Upco Up comin ing g Cha hang nges es in Em in Emplo ployee - PowerPoint PPT Presentation

Upco Up comin ing g Cha hang nges es in Em in Emplo ployee e Retirem etirement ent Cos osts ts 1 April 2011

PENSION COST ISSUES  Significant pension cost increases expected starting in 2012/2013 budget year.  4 primary reasons for increases.  Widespread criticism of methodologies used by pension funds .  Impact of cost increases. 2

Pension Cost Increases for Los Altos Agencies* (Percent Increase over Current Pension Costs) Increase Each Budget Year from 2010 Costs Additional Cost Current Pension in Year 3: 2012- 2013- 2014- Agency Costs (2010) 2014-2015 2013 2014 2015 LASD $2,352,251 $1,853,173 28% 58% 79% MVLA $2,930,850 $2,222,857 27% 56% 76% FHDA $10,436,759 $8,321,615 28% 59% 80% City of Los $2,021,040 $ 854,556 12% 31% 42% Altos * The expected rate of increases calculated for CalPERS also have been used as estimates for increases by CalSTRS. 3

Schedule for the Pension Fund Cost Increases  The Chief Actuaries of CalPERS and CalSTRS as well as their 2 actuarial consultants had recommended that necessary rate increases begin in in the upcoming fiscal year, 2011-2012.  Due to current state and local budget constraints, at their March decision meeting, the CalPERS Board of Administration decided to postpone the increases.  The increases now are expected to start in budget year 2012-2013 as part of a 3-year phase in. CalPERS and CalSTRS will probably officially adopt these increases in March of next year (2012). 1 __________________ 1. In a conversation on April 1 with CalPERS Board member State Treasurer Bill Lockyer, he confirmed that he expects the rate increases to start in 2012-2013 . 4

Required pension payments to CalPERS and CalSTRS have two components.* 1. Current year normal cost The annual cost of service accrual for the upcoming fiscal year for active employees. The normal cost should be viewed as the long term contribution rate. 2. Current year payment Needed to amortize the unfunded actuarial accrued liability (UAAL). * CalPERS – California Public Employees Retirement System CalSTRS – California State Teachers Retirement System 5

A CTUARIAL A SSUMPTIONS U SED BY C AL PERS/C AL STRS TO C REATE THE A NNUAL C HARGES 1.Financial data  Assumed rate of return on investments (ROI): 7.75%  Assumed discount rate used to calculate present value of the liabilities: 7.75%  Assets  Funded Liabilities  Unfunded Liabilities 6

Actu tuaria arial l Assumptions ions Continu inued ed 2 . Economic actuarial assumptions  Rate of Inflation: 3%  Wage Inflation: 3.5% 3. Demographic Actuarial Assumptions  Age at entry  Age at retirement  Post-retirement mortality by gender  Marital status 7

Actu tuaria arial l Assumptions ions Continu inued ed 4. Funding Methods and Policies  Smoothing of excess achieved over assumed ROI: 5 years  Amortization of unfunded liability: 30 years 5. Plan Provisions  Specific retirement benefits of pubic agency  Employee contributions, if required by public agency 6. Participant Data  Active members  Retirees and beneficiaries  Members who have terminated with a deferred vested benefit 8

Schedule of Impending Rate Increases  The CalPERS rate increase is expected to be phased in over three years starting in 2012-2013. 1  The CalPERS Board of Administration will probably make the official decision in March of 2012.  The same percentages and phase-in are assumed in this study for the CalSTRS costs (teachers). 2, 3 _________________________ 1. Webinar Presentation by David Lamoureux, Deputy Chief Actuary, CalPERS, December 7, 2010. 2. Actually, the CalSTRS actuarial consultant, Milliman Consultants, states that the CalSTRS rate increase needs to be double that of CalPERS ( i.e., 15% vs. 7% for CalPERS). 3. CalSTRS is required by law to obtain the approval of the State Legislature to raise their rates. 9

F OUR P RIMARY R EASONS FOR THE B IG R ATE I NCREASE BY C AL PERS. 1  CalPERS lost 25% of its investments in 2008-2009 – that loss will have to be made up.  CalPERS will lower its actuarial assumption for ROI from 7.75% to 7.5% (which lowers its projected revenues).  CalPERS has lowered the assumed age of retirement (which results in additional years of pension payments).  CalPERS has raised the post-retirement mortality age (which results in additional years of pension payments). _____________________ 1. Webinar Presentation by David Lamoureux, Deputy Chief Actuary, CalPERS, December 7, 2010. 10

T HERE IS W IDESPREAD C RITICISM ABOUT 4 OF THE MAJOR METHODOLOGIES USED BY C AL PERS AND BY THE REST OF THE PENSION MANAGEMENT INDUSTRY . 1 The New York Times reported on January 7, 2011, that CalPERS is under investigation by the SEC for understating risk of investments and for understating liability. 1. Financial economists and academics contend that the pension funds significantly understate their liabilities. They have calculated that the pension funds are seriously underfunded. 2. They also argue that the amortization period for liabilities should be significantly reduced from the current practice of 30 years. Some suggestions are that it be the average period of pension payment, i.e., 16 years . 2 _________________ 1. See References. 2. The average duration of pension payments is 16 years. 11

3. A Stanford study 1 , using a risk-based poisson analysis, concluded that in 16 years CalPERS will have a:  61% probability of a shortfall (UAAL) greater than $100 billion; and  44% probability that it will be greater than $250 billion. 4. This would result in a funding deficit of 40% as opposed to their stated deficit of 14% . 2 Cumulative Probability of Shortfall in 16 Years 1 80% 80% 71% 71% 67% 67% 66% 66% tfall 70% 70% 61% 61% 59% 59% ortf 60% 60% y of Shor 51% 51% 50% 50% 44% 44% 40% 40% Cal CalPERS RS 31% 31% ity 29% 29% ilit Cal CalST STRS RS 30% 30% 22% 22% Probabil 20% 20% 12% 12% 10% 10% 0% 0% Sur urplus lus Defi eficit >$0 Defi eficit >$50B Defi eficit >$100B Defi eficit >$250B Defi eficit >$500B+ B+ _____________________ 1. Howard Bornstein et. al., Going for Broke: Reforming California’s Public Employee Pension Systems, Stanford Institute for Economic Policy Research (SIEPR), April 2010. 2. CalPERS current stated UAAL is $35.1 billion and CalSTRS is $40.1 billion. 12

In Conclusion City of Los Altos employee pension payments to CalPERS are estimated to add additional costs over the amount the City currently pays.  $300,000 in 2012-2013  $630,000 in 2013-2014  $850,000 in 2014-2015 13

THESE MUNICIPALITIES INCORPORATE THE UPCOMING EMPLOYEE PENSION COST INCREASES IN THEIR BUDGET FORECASTS  Palo Alto – estimated to start in 2012-2013  Sunnyvale – estimated to start in 2011-2012  Mountain View – estimated to start in 2012-2013  Los Gatos – estimated to start in 2011-2012  Burlingame – in current year budget. 1 __________________________ 1. Since Burlingame does not have multi-year budgets, the impending increases are discussed in significant detail in the current year budget. 14

Reference List for Pension Research 1. City of Los Altos a. Comprehensive Annual Financial Report for the Years Ended June 30, 2007, 2008, 2009. b. FY 2010-2011 Adopted Operating Budget, City of Los Altos. c. Responses to Findings & Recommendations of the Santa Clara County Civil Grand Jury, 7/27/ 2010. 2. CalPERS a. Actuarial Methods & Assumptions, Financial Final Report, 2009. b. Reportable/Non-Reportable Compensation, Procedural Manual. c. OPEB Assumption Model, 2010. d. Focus on Asset Allocation in Different Conditions, December 13, 2010. e. Webinair presentation by David Lamoureux, Deputy Chief Actuary, CalPERS Potential Changes to Your Employer Contribution Rates, December 7, 2010. f. Public Agency Employer Contribution Rate Search, Los Altos, 2010. g. CalPERS Responds to Stanford Policy Brief on Public Pension Funds, Press Release, April 7, 2010. h. Comprehensive Annual Report for Year Ended June 30, 2009. i. State & Schools Actuarial Valuation As of June 30, 2008. 3. Governmental Accounting Standards Series, Preliminary Views, Pension Accounting and Financial Reporting by Employers, Governmental Accounting Standards Board (GASB), 9/17/2010. 4. Perry Wong, I-Ling Shen , California’s Pension Shortfalls, Milken Institute California Center, 10/2010. 5 Barton Waring, The Financial Economics View for Measuring Public Pension Liabilities, Public Pension Symposium, Society of Actuaries, May 2009. 6. Barton Waring, Comments [to the GASB] on the Preliminary Views, Pension Accounting and Financial Reporting, September 15, 2010. 7. Edward E. Burrows, Defined Benefit Plans Accounting and Funding: Financial Economics vs. Pension Tradition, October 2004. 8. Howard Bornstein, Stan Markuze, Cameron Percy, Lisha Wang and Moritz Zander, Going for Broke: Reforming California’s Public Employee Pension Systems, Stanford Institute for Economic Policy Research 15 (SIEPR), April 2010. 15