* 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 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
"It's tough, tough medicine," said Rod Gould, city manager
of the beachfront city of Santa Monica, which adjoins Los
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
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
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.
MORE NOW, LESS LATER
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
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
"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
Illinois, which has skipped or skimped on pension payments
for years, has the nation's worst-funded state pension system.