California taxpayers might see the municipal pension contributions they fund for the $258.3 billion California Public Employees' Retirement System rise as much as 50% under a plan to fill $87 billion in unfunded obligations.
Alan Milligan, the pension fund's chief actuary, recommends that the biggest U.S. pension plan stop spreading out losses and gains over 15 years and instead set rates based on how much is needed to reach 100% funding within 30 years.
The Sacramento-based pension fund is about 26% short of meeting its long-term commitments. The state and cities contributed $7.8 billion in the last fiscal year, almost four times more than a decade earlier.
In a version of pay-me-now-or-pay-me-later, Milligan said the proposed funding plan “will result in a lower probability of large increases in employer contribution rates” in the future, according to a report to a CalPERS committee.
Smoothing out gains and losses over 15 years, rather than accounting for them in one year, helps to ease potential spikes in the annual contribution rates. The rates are calculated as a percentage of the payroll of the state, cities and other local governments, financed by taxes.
Under Mr. Milligan's proposal, the pension fund would shrink its 15-year rolling period for asset smoothing to five years and amortize gains and losses over a fixed 30-year period rather than the current rolling 30-year period. A fixed period means that all obligations will be fully funded by a specific date.
If approved, the rates charged to governments would increase by as much as 50%. The boost would be spread over six years, beginning as early as next year for some.
Government contributions were already set to increase under the current smoothing and amortization policy. Half of the increase for the state, for example, would occur even under the existing policy. Under the current rates and smoothing policy, the pension fund would reach an 80% funded status within 30 years.
The median funded status of state pension plans fell to 72% in 2011 from 83% in 2007, according to data compiled by Bloomberg.