a shortfall of $10.19 billion. This shortfall must be attended to via additional contributions over and above the 17.02% noted above. Otherwise, the shortfall will grow, and sometime in the not so distant future the pension plan will extract enormous sums from the UC operating budget and from employee wages.

3. Circumstances may never return to normal: on Nov. 18, the CA Legislative Analyst’s Office opined that no additional state contributions to UCRP would be forthcoming between 2009-10 and 2014-15.

To obtain a clear picture of the magnitude of our problem, observe that the now planned $867 million underfunding for 2010-2011 is larger than the state funded budget cut UC experienced in 2009-2010 (when the state cut our budget from $3.3 billion to $2.5 billion). On top of this, an additional and even larger contribution of $1,154 million needs to be made in each of the next 15 years to amortize/eliminate the current $10.19 billion shortfall.

The FA wants to encourage the Regents, the administration, and the faculty to get out of denial mode and make proper plans to fund UCRP. They need to step forward now and address this significant issue before it dwarfs all other issues at UC.

A new report by the Legislative Analyst is out:

http://www.lao.ca.gov/2009/bud/fiscal_outlook/fiscal_outlook_111809.pdf

Apart from the general grim outlook for the state, there is a section on higher ed and UC.  However, the pension issue is not covered in that section.  Rather, it appears on page 38 in a section on state retirement costs.

No Additional State Payments for UC Retirement Programs Assumed. Consistent with past funding practices, our forecast assumes no additional state contributions between 2009‑10 and 2014‑15 to cover costs of UC’s pension and retiree health programs. Both have unfunded liabilities, and currently, no significant contributions are being paid by UC or its employees to the pension program. Unless UC identifies non-state funding
sources for these programs soon, their costs will escalate significantly over the long term.

While this is consistent with LAO's position, this version is more explicit that the state has no responsibility for the UC pension and somehow the regents should pay for it.  It is not clear what non-state sources would pay for the 1/3 of the liability that belongs to the state.  Putting in a dollar of state funds gets you another 2 dollars, i.e., 2 for 1.  LAO seems to want 3 for 0.  
Dan Mitchell, FA Executive Board Member