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Pension Funds

CalPERS shortens amortization period to 20 years

The CalPERS board voted Wednesday to shorten the period over which actuarial gains and losses are amortized to 20 years from 30 years for new pension liabilities.

The new policy will become effective as of the June 30, 2019, actuarial valuations.

The $356.6 billion California Public Employees' Retirement System, Sacramento, last revised its amortization policy in April 2013 when it added a five-year "direct rate smoothing" for certain unfunded liability bases. Staff recommended the policy change because it was concerned that the prior amortization policy could result in negative amortization, which is when the payments on the liabilities are not sufficient to cover the interest accrual.

Reducing the amortization period for certain sources of unfunded liability is expected to increase average funding ratios and provide faster recovery of funded status in a market downturn, according to a staff report to the finance and administration committee, which on Tuesday approved passing the change to the board for a final decision. CalPERS was 68% funded as of June 30.

The downside of the shorter amortization period is that it could increase the contributions of the cities that participate in CalPERS.

Marcie Frost, CalPERS CEO, said that the amortization policy change is "an important step in strengthening the fund for generations to come."

"It will save employers money over the long term and will reduce their unfunded liability balances sooner, but we know that these decisions are difficult ones to make for the board, difficult for the team to bring to the board to make the decision and the impacts to the employers are not easy," she said before the board's vote.

Officials from the city of South San Francisco in public comment told the board that the city would have no trouble paying the additional $2 million the change would cost the city, but that CalPERS' board should consider that this change follows other policy modifications including the amortization smoothing that taken together created a huge burden for the employers.