UPDATE 3-Calpers endorses employer rate hikes of up to 50 pct
* 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 move comes at a tough time for California's local governments as many of them are still struggling with budget problems following the financial crisis and the loss of revenue from the housing slump. Two sizeable California cities, Stockton and San Bernardino, last year filed for bankruptcy, citing large bills for pensions as one of the reasons for their financial distress.
"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 will have to put on hold plans for reviving or expanding services to make higher payments to the California Public Employees' Retirement System, known as Calpers.
Calpers' overhaul is aimed at 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. Those rates will be phased in, and in some cases they could rise as much as 50 percent.
While employers' pension spending will rise dramatically, the new policy will help avoid large rate increases in case of future financial market slumps and will 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.
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 currently about 70 percent funded, up from about 61 percent during the 2007-2009 recession. With the accounting changes, the retirement system is expected to be fully funded in 30 years.
The value of Calpers' assets is near the peak of about $260 billion set in October 2007. Its 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.
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, said Tom Dresslar, a spokesman for State Treasurer Bill Lockyer.
"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."
According to Fitch Ratings analyst Stephen Walsh, it is too early to say how the new Calpers policy will affect credit ratings for cities, counties and local agencies.
Local governments across California in recent years have increasingly sought to rein in pension spending by giving new employees less generous pension benefits. "We've seen management respond to increased costs," Walsh said.
Some 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.
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Under state law, payments to Calpers cannot be suspended or reduced as part of a restructuring of a city's finances. The law, which is a concern to bondholders who feel that Calpers gets preferential treatment, is set to be tested in the San Bernardino bankruptcy as the city has suspended payments to the pension system.
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 and it's 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."
City authorities were concerned there was not enough consultation.
"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 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.
The bankruptcy filings by Stockton and San Bernardino last year raised concerns that other cash-strapped local governments in the most populous U.S. state could follow their example.
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, Minneapolis, 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 state pension system.
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