CalPERS, Flush With Market Gains, Wants to Boost Retiree Pay
With its pension fund bulging with gains from the 1990s bull market, the board of the California Public Employees Retirement System on Wednesday proposed to share the wealth by boosting benefits for more than 800,000 government workers and retirees.
The 13-member board asked the governor and Legislature to increase all current CalPERS pensions by up to 5%, make it easier for state workers to retire early, and eliminate a two-tier system that denies full benefits to employees hired since 1991.
The average pensioner in the CalPERS system receives $14,688 a year, so the full increase would average more than $700 annually.
CalPERS’ decision is highly unusual for pension systems, which generally do not have automatic cost-of-living adjustments and force retirees to live on fixed incomes. Indeed, CalPERS’ move marks the first meaningful increase for retirees in 30 years.
The proposal to raise state retiree benefits stands in stark contrast to the trend in the private sector, where corporations are increasingly taking advantage of surpluses in their pension funds to pad their bottom lines.
The increase is also another example of how the benefits of the surging stock market, which has had powerful effects across the economy, is also trickling down to public retirees living on modest incomes. The CalPERS benefits increase, which would become effective next Jan. 1, would cost the system around $600 million a year. The total price tag would be $7 billion, in current dollars, over 20 years.
The pension fund’s board, along with backers from organized labor, believe that prospects for approval are strong, with Democratic Gov. Gray Davis in office and Democratic majorities in both houses of the Legislature.
Davis, however, has not signed on to the proposal. The administration’s lone representative on the CalPERS board, Department of Personnel Administration director Marty Morgenstern, abstained when the proposal came up for a vote.
“The governor wants to be equitable, but he’s not eager to spend $600 million,” Morgenstern said. “He wants to take a look at this. . . . On the one hand, he wants to be equitable, and on the other, he wants to be prudent.”
The proposed increase in benefits was made possible by CalPERS’ healthy returns on its investments in stocks. Over the years the fund managers have gradually increased their investments in stocks to about 65% of total assets. Most of the money is invested in stocks that represent the broad market, such as the Standard & Poor’s 500, a strategy that has earned CalPERS about $70 billion since 1994.
In recent times, market gains of 15% to 20% a year have far outstripped total employer and employee contributions into the pension fund. During Republican Gov. Pete Wilson’s administration, the growing CalPERS surplus was used not to beef up benefits but to lower the state’s contributions to the fund, essentially giving the break to the state budget rather than to retirees. This fiscal year, the state was able to save $755 million in the form of reduced payments into the fund.
If the plan to increase benefits fails, the current year’s windfall would save the state $300 million next fiscal year--money that could be redirected to schools, welfare benefits and other programs.
The CalPERS board, six of whom are directly elected by covered workers and retirees, overwhelmingly wanted to send the money to the fund’s beneficiaries. They were assured by their actuary that the fund, now worth $157.5 billion--the largest in the U.S.--was comfortably over-funded and that the system could weather any market downturn.
“Everyone knows that markets ebb and markets flow,” said the board’s president, William D. Crist. Now that the various pension plans administered by the state system are in the black, he said, it is time to pass on the benefits and eliminate disparities among different categories of employees.
The board’s vice president, Charles P. Valdes, scoffed at the argument that a sharp drop in the market could wipe out the surplus, adding that there were always reasons for denying benefits to state workers. “When there are valleys [in the market], they say, ‘There’s no money,’ ” he said. “When there are peaks, people ask, ‘What if it tanks?’ ”
Traditionally, benefit increases for current state employees are negotiated at the bargaining table, said Morgenstern, who is the administration’s top negotiator. Putting the increases in retirement benefits into legislation would remove them from bargaining.
Still, Morgenstern said that Davis will be more sympathetic to government workers than his predecessor. State workers “got nothing from the last governor,” he said. “This governor has expressed sympathy, but he’s also expressed sympathy to being cautious and conservative in spending the state’s money.”
Senate President Pro Tem John Burton (D-San Francisco)--a formidable force in any legislative wrangling--is championing the proposal. “I am a supporter of it,” he said after the CalPERS vote. “I think it’s good public policy. . . . The money is there. We’re correcting some inequities. We’ll even end up saving general fund money in the long run, because people with more seniority and a little larger salaries basically will be moving on and we’ll bring in new blood.”
Part of the increase in funding necessary to boost benefits will come from holding the current state employer contribution rate constant--at about 8.54% of payroll for the largest group of state employees. If benefits were not increased, the rate would drop to 5.03%, saving the state $300 million.
The rest of the costs are covered by changing the way the liability of the fund is calculated. For example, the current method calculates the value of holdings at about 90% of their true market value. The CalPERS board proposal would increase that to 95%. The various actuarial changes contemplated are still quite conservative, said Robert Walton, CalPERS’ assistant executive officer, but they provide an additional savings on paper of $300 million.
There are 322,000 current pensioners covered by the system, and about 770,000 active employees. The one-time pension increase covers all the retirees. The proposal does not cover the 250,000 active employees in the CalPERS system who work for various local governments around the state.
