California pension fund, facing large losses, tells struggling state it needs an extra $600M

Calif pension fund asks state for additional $600M

SACRAMENTO, Calif. — Facing massive investment losses, a key committee of California’s giant pension fund voted Tuesday to make the state increase its contributions to employee retirement benefits by $600 million in the coming fiscal year.

The demand comes as California grapples with a $19 billion budget deficit and a threat by Gov. Arnold Schwarzenegger to eliminate its welfare program.

The contribution increase would be for one year starting in July, but the California Public Employees Retirement System is likely to require similar increases in future years. Local school districts, facing their own budget struggles, also will see their pension contribution rates grow.

The development is driven largely by CalPERS’ huge investment losses, but also because people are living longer and retiring earlier.

CalPERS, the nation’s largest public pension fund, lost $55.2 billion, or a quarter of its value, during the 2008-09 fiscal year.

“The biggest reason why we need increases is the investment losses,” said Alan Milligan, interim chief actuary for CalPERS. “Quite frankly, there’s more to come.”

The vote by CalPERS’ Benefits and Program Administration Committee will go to the full board Wednesday. Nine of the pension board’s 13 members sit on that committee, and none voiced any opposition.

CalPERS sets a state contribution rate every year, which the state is required to pay. Milligan said the investment losses will continue to affect the rate in coming years because of the “smoothing methods” adopted to spread the losses over a longer period.

CalPERS provides retirement and health benefits to more than 1.6 million public employees, retirees and families. The fund’s value was $205 billion as of Friday.

The governor says the pension system is unsustainable and drains money from other state programs. This week, his office said retirement costs for government employees this year will exceed what the state is providing to the University of California and California State University systems. The cost for CalPERS is $3.5 billion and the cost for the separate teachers’ retirement system is $1.2 billion, according to the governor’s office.

On Tuesday, Schwarzenegger issued a statement saying the action by the CalPERS committee is further evidence that the system must be reformed.

“Every additional dollar we spend on state employee pensions is a dollar we take from education, health and public safety,” he said.

A Republican lawmaker has introduced legislation to reform the system, in part by reducing benefits to newly hired state workers.

The contribution rate that the state pays to the California State Teachers’ Retirement System, or CalSTRS, will not change in the next fiscal year, CalSTRS spokesman Ricardo Duran said. Unlike CalPERS, CalSTRS needs legislative approval for a rate change. Duran said that gives CalSTRS less opportunity to change its contribution level, and the rate has remained the same for the past 20 years.

“This being an election year, even though there’s probably a need this year, we’re holding off until next year to go to the Legislature with a funding solution of our own,” Duran said.

State and local government pension and retiree health care plans are coming under scrutiny throughout the country because of their unfunded liabilities. That’s the difference between current assets and what taxpayers will be required to pay government retirees in the long term.

Graduate students at Stanford University issued a report last month estimating California’s unfunded pension liability at $239.7 billion for CalPERS and $156.7 billion for CalSTRS.

Less than two years ago, California’s two major pension funds had estimated combined unfunded liabilities of $61 billion.

The Stanford study was commissioned by the Schwarzenegger administration but has been criticized by CalPERS and retiree groups for following accounting standards that are not used by the pension funds.