California Will Pay Less for Pensions

June 20, 2013 ( – California will pay less for public employee pensions in the 2013 to 2014 fiscal year based on new contribution rates approved by the California Public Employees Retirement System (CalPERS) Board.

According the CalPERS, the state contributions would have fallen by $71.3 million but a provision in the pension reform legislation last year will require some of those savings to be used to pay down the unfunded liability for the plan. Pensions for classified school employers will decrease by $31.5 million as part of the approved rates.

“Lower pension costs is good news for the state’s general fund,” said CalPERS Board President Rob Feckner. “By paying down unfunded liabilities, some of these savings will help reduce risk in the system.”

Overall, California will pay $3.9 billion for pensions and the schools plan will require $1.2 billion in contributions for the 2013 to 2014 fiscal year. The lower dollar cost of pensions is a result of a drop in payroll, lower than expected salary increases, and additional member contributions required by California State Assembly Bill 340 (AB 340).

In September 2012, AB 340 was signed into law. It included the California Public Employees’ Pension Reform Act (PEPRA) and related pension reform changes to the Public Employees’ Retirement Law (PERL) and Legislators’ Retirement Law (LRL). These statutory provisions became effective on January 1, 2013.

Though the dollar amount is lower for the state and schools plans, the percent of payroll needed to pay for benefits generally increased. The contribution rate for the five state pension plans ranges from 15.7% for industrial members to 34.6% for members of the California Highway Patrol. The rate for the miscellaneous plan, the largest group in state service with more than 150,000 active members, is 21.1%.

According to CalPERS, the AB 340 reforms not only raised contribution rates for many state employees, it also required the savings realized by California be offset with additional payments toward the unfunded liability. Therefore, the state will be required to pay an additional $63.3 million or .08% to 1.32% above the base contribution rate for its employees.

“Even with this additionally required payment, the state is paying $8.2 million less than it did last year,” said George Diehr, vice chair of the System’s Pension and Health Benefits Committee. “Our new asset smoothing policy should continue to improve our funded status and reduce overall risk.”

Currently, pension plans for California are on average about 70% funded, and the schools plan is approximately 75% funded. The unfunded liability for state plans is approximately $45.5 billion. The unfunded liability for the schools plan is $14.6 billion. The full state and schools actuarial valuation will be made available online by CalPERS during the coming months.

PLANSPONSOR recently recognized CalPERS for its leadership with respect to public pension plans.