|Budget Issue:||2015-16 General Fund pension payments to be below projections.|
|Finding or Recommendation:||On April 14, the CalPERS Board approved the state's 2015-16 contribution rates for state employee pension benefits. The final contribution rates are lower than what was assumed in the Governor's January budget proposal. We estimate that state costs for employee pension benefits will be about $100 million (more than $45 million General Fund) lower than was assumed in the January budget proposal.|
State Pension Contributions Assumed in Governor’s Budget. The state contributes money each year to fund employee pension benefits. Required contribution rates are adopted by the California Public Employees’ Retirement System (CalPERS) board each spring. The Governor’s January budget proposal makes assumptions about the contribution rates that will be adopted by the CalPERS board. These assumptions are based on the most recent actuarial valuation of the state’s pension benefits at the time the budget is developed. For 2015-16, the budget currently assumes that the state will spend about $5 billion ($3 billion from the General Fund) to pay for employee pension benefits.
Recent Action on 2015-16 Employer Contribution Rates. On April 14, 2015, the Finance and Administration Committee of the California Public Employees’ Retirement System (CalPERS) board recommended 2015-16 employer contribution rates calculated by the system's actuarial staff. Compared with what the administration assumed in its January budget proposal, the rates recommended by the CalPERS board committee are somewhat lower across all state retirement tiers. In the coming weeks, the administration likely will adjust the assumptions used in the budget to reflect the CalPERS board's final actions on 2015-16 rates.
Expected 2015-16 Contribution Rates Result in Lower-Than-Assumed State Costs. We estimate that the newly recommended CalPERS rates will result in state costs for employee pension benefits that are about $100 million less than currently assumed in the Governor’s budget. Of that roughly $100 million total across all state funds, more than $45 million would be savings to the state General Fund, according to our initial estimates.
Growth in State Pension Costs Between 2014-15 and 2015-16. The state’s total contributions to fund employee pension benefits in 2015-16 are expected to be nearly $500 million (11%) more than these costs in 2014-15, CalPERS staff estimated in the committee agenda item. These increased costs can be attributed to:
New Actuarial Assumptions. More than half of the increased costs result from the CalPERS board’s February 2014 decision to adopt new demographic actuarial assumptions. The effect of these new assumptions will be phased in over three years between 2014-15 and 2016-17.
Payroll Growth. About a quarter of the increased state costs result from assumptions about growth in the state’s payroll including the number of state employees and how much they are paid.
Amortization of Unfunded Liabilities. The remainder of the increased costs is largely due to the amortization of market gains and losses and continuing payments on the system's unfunded pension liabilities. On April 17, 2013, the CalPERS board approved changes to CalPERS’ amortization and smoothing policies. Under the new policies, market gains and losses are amortized over a 30-year period with the full effect being phased in—or smoothed—over five years. With strength in 2013-14 investment returns, CalPERS estimates that the state plans' unfunded liabilities dropped by over $6 billion from June 30, 2013 to June 30, 2014.
(LAO Contact: Nick Schroeder.)