California public pension funds face cost-cuts

A report into Californian pension funds calls for administrators and government to radically redraw how they calculate benefits to members to cut government contributions and address a looming funding crisis.

The report, commissioned by the lobby group California Foundation for Fiscal Responsibility (CFFR), compared state and local pension benefits for public sector employees and found their plans to be substantially more generous than the private sector and their federal counterparts.

CFFR commissioned Capitol Matrix Consulting to not only pick apart the current pension fund landscape but also to analyse two models aimed at cutting government retiree-related costs.

The report found that, while public sector employees earn a comparable wage to private sector workers, they received up to three times as much in retirement benefits. The exception is teachers, who receive benefits that are only modestly larger.

CalPERS, California’s largest pension fund, which did not review the report before publication, has responded saying it raised significant policy and legal questions and they would take a more detailed look at its methodology and research.

It is estimated that California’s 10 largest public funds face a $240 billion actuarial shortfall.

These 10 funds account for more than 90 per cent of public pension fund assets in California, and they face a combined shortfall of nearly one-third of their total liabilities.

A recent Center on Budget and Policy Priorities study has found 44 US states are anticipating a budget shortfall in the 2012 fiscal year; and CFFR says both the methodologies used in the report and their alternative funding models are applicable beyond California and they hope they will provide a basis for comparison for other states facing funding shortfalls.

Also under the authors’ microscope was the expected cost spike to the government in providing health care cover for public sector employees.

In the case of some low- to moderate-income earning public sector employees, their health care benefits can actually end up being more valuable than their pensions, the report reveals.

Noting that little budgetary allowance has been made to cover health costs, the report estimates that annual health care costs for public sector employees could top $1.4 billion in 2010-11 and quadruple by the middle of the next decade.

“In short, absent significant changes to benefit accruals, public employer obligations for retirement benefits will rise sharply over the next decade, further squeezing governmental budgets that are already facing enormous pressures,” the report concludes.

The study compared the pensions and retiree health benefits of different types of state and local workers in California and compared them to equivalent federal employees and workers from a selection of large companies.

These included Safeway, Cisco, Northrop Grumman, Chevron,  McKesson and Qualcomm.

Close to 90 per cent of state and local employees are covered under defined-benefit schemes compared with just 20 per cent of private employees in the Pacific Region of the United States.

The first of CFFR’s two alternative models is based on a modified version of the basic federal pension plan and the second model limits employer contributions to 6 per cent of payroll, and 9 per cent for safety classifications.

Similar to federal and private sector benefit plans, the alternative CFFR alternatives would share funding risk with the employee.

Under the existing state pension fund systems investment, longevity and a large part of inflation risk are borne by the employer, ultimately the taxpayer.

Under the proposed alternatives a “fiscal emergency” would be declared and benefits would be calculated from that date for both current public sector employees and future hires.

Most current public sector employees would be receive less benefits under the new models, with only teachers, in some cases, receiving more.

Unlike the current generous California systems, the two alternatives would also reduce benefits for employees who retire before key age and service thresholds and limits health care subsidies for early retirees.

The report notes that it did not investigate the legal issues surrounding moves to change current employee benefits.

CalPERS, California’s largest pension fund, responded to the report, with chief executive Anne Stausboll (pictured) saying it had not had a chance to review the report before publication.

Stausboll said the report raised significant policy and legal questions and they would take a more detailed look at its methodology and research.

“The issues outlined in the report will significantly impact the lives of public servants,” Stausboll said.

“Any policy decisions that carry such magnitude of impact must be made based on all the facts, careful consideration of all the implications, and most importantly be free from ideology.”

It notes that as of 2010 its average monthly service retirement allowance was $2,200 and that 74 per cent of all service retirees receive $36,000 a year or less.

In its April snapshot, the National Association of State Retirement Administrators found that asset values in state and local pension trusts had rebounded strongly.

It warned that  analysis based on 2009 figures could overstate the funding problem.

NASRA found that state and local funds had regained much of the ground they had lost during the 2008-09 market downturn.

Aggregate public pension asset values now topped $2.93 trillion, a 35 per cent increase from their March 2009 low point.