February 19, 2014 / 5:01 AM / 6 years ago

California pension rate hikes loom after Calpers vote

LOS ANGELES (Reuters) - California and many of its cities will soon be paying more for public pensions after the state’s giant retirement system voted on Tuesday to change the way it calculates contributions.

An elderly couple looks out at the ocean as they sit on a park bench in La Jolla, California November 13, 2013. REUTERS/Mike Blake

The move by the board of the California Public Employees’ Retirement System (Calpers) - the world’s biggest public pension fund with assets of $277 billion - was welcomed by the state’s Democratic governor, Jerry Brown, who had been pushing for Calpers to act more aggressively in how it funded the provision of pensions for city and state workers.

But higher pension contributions are bound to be met with angst by some California cities, which say they are already struggling to meet Calpers’s rate demands.

Pension contributions to Calpers are usually the biggest expense for California cities that pay into the system. Two cities in the state, San Bernardino and Stockton, are in bankruptcy. Pension costs were a significant factor in their budget crises.

The Calpers board on Tuesday voted to change funding assumptions to reflect longer life expectancies for workers - two years for men and 18 months for women. That will lead to higher rates as the pension system seeks to absorb the costs of retired workers living longer.

The board agreed to a request by Brown to hasten to this summer an increase in the state’s contribution to the fund, for the pensions of state employees.

The rate hike will hit the California state treasury from July 1 and will be phased in over three years, ultimately costing an extra $1.2 billion a year and bringing California’s annual contribution to Calpers to about $5 billion.

Apparently recognizing the politically treacherous path of hiking rates for cities immediately, Calpers voted to not change contributions for cities, counties and other municipal entities until mid-2016.

Rising pension costs - also a significant factor in the bankruptcy of Detroit, Michigan - have become a lightning rod for some lawmakers and fiscal hawks. They argue that lavish pension deals for public workers, many of which were agreed to by states and cities before the 2008 financial crash, are unsustainable.

Michael Sweet, a municipal bankruptcy attorney in San Francisco, said higher pension costs will mean less money for cities to spend on other public services, such as police and roads.

“Cities seem to be asked to pay what is necessary to make sure Calpers has the funds available to cover the pensions these cities promised their workers,” Sweet said.

Brown had argued that delaying state contributions, which was proposed by some Calpers board members, was a false economy and would ultimately cost California more in the long run.

“The Board today took important and responsible action to strengthen California’s pension system,” Brown said in a statement.

After the vote, Calpers, in a statement, said: “While today’s action will result in higher pension costs for the State and...contracting employers, it helps to stabilize pension costs over time and puts Calpers on a path to meet the pension obligations promised to current and future public employees.”

Reporting by Tim Reid; Editing by Clarence Fernandez

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