UPDATE 2-Calpers approves employer rate hikes of up to 50 pct

Wed Apr 17, 2013 6:36pm EDT

* Accounting changes aim to fully fund Calpers in 30 years

* City group concerned about dramatic rate increases

* Changes seen positive for state finances

By Jim Christie

SAN FRANCISCO, April 17 (Reuters) - The board of California's $255 billion public pension fund on Wednesday approved accounting changes requiring state agencies, cities and counties to pay rate increases of up to 50 percent in a plan to fully fund the pension system's obligations in 30 years.

The changes at the California Public Employees' Retirement System, known as Calpers, overhaul its so-called smoothing and amortization of assets and will be used to set contribution rates for public employers in the state beginning in the 2015-16 fiscal year.

While employers' pension spending will rise dramatically, the new policy will help avoid large rate increases in case of future financial market slumps and bolster the pension fund's long-term finances.

Anne Stausboll, Calpers' chief executive, told the fund's board before its vote that the revisions were one of the most important initiatives facing the retirement system.

Rating agencies and the $3.7 trillion U.S. municipal debt market should view Calpers' move to become fully funded as a positive development for California's finances, Tom Dresslar, a spokesman for State Treasurer Bill Lockyer, said.

"It makes the accounting sounder, puts the system on more stable financial footing," Dresslar said. "We think the credit rating agencies will acknowledge that. ... It definitely should improve our standing in the market."

In California, local officials said rising pension expenses will be difficult to face, but the accounting changes will work in their favor if they make Calpers' finances more stable.

"It's tough, tough medicine," said Rod Gould, city manager of the beachfront city of Santa Monica, which adjoins Los Angeles.

Gould said some local governments with wobbly finances could be pushed toward insolvency, and many others on better fiscal footing will have to put on hold plans for reviving or expanding services in order to make higher payments to Calpers.

"A lot of our folks are saying that full funding of the system is the right thing to do, but these increases are dramatic," said Natasha Karl, legislative representative for the League of California Cities. "Something of this magnitude should have involved greater vetting by cities and other stakeholders."

Local governments contracting with Calpers -- contracts are unique to each municipality -- were already expecting to pay more from July after the fund last year lowered its assumed rate of return to 7.5 percent from a longstanding level of 7.75 percent, making the shortfall appear higher.

Two sizeable California cities, Stockton and San Bernardino, filed for municipal bankruptcy last year, raising concerns that other cash-strapped local governments in the most populous U.S. state could follow their example. Pension spending is a major financial issue for both cities.

Moody's Investors Service on Wednesday placed the ratings of 29 U.S. local governments and school districts under review as part of its new approach to analyzing public pension liabilities. Included in the review were Chicago; Cincinnati, Ohio; Minneapolis, Minnesota; and Portland, Oregon. No California cities were in the review.

Illinois, which has skipped or skimped on pension payments for years, has the nation's worst funded states pension system.

GETTING TO FULL FUNDING

Calpers staff said in a report urging the accounting changes that without alterations, the retirement system faced a 26 percent to 34 percent chance of seeing its funding level fall below 40 percent over the next 30 years.

Calpers is about 70 percent funded, up from about 61 percent during the 2007-2009 recession.

The value of Calpers' assets is near a peak of about $260 billion set in October 2007. The worth sank to about $160 billion during the financial crisis, prompting a hard look within the fund for ways to mitigate investment risk and address long-term sustainability.

While the new accounting at Calpers will add strain to municipal budgets, it marks a "huge step in the right direction" for the fund, said Joe Nation, a former Democratic member of California's Assembly who has been warning about rising public pension costs in recent years.

"It'll be difficult for cities, counties and special districts, but they'll be better off in the long run," Nation said. "If you pay more now, you'll pay less later."

That also applies to state agencies, the reason Democratic Governor Jerry Brown's administration supported the new actuarial policies, said Richard Gillihan, a program budget manager at the state finance department.

Gillihan said Calpers' new policy is a form of debt reduction for the state: "The decision really is pay now or pay more later. ... It's sort of like a home mortgage. The longer you string it out, the more you pay on it."

Finance Department spokesman H.D. Palmer said the new Calpers policy is "one of many steps we believe are needed to take to get the state on a long-term path to fiscal stability."

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