Action by CalPERS will cost school employers even more than expected
   

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Action by CalPERS will cost school employers even more than expected

CalPERS board approves half-percent drop in discount rate

Employer contributions face significant increases

Just before the holiday, the CalPERS Board approved lowering what is known as the “discount rate” from 7.5 percent to 7.0 percent. This action effectively lowers what CalPERS projects will be the annual rate of return on its entire investment portfolio.


What this means for schools

  • With public employee pension benefits currently locked in place by law and court cases, lowering the assumed investment return will leave the Board no other route to make up an increasing gap between income and outgo except to increase CalPERS employer contribution rates faster and higher than expected. 
  • The Good News: Although the impact will be felt as soon as the 2018-19 fiscal year, this action by CalPERS is being delayed one year for school employers and is being phased in over three years rather than taking effect in 2017-18.
  • The Bad News: By reducing the current discount rate from 7.5 percent to 7.375 percent in 2018-19, 7.25 percent in 2019-20, and then 7.0 percent in 2020-21, the CalPERS Board will be scheduling higher employer contribution rates that will significantly exceed previous projected increases. 
  • The previous estimated schedule of employer contribution increases topped out at 20.4 percent in 2020-21. However, the new projected schedule shows the 2020-21 rate moving upward to 24.9 percent for that year, with a top rate of 28.2 percent in 2023-24. This is not a typo; 28.2 percent in 2023-24 for school district, county office of education and local school joint power agency employer contributions for all classified employees (i.e. for transportation, Regional Occupational Centers & Programs, etc.).

The CalPERS action follows several months of discussions by CalPERS staff with investors, economists, employers (including CSBA) and employees. The problems with the CalPERS fund are considerable and substantial in that the system has an annual deficit of about $5 billion, and that number is growing by $1 billion a year. The investment portfolio is projected to grow by only 6.2 percent annually over the next 10 years. That difference between 6.2 percent and 7.5 percent has left the system only 68 percent funded with projections of that figure worsening each year.

The impact on schools from the higher contribution rates could reach an additional $500-750 million on an ongoing annual basis on top of the $6 billion in already scheduled increases between CalPERS and CalSTRS.


Looking ahead

While the CalPERS Board has the authority to set its contribution rates, for CalSTRS to follow suit, legislation is needed. A representative from the Department of Finance stated support for the move by CalPERS, and while the representative was speaking as an employer, it is no secret how Governor Brown feels about debt and keeping public pension systems afloat. Legislation or budget trailer bill language could be passed in the 2017-18 Legislative Session, setting forth a similar additional increase in employer contributions for CalSTRS, which covers certificated employees.

More information is likely forthcoming with the state budget season starting next week when Governor Brown releases his Budget Proposal. Addressing employer contribution rates is one of CSBA’s priorities for the current Legislative Session.

Please direct questions to:
Carlos Machado, CSBA Legislative Advocate, or
Dennis Meyers, CSBA Assistant Executive Director for Governmental Relations.


California School Boards Association | 3251 Beacon Blvd., West Sacramento, CA 95691
Phone: (800) 266-3382 | Fax: (916) 371-3407
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