RPVCCA_CC_SR_2012_06_19_06_Unfunded_Pension_LiabilityCITY OF
MEMORANDUM
RANCHO PALOS VERDES
TO:
FROM:
DATE:.
SUBJECT:
REVIEWED:
Staff Coordinator:
HONORABLE MAYOR AND MEMBERS OF THE CITY COUN~C
DENNIS McLEAN,DIRECTOR OF FINANCE &INFORMATIO .
TECHNOLOGY
JUNE 19,2012
UNFUNDED PENSION LIABILITY (Supports City Council 2012 Goal
for Government Efficiency,Fiscal Control and Transparency)
CAROLYN LEHR,CITY MANAGER ~
Kathryn Downs,Deputy Director of Finance &Information
Technology \~
RECOMMENDATION
1.Receive and file this report and the Finance Advisory Committee Memorandum
dated April 25,2012;and
2.Defer further discussion of this topic to December 2012,after additional reporting
information is received from the California Public Employees'Retirement System
(CaIPERS)to comply with a new accounting pronouncement for financial reporting
of the unfunded pension liability.
BACKGROUND
At the request of Mayor Pro-Tem Campbell,on January 17,2012 the City Council
discussed the City's unfunded pension liability and made the following assignment to the
Finance Advisory Committee (FAC):
"The Finance Advisory Committee (FAC)will study the alternatives that are available for the
City to accurately ascertain the CalPERS Unfunded Pension Liability owed by the City of
Rancho Palos Verdes,as other California General Law cities have successfully done,and
report its finding(s)to the City Council within 90 days."
As a reminder,the Unfunded Pension Liability (UPL)is defined as the excess accrued
liability (earned benefits)over the plan assets.The UPL is not a liability requiring payment,
other than annual funding contributions,unless the City terminates its contract with
CaIPERS;which is an unlikely event at this time.
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UNFUNDED PENSION LIABILITY
June 19,2012
Page 2 of 4
DISCUSSION
FAC Consideration
On March 28,2012 and April 25,2012,the FAC discussed the issue and prepared a
Memorandum to City Council dated April 25,2012 regarding the calculation of the City's
UPL (see Attachment A).The FAC's consideration included a significant level of
information provided at the request of the Mayor Pro-Tem and the FAC,which has been
included with this staff report to ensure that the City Council receives the same information
provided to the FAC.
1.A detailed report from Staff providing information about the City's Pension Plan,the
City Council's pension reform actions of 2011,the alternatives for calculating the
unfunded liability,information about a forthcoming accounting standard,other
relevant information,and the following attachments (see Attachment B):
a.Miscellaneous Plan of the City of Rancho Palos Verdes (Employer #1020)
Annual Valuation Report as of June 30,2010;
b.January 18,2011 letter from Bartel &Associates,LLC to the City Council,
regarding "City of Rancho Palos Verdes CalPERS Unfunded Liability";
c.January 23,2012 email communication between Kathryn Downs and Kung-
Pei Hwang of CalPERS,regarding "Actuarial for UL";
d.Governor Brown's "Twelve Point Pension Reform Plan"dated October 27,
2011 ;
e.California Legislative Analyst's Office "An Initial Response to the Governor's
Proposal"dated November 8,2011 ;
f.CalPERS Circular Letter dated March 16,2012 regarding "Employer Rate
Impacts due to Discount Rate Change";and
g.CalPERS Actual Investment Returns - A 20 Year History.
2.Conversations between FAC Member James and the Senior Actuary at CalPERS
assigned to the City;and
3.Other sources of information available to the public,such as the CalPERS website
and the assessment of public employee pension plans in Los Angeles County
conducted by the Los Angeles County Civil Grand Jury.
The FAC's seven-page Memorandum outlines its considerations and includes the following
recommendation:
"It is our recommendation that the City Council continue this matter until November or
December,2012,with a view towards reviewing:(1)the anticipated announcement ofa new
GASB standard in June,2012,and (2)the actuarial valuation report from CalPERS for fiscal
year 2011.
The City Council and Staff should be in a better position at that time to determine whether to
seek more exact information from CalPERS or a consultant actuary,and/or whether any
steps should be taken by RPV to mitigate any risks associated with our City's unfunded
pension liability (e.g.,dedicating a portion of our reserves,exploring other pension options,
etc.)."
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UNFUNDED PENSION LIABILITY
June 19,2012
Page 3 of 4
Unfunded Pension Liability
There are 3 methods of calculating the City's UPL,as follows.
1.Actuarial UPL =Accrued Liability,less Actuarial Value of Assets.This is the
methodology used by CalPERS to calculate the City's annual contribution to reduce
the City's share of its risk pool's UPL.Historically,CalPERS has increased the
City's contribution rate when the risk pool's UPL increases significantly and
decreased the rate when risk pool's UPL has decreased.Staff estimated that its
share of the Actuarial UPL as of June 30,2010 was about $3.2 million.The FAC
validated the Actuarial methodology and agreed with the estimate provided by Staff.
2.Market UPL =Accrued Liability,less Market Value of Assets.This is the
methodology that Staff believes will be used to report the UPL on the financial
statements,once the new accounting pronouncement is issued.Staff estimated
that its share of the Market UPL as of June 30,2010 was about $9.6 million.The
FAC validated the Market methodology and agreed with the estimate provided by
Staff.
3.Termination UPL =Accrued Liability (identified with an updated actuarial valuation
upon initiation of the termination process),less Market Value of Assets,discounted
by U.S.Treasury yields.This methodology was adopted by CalPERS in August
2011 to mitigate benefit funding risk,and was identified by the FAC as a part of its
assignment.The Termination methodology would only be used in the event that the
City terminated its contract with CaIPERS.
None of these methods provide a current and accurate value of the UPL.The Actuarial
UPL and Market UPL are estimates based upon information that is 16-27 months old at
any given time.The Termination UPL is designed specifically to protect CalPERS when an
agency terminates its contract.For this reason,Staff agrees with the FAC
recommendation to defer consideration of this matter.The CalPERS is expected to
provide additional reporting information to comply with the new accounting pronouncement,
with the actuarial valuation report dated June 30,2011 (to be issued late 2012).At that
time,there will be a standard UPL methodology for reporting purposes equally applied to
all government agencies with defined benefit plans.
2011 Pension Reform
In September 2011,the City Council took action to require employees to pay the full 8%
employee contribution to the pension plan in exchange for a 5%salary increase.
Previously,the employees had been contributing 1.5%of the 8%employee contribution.
Based on current salary rates,actual positions filled,and the effective date of September
23,2011,the estimated FY11-12 savings for pension reform have totaled about $67,000
for 7 months.
The City Council also took action to establish a second tier of decreased benefits for new
employees.No new employees have been hired since September 2011.For FY12-13,
total expected savings would include the increased employee contribution noted above and
the reduced pension benefit for new employees.Assuming that 2 of the unfilled positions
remain unfilled and 5 of the unfilled positions are not filled until the end of September 2012
6-3
UNFUNDED PENSION LIABILITY
June 19,2012
Page 4 of 4
(consistent with the assumption in the proposed FY12-13 budget),total FY12-13 savings
would be about $114,000.
Attachments
A -Memorandum from the Finance Advisory Committee dated April 25,2012 titled
"Calculation of the City's Unfunded Pension Liability"
8 -Staff Report to the Finance Advisory Committee dated March 28,2012 titled
"Alternatives for Identifying the City's Unfunded Pension Liability"with attachments.
6-4
Attachment A
MEMORANDUM
To:
From:
Date:
Subject:
Rancho Palos Verdes City Council
Finance Advisory Committee
April 25,2012
Calculation of the City's Unfunded Pension Liability
1.Assignment from City Council
On January 17,2012,the Rancho Palos Verdes (RPV)City Council voted to have the
Finance Advisory Committee (F AC):"...study the alternatives that are available for the
City to accurately ascertain the CalPERS Unfunded Pension Liability owed by the City of
Rancho Palos Verdes,as other California General Law cities have successfully done,and
report its finding(s)to the City Council within 90 days."
2.Consideration by the Finance Advisory Committee
On March 22,2012,the members of the FAC received the above assignment along with a
Staff Report providing background about RPV's participation in the California Public
Employee's Retirement System (CaIPERS)and Staffs calculations ofthe City's
estimated unfunded pension liability as of June,30,2010.
On March 28,2012,the F AC met,received a presentation from Staff and discussed the
question.At the conclusion of that discussion,the Chair appointed committee members
Bill James and Dora de la Rosa to act as a subcommittee,study the issue further and
report back to the F AC at its April 25,2012 meeting.
The subcommittee looked at additional documents,communicated with RPV's Director
of Finance,Dennis McLean,its Deputy Director of Finance,Kathryn Downs,and Senior
CalPERS Actuary,Kung-pei Hwang,and prepared a draft of this Memorandum.
On April 17,2012,the draft Memorandum was sent to the remaining committee members
as part ofthe materials for the next meeting.On April 25,the FAC met,received an oral
report from the subcommittee,discussed the question again,and adopted the draft
1 6-5
Attachment A
Memorandum with minor changes to reflect input and views from other members of the
Committee.
3.Report re Calculation of Unfunded Pension Liability
To determine the value of its assets and the required contributions of participating
agencies,CalPERS employs a "15 year smoothed market"valuation method -an
average of market values over such period.The idea is that using an average reflecting
general economic conditions over an extended period of time coupled with periodic,
conservative tweaking of factors like the return rate will produce a more level,and more
predictable,cost factor for participating agencies.Stated a different way,"smoothed
values are often used with the goal of producing a pattern of employer contributions to
the plan that does not fluctuate as much as the financial markets."l
During slower economic times,such a method will overstate the value of the assets
available to meet future pension plan needs.As stated by the California Legislative
Analyst's Office in its report on Public Pension and Retiree Health Benefits,issued in
November,2011:
"A troubling trend of California's state and local public pension systems has
been the growth of substantial unfunded actuarial accrued liabilities (...).Put
in very simple terms,an unfunded liability is the amount that would be needed
to be invested into a public pension plan today such that,when coupled with
amounts already deposited in the fund plus assumed future investment
earnings,all benefits earned to date by public employees would be funded
upon their retirement.While there is some disagreement on how to value
unfunded liabilities of pension systems,it is clear that California's state and
local systems are coping with very large shortfalls.These shortfalls will push
costs upward -above what they might otherwise be -for years to come,in
some cases."(p.11)2
Concerns have been expressed that the unfunded portions of risk pools have reached
troubling levels.Identification of the amount of an agency's individual unfunded pension
liability,as well as the total amount of the unfunded liabilities for its pools,may be
helpful in assisting that agency's assessment of whether steps should be taken at the local
level to mitigate its risks,including the risk of an unexpected increase in its annual
payments at some point in the future.
Any methodology used to calculate an unfunded pension liability will necessarily require
a number of actuarial assumptions,and any number calculated will be an estimate.E.g.,
1 U.S.Government Accountability Office Report on State and Local Government Pension Plans,issued in
March,2012,at p.45.
2 Also see,e.g.,the 2010-2011 Los Angeles County Grand Jury "Assessment of the State Pension Plans in
Los Angles County",which noted,at p.212,the negative effect that the 2009 downturn in the investment
markets had had on pension systems,and questions that have been raised concerning both actuarial
assumptions and the ability of local governments to continue funding higher contributions.
2
6-6
Attachment A
the liability itself will ultimately depend upon how long our employees actually live,not
on a current life expectancy table,and the portion of that liability which may be said to be
"unfunded"will ultimately depend upon future interest rates,the future performance of
pool assets and other economic factors which will vary from year to year and are
impossible to precisely predict.
a.RPV's estimated unfunded pension liability based upon current CalPERS
actuarial assumptions -$3.2 million.
RPV participates in a risk pool consisting of agencies with the same benefit formula.In
its Actuarial Valuation (as of June 30,2010)for the City of Rancho Palos Verdes,
CalPERS provided a number -$238.1 million -which was stated to be the pool's
"actuarial unfunded liability".3
In today's economic climate,that number is low,due primarily to the fact that one of
CaIPERS'actuarial assumptions is a 7.75%rate ofretum on investments (net of
administrative expenses).4 RPV's estimated share of the "actuarial unfunded liability"
was approximately $3.2 million.s
If CaIPERS'actuarial assumptions were all correct,then this would be the number that
RPV would have to pay,over time,in addition to normal annual payments to make up the
unfunded portion of the liability.In fact,that is how the amounts of our annual payments
are determined.6
b.RPV's estimated unfunded pension liability based upon the market value
of assets in our pension pool--$9.6 million.
3 Information concerning the actuarial assumptions employed by CalPERS in preparing its Actuarial
Valuation is set forth in Appendix A of Section 2 of that report.They include demographic assumptions
such as the percentage of employees who will die,become disabled or retire in each future year,and
economic assumptions,such as future salary increases and future returns on CalPERS assets.
4 CalPERS is very conservative when it comes to changing this rate.The rate was 8.25%from 1999 to
2005 and 7.75%from 2006 to 2012.On March 16,2012,the CalPERS Board of Administration voted to
reduce the rate to 7.50%beginning FY 2013-14 and directed its staff to phase in the increase in employer
contributions over a two year period.CalPERS Circular Letter No.200-010-12.
Staff calculated RPV's share based upon projected FY12-13 payrolls and used the same methodology
as was used by John Bartel of Bartel &Associates LLC,an actuary who specializes in California public
pensions,in a prior presentation to the City.According to the Bartel report,the equivalent number for the
fiscal year ending June 30,2009,was $2.7 million.One assumption underlying these estimates is that
RPV is a 'typical'city,i.e.,that factors such as the ages and service periods of our employees are average
compared to those of other agencies in our risk pool.
6 "The City's pension cost for FY12-13 will be based on 13.914%of covered payroll (base salary,which
does not include overtime,bonuses,allowances,or vacation buy-outs).Of this contribution percentage,
4.527%is a payment to reduce the risk pool's unfunded liability (see page 3 of AVR Section 1).This
payment is based on the Actuarial Unfunded Liability."Staff Report,at p.3.
3 6-7
Attachment A
According to the CalPERS Actuarial Valuation,the total accrued liability for our risk
pool was $1.973 billion,and the market value of the pool's assets was approximately
$1.261 billion,leaving an "unfunded liability"of approximately $711 million.The
estimate ofRPV's "share"of that shortfall was approximately $9.6 million.?
c.RPV's estimated unfunded pension liability based upon the cost to
terminate the plan --$36 million.
If an agency were to seek to terminate its contract for retirement services using the above
figures,CalPERS would be required to assume the risk that current market conditions
might not tum around.In Circular Letter No.200-058-11,sent to all public agencies on
August 19,2011,CalPERS announced that:
"To ensure that the most appropriate actuarial assumptions are used at the
time a public agency terminates its contract with CalPERS,the Board has
adopted an interim method to determine the discount rate,inflation
assumption and other related economic assumptions to be used when
calculating the liabilities of terminating agencies ....
. . .using the US Treasury rates in effect as of June 30,2011,and the new
termination calculation method described above,the discount rate for
valuation of the Pool as of June 30,2011,would be 3.8%.Using this rate,
actuarial liabilities attributable to the Pool increases from $60 million to close
to $92 million,...."8
In order to (in their words)"protect member benefits and to mitigate funding risk",
CalPERS uses an entirely different methodology when calculating the payout
requirement for a terminating agency:
"The discount rate assumption to be used for actuarial valuations for
employers terminating a contract (or portion of a contract)with CalPERS,and
for the annual actuarial valuation of the Terminated Agency Pool,will be a
weighted average of the 10 and 30 year US Treasury yields in effect on the
valuation date.The weighted average percentages will be the weights that
when applied to the duration of the 10 and 30 year US Treasury,determined at
current spot rates,equal the duration of the expected benefit payment cash
flows of the contract (or portion of a contract in the case of a partial
termination)being terminated or the terminated Agency Pool."
?Again,Staff calculated RPV's share based upon projected FY12-13 payrolls.According to the Bartel
report referred to in n.6,the equivalent number for the fiscal year ending June 30,2009,was $9.8 million.
8 At pp.2-3,and note,the "Pool"referred to in the Circular Letter is CalPERS'Terminated Agency Pool,
not the risk pool in which RPV participates.
4 6-8
Attachment A
CalPERS has not done yet any calculations based upon the above methodology.
Furthennore,we do not know the exact rate CalPERS would use ifRPV tenninated its
pension plan contract since we do not know the duration of our liabilities (which would
be based upon the age of our participating staff members,years of service,etc.).But we
do know that the U.S.Treasury rate assigned to us in the current market would be
substantially less than either the current actuarial discount rate or the current market
rate.9
According to CaIPERS,the liability number for a tenninating agency using the above
methodology would be approximately twice as much as its share of the Risk Pool's
Accrued Liability.Using the same calculations as those used in the Staff Report to
estimate a tennination value for RPV,RPV's share of the total Accrued Liability of our
Risk Pool would be approximately 2x 1.34%x $1.973 billion =$52.9 million.
Subtracting our share of the market value ofthe Pool's assets,1.34%x $1.261 billion =
$16.9 million produces a tennination value for RPV of $36 million.
A draft of this Memorandum has been reviewed and approved by our CalPERS
representative,and the above calculations have been specifically discussed with him.
Taking into account (1)that these estimates are based on fiscal year 2010 data,and (2)
the inherent limitations of actuarial assumptions,he has advised us that he agrees that
they present a fair and accurate picture.
4.Conclusion and Recommendation
The Staff Report correctly points out that the number one uses "will depend upon the
intended use of the estimate."10 The problem may aptly be compared to the Indian
parable of the blind men and the elephant,l1 and,as in the parable,the whole 'elephant'is
larger than it may have initially been perceived to be.
The first two estimates provided above,$3.2 million and $9.6 million,reflect an estimated
"actuarial unfunded liability"and an estimated "market value unfunded liability."These
numbers are similar to the numbers stated by John Bartel in his prior report,which was
based on the CalPERS Actuarial Valuation (as of June 30,2009).
Our "actuarial unfunded liability"reflects a portion of the current projected funding cost
of participation in the pension plan.As stated above,we are actually paying this amount
9 E.g.,the 10-year U.S.Treasury yield traded at around 2%on April 16,2012,and the 30 year yield was
approximately 3.2%.
10 See,"Exhibit A',last paragraph on p.2.
11 In that story,six blind men were asked to determine what an elephant looked like by feeling different
parts of its body.One,who touched its leg said,"the elephant is like a pillar.'A second held its tail and
said "the elephant is like a rope."The third touched its trunk and said,"the elephant is like a tree branch."
The fourth felt its ear and said "the elephant is like a fan."The fifth touched its tusk and said "the elephant
is like a pipe."The last blind man felt the side of its belly and said "the elephant is like a wall."
5 6-9
Attachment A
(over time).The third estimate,$36 million,is higher than our liability under the plan in
any sense,but would have applicability in the event of an actual termination of the
CalPERS contract.
A conclusion that the "market value unfunded liability"reflects the most realistic
estimate for a participating agency is consistent with changes currently being proposed by
the Government accounting Standards Board (GASB):
"Under current GASB accounting standards,the discount rate must be the
expected return on plan assets.The GASB proposals,if enacted,would set
the overall discount rate equal to a composite of (1)the expected return on
plan assets to the extent that the plan is funded or projected to be funded,and
(2)a high-quality municipal bond rate to the extent that some plan benefits are
not expected to be funded in advance.In practice,this blended discount rate
is expected to be close to the current basis -that is,the expected return on
plan assets -for most plans.The GASB proposals would also require the use
of a single actuarial cost method;and they would use the current market value
of assets,rather than a smoothed value,in determining a plan's deficit or
surplus,which would be reported on the government entity's balance sheet."12
The FAC believes that it would not be cost effective or useful,at this time,to request a set
of more precise calculations of the above figures from CaIPERS,or to hire an actuary to
perform what would essentially be the same task.In our opinion,either undertaking
would have minimal benefit to the City for three reasons:(1)all of these numbers are
estimates which will continue to fluctuate and more precise numbers would already be
over a year outdated;(2)CalPERS has announced that it intends to provide such
information in October of this year 13 ;and (3)neither CalPERS nor an outside actuary
would be able to provide us with calculations before then.14
It is our recommendation that the City Council continue this matter until November or
December,2012,with a view towards reviewing:(1)the anticipated announcement ofa
12 U.S.Government Accountability Office Report on State and Local Government Pension Plans,issued
in March,2012,at pp.47-48 (footnotes omitted);and see,Staff Report,at p.5.
13 As stated in CalPERS Circular Letter 0.200-058-11,at p.3:"In order to ensure transparency and
provide relevant information,the CalPERS Actuarial Office expects to be able to provide employers with
hypothetical information regarding their termination liabilities as part of the regular annual actuarial
valuation report.At this time we expect this information to be available,at the earliest,in the June 30,
2011,actuarial valuation report that will be mailed in October of2012."According to Kung-pei Hwang,
that report will provide updated versions of all three numbers discussed in this Memorandum.
14 Hiring an outside consultant could cost in the range of$10,000-18,000,and would take 4-6 weeks
after the data becomes available for FY 2010-2011 (This is the estimate provided to Staff by Bartel &
Associates LLC.The higher end of the estimate reflects the projected cost of a termination cost analysis.)
CalPERS estimates that its response time would be approximately 6 months after a City passes a
termination resolution.CalPERS has only just began working on data for FY2010-2011 and has stated that
data for such period will not become available until it produces its report in October,2012.
6 6-10
Attachment A
new GASB standard in June,2012,and (2)the actuarial valuation report from CalPERS
for fiscal year 2011.
The City Council and Staff should be in a better position at that time to determine
whether to seek more exact information from CalPERS or a consultant actuary,and/or
whether any steps should be taken by RPV to mitigate any risks associated with our
City's unfunded pension liability (e.g.,dedicating a portion of our reserves,exploring
other pension options,etc.).
Since the F AC received this assignment,the Council has requested input from us
concerning the City's reserve policy.We will respond to that request in a separate report,
but anticipate considering the impact,if any,of our unfunded pension liability on that
policy,and,if appropriate,making a recommendation to the Council based thereon.
7 6-11
MEMORANDUM
TO: HONORABLE CHAIR & MEMBERS OF THE FINANCE
ADVISORY COMMITTEE
FROM: KATHRYN DOWNS, DEPUTY DIRECTOR OF FINANCE
& INFORMATION TECHNOLOGY
DATE: MARCH 28, 2012
SUBJECT: ALTERNATIVES FOR IDENTIFYING THE CITY’S
UNFUNDED PENSION LIABILITY
RECOMMENDATION
Provide the City Council with a recommendation to accept, receive and file Staff’s
calculations of the estimated unfunded pension liability as of June 30, 2010 which are
based upon both the actuarial and market valuation methods.
BACKGROUND
On January 17, 2012, the City Council made the following assignment to the Finance
Advisory Committee (FAC):
“The Finance Advisory Committee (FAC) will study the alternatives that are available for the
City to accurately ascertain the CalPERS Unfunded Pension Liability owed by the City of
Rancho Palos Verdes, as other California General Law cities have successfully done, and
report its finding(s) to the City Council within 90 days.”
DISCUSSION
The City provides a defined pension benefit to its employees by participating in the
California Public Employees’ Retirement System (CalPERS). Employees are eligible to
retire at age 55, and the pension benefit is calculated as follows: years of service multiplied
by 2.5%, multiplied by the final 12 months of base salary. The benefit formula is commonly
referred to as 2.5% @ 55. An example employee retiring at age 55 with 25 years of service
and a base salary of $80,000 for the final 12 months of employment would retire with an
annual pension benefit of $50,000 (25 X 2.5% X $80,000). The annual benefit increases
with a cost of living allowance (not to exceed 2% each year) until the employee is
June 19, 2012 Attachment B
CrTYOF RANCHO PALOS VERDES
6-12
ALTERNATIVES FOR IDENTIFYING THE CITY’S UNFUNDED PENSION LIABILITY
March 28, 2012
Page 2 of 5
deceased.
The City has less than 100 active members, and is therefore required by CalPERS to
participate in a risk pool with other agencies with the same benefit formula. CalPERS
prepares an Actuarial Valuation Report (AVR) each year, which identifies the risk pool’s
plan assets and accrued liability. The excess of accrued liability over the plan assets is the
unfunded liability. The most recent actuarial valuation was issued October 2011 for the
year ended June 30, 2010 (see Attachment A). By participating in the risk pool, the City is
responsible for its share of the risk pool’s unfunded liability. Additionally, annual
contribution rates are set for the entire risk pool based upon the actuarial review of the
entire pool, rather than each respective member agency.
Alternatives for Identifying the City’s Unfunded Pension Liability
After discussions with Kung-Pei Hwang (Senior Actuary at CalPERS) and John Bartel (an
independent consulting actuary with Bartel & Associates, LLC), three methods have been
identified for determining the City’s unfunded pension liability:
1. Calculate an estimate using information from the AVR;
2. Request a calculation from CalPERS based upon a City Council resolution of intent
to terminate the plan; or
3. Contract with a consulting actuary to prepare a calculation.
Alternative 1 – Calculate an Estimate
We can immediately estimate the City’s share of the risk pool’s unfunded liability using the
following calculation. This method is consistent with the method used by John Bartel in a
letter addressed to the City Council dated January 18, 2011 (see Attachment B).
June 30, 2010
Projected FY12-13 payroll for City A 5,211,033
Projected FY12-13 payroll for Risk Pool B 388,149,050
City's estimated share of Risk Pool A / B = C 1.34%
Risk Pool's Actuarial Value of Assets (item # 5 on page 11 of AVR Section 2) D 1,734,769,226
Risk Pool's Market Value of Assets (item # 10 on page 11 of AVR Section 2) E 1,261,453,576
Risk Pool's Accrued Liability (item # 4e on page 11 of AVR Section 2)F 1,972,910,641
Risk Pool's Actuarial Unfunded Liability F - D = G 238,141,415
Risk Pool's Market Value Unfunded Liability F - E = H 711,457,065
City's estimated share of Risk Pool's Actuarial Unfunded Liability C X G 3,197,129
City's esimated share of Risk Pool's Market Value Unfunded Liability C X H 9,551,553
There are at least two issues associated with calculating the City’s estimated share of the
risk pool’s unfunded liability. The first issue is: which estimate does one consider when
discussing the City’s unfunded liability, the City’s estimated Actuarial Unfunded Liability of
$3.2 million or the estimated Market Value Unfunded Liability of $9.6 million? The answer
will depend on the intended use of the estimate.
6-13
ALTERNATIVES FOR IDENTIFYING THE CITY’S UNFUNDED PENSION LIABILITY
March 28, 2012
Page 3 of 5
If the estimate is used to discuss the City’s additional pension costs related to the unfunded
liability, then the estimated Actuarial Unfunded Liability of $3.2 million should be used. The
City’s pension cost for FY12-13 will be based on 13.914% of covered payroll (base salary,
which does not include overtime, bonuses, allowances, or vacation buy-outs). Of this
contribution percentage, 4.527% is a payment to reduce the risk pool’s unfunded liability
(see page 3 of AVR Section 1). This payment is based on the Actuarial Unfunded Liability.
If the estimate is used to discuss what the City would owe to CalPERS if the City
terminated its contract with CalPERS, then the estimated Market Value Unfunded Liability
of $9.6 million should be used. If the City were to terminate its contract with CalPERS, the
City would be required by law to provide a replacement benefit with a similar value to the
employee. There are two distinct advantages to contracting with CalPERS for the
employees’ pension benefit: 1) the administration costs are spread over a large number of
participating agencies; and 2) the CalPERS investment portfolio is larger than other
pension plans, which may contribute to decreased volatility and the opportunity to earn a
higher rate of return.
The second issue with calculating an estimate of the unfunded liability is that the
information is not current. The estimate is based on information as of June 30, 2010.
CalPERS assumed an investment return of 7.75% during preparation of the AVR. The
CalPERS actual investment return for the year ended June 30, 2011 was 20.9%, which will
have a favorable impact on the Market Value Unfunded Liability.
Alternative 2 – Request a Calculation from CalPERS
As stated previously, CalPERS will only prepare a calculation for the City’s individual
unfunded liability when the City leaves the risk pool by terminating the plan; or by improving
the benefit, which would move the City into a different risk pool. This information has been
verified with Kung-Pei Hwang, Senior Actuary with CalPERS (see Attachment C, email
communication with Mr. Hwang).
Alternative 3 – Contract with a Consulting Actuary
The City can contract with a consulting actuary to prepare a calculation of the City’s
unfunded liability. John Bartel of Bartel & Associates LLC is a well respected actuary who
specializes in California public pensions and has made presentations to the City Council in
the past. It should be noted that Mr. Bartel’s calculation may differ from one prepared by
CalPERS or any other professional actuary, as the assumptions may differ.
New Accounting Standard
The Government Accounting Standards Board (GASB) is the independent organization that
establishes and improves standards of accounting and financial reporting for U.S. state and
local governments. Periodically, the GASB issues statements for new accounting
standards. The GASB is currently working on a statement for postemployment benefit
accounting and financial reporting that is expected to be issued in June 2012, effective for
the fiscal year ended June 30, 2013. The GASB has been working on this standard since
2006. As with all GASB standards, once the final standard is issued, the City will
6-14
ALTERNATIVES FOR IDENTIFYING THE CITY’S UNFUNDED PENSION LIABILITY
March 28, 2012
Page 4 of 5
implement the new accounting and financial reporting requirements.
During a conference of the California Society of Municipal Finance Officers held on March
1, 2012, David Bean, Director of Research & Technical Activities at the GASB, stated that
the new standard is expected to require that the Market Value Unfunded Liability be shown
on the Statement of Net Assets (the City’s balance sheet). During this same conference,
Alan Milligan, Chief Actuary at CalPERS, stated that CalPERS will provide the information
needed to comply with the new GASB accounting standard to its contracting agencies. Mr.
Milligan further stated that the additional work to provide this information to each
contracting agency may necessitate an annual administrative charge.
Other Information
Former Chair James suggested that Staff include additional information to improve the
FAC’s general understanding of public employee pensions. Although this information is not
directly related to the FAC’s assignment regarding the unfunded liability, Staff agrees that
the FAC will benefit from having a better understanding. Staff has attached Governor
Brown’s Twelve Point Plan for pension reform, as well as the California Legislative
Analyst’s Office response to the Governor’s Plan.
FAC Members may be interested in further reading regarding public pensions. The Los
Angeles County Civil Grand Jury conducted an assessment of public employee pension
plans in Los Angeles County. The Grand Jury’s 2010-2011 report can be found at the
following link:
http://www.lacera.com/home/pdfs/lac_civil_grand_jury_report%202011.pdf.
On March 14, 2012, the CalPERS Board of Administration approved a recommendation to
decrease the assumed rate of return on investments from 7.75% to 7.50%. The expected
effect of this change will be a 1.0% to 2.0% increase of the Employer contribution rate
beginning in FY13-14 (see Attachment F, CalPERS circular letter). The City’s 2011 Five-
Year Financial Model included an assumption that the Employer contribution would
increase 1.6% in FY13-14. Staff has also included a 20-year history of CalPERS actual
investment returns (see Attachment G).
Attachments
Attachment A – Miscellaneous Plan of the City of Rancho Palos Verdes (Employe # 1020)
Annual Valuation Report as of June 30, 2010
Attachment B – January 18, 2011 letter from Bartel & Associates, LLC to the City Council,
regarding “City of Rancho Palos Verdes CalPERS Unfunded Liability”
Attachment C – January 23, 2012 email communication between Kathryn Downs and
Kung-Pei Hwang of CalPERS, regarding “Actuarial for UL”
Attachment D – Governor Brown’s “Twelve Point Pension Reform Plan” dated October 27,
2011
6-15
ALTERNATIVES FOR IDENTIFYING THE CITY’S UNFUNDED PENSION LIABILITY
March 28, 2012
Page 5 of 5
Attachment E – California Legislative Analyst’s Office “An Initial Response to the
Governor’s Proposal” dated November 8, 2011
Attachment F – CalPERS Circular Letter dated March 16, 2012 regarding “Employer Rate
Impacts due to Discount Rate Change”
Attachment G – CalPERS Actual Investment Returns – A 20 Year History
6-16
California Public Employees’ Retirement System
Actuarial Office
P.O. Box 942701
Sacramento, CA 94229-2701
TTY: (916) 795-3240
(888) 225-7377 phone • (916) 795-2744 fax
www.calpers.ca.gov
October 2011
MISCELLANEOUS PLAN OF THE CITY OF RANCHO PALOS VERDES (EMPLOYER # 1020)
Annual Valuation Report as of June 30, 2010
Dear Employer,
Enclosed please find a copy of the June 30, 2010 actuarial valuation report of your pension plan. Since your plan had
less than 100 active members in at least one valuation since June 30, 2003, it is required to participate in a risk pool.
The following valuation report has been separated into two Sections:
Section 1 contains specific information for your plan, including the development of your pooled employer
contribution rate, and
Section 2 contains the Risk Pool Actuarial Valuation appropriate to your plan, as of June 30, 2010.
This report contains important actuarial information about your pension plan at CalPERS. Your CalPERS staff actuary
is available to discuss the actuarial report with you.
Changes Since the Prior Valuation
A temporary modification to our method of determining the actuarial value of assets and amortizing gains and losses
was implemented for the valuations as of June 30, 2009 through June 30, 2011. The effect of those modifications
continue in this valuation.
There may also be changes specific to your plan such as contract amendments and funding changes.
Future Contribution Rates
The exhibit below displays the required employer contribution rate and Superfunded status for 2012/2013 along with
an estimate of the contribution rate and Superfunded status for 2013/2014. The estimated rate for 2013/2014 is
based on a projection of the most recent information we have available, including an estimate of the investment
return for fiscal 2010/2011, namely 20.0%. See Section 2 Appendix E, “Investment Return Sensitivity Analysis”, for
increase in 2014/2015 rate projections under a variety of investment return scenarios for the Risk Pool’s portion of
your rate. Please disregard any projections that we may have provided to you in the past.
Fiscal Year Employer Contribution Rate Superfunded?
2012/2013 13.914% No
2013/2014 14.1% (projected) No
Member contributions (whether paid by the employer or the employee) are in addition to the above rates.
Attachment A
A
CalPERS
6-17
MISCELLANEOUS PLAN OF THE CITY OF RANCHO PALOS VERDES (EMPLOYER # 1020)
October 2011
Page 2
The estimate for 2013/2014 assumes that there are no amendments and no liability gains or losses (such as larger
than expected pay increases, more retirements than expected, etc.). This is a very important assumption
because these gains and losses do occur and can have a significant effect on your contribution rate.
Even for the largest plans, such gains and losses can impact the employer’s contribution rate by one or two percent
or even more in some less common instances. These gains and losses cannot be predicted in advance so the
projected employer contribution rate for 2013/2014 is just an estimate. Your actual rate for 2013/2014 will be
provided in next year’s report. If you have questions, please call (888) CalPERS (225-7377). In the interest of allowing us to give every public agency their result, we ask that, if at all possible, you wait until after October 31 to contact us with questions.
Sincerely,
ALAN MILLIGAN, MAAA, FCA, FSA, FCIA
Chief Actuary
6-18
Actuarial Valuation
as of June 30, 2010
The MISCELLANEOUS PLAN
of the
CITY OF RANCHO PALOS VERDES
(Employer # 1020)
Required Contributions
For Fiscal Year
July 1, 2012 - June 30, 2013
A
CalPERS
6-19
TABLE OF CONTENTS
SECTION 1 – PLAN SPECIFIC INFORMATION
SECTION 2 – RISK POOL ACTUARIAL VALUATION INFORMATION
FIN PROCESS CONTROL ID (CY): 369098 FIN PROCESS CONTROL ID (PY): 345990 REPORT ID: 67723
6-20
Section 1
CALIFORNIA PUBLIC EM PLOYEES’ RETIREMENT SYSTEM
Plan Specific Information for
The MISCELLANEOUS PLAN
of the CITY OF RANCHO PALOS
VERDES
(Employer # 1020)
(Rate Plan # 1107)
6-21
Table of Contents
ACTUARIAL CERTIFICATION 1
PURPOSE OF SECTION 1 3
REQUIRED EMPLOYER CONTRIBUTIONS 3
PROJECTED CONTRIBUTIONS 4
RATE VOLATILITY 4
EMPLOYER SIDE FUND 4
SUPERFUNDED STATUS 5
SUMMARY OF PARTICIPANT DATA 5
LIST OF CLASS 1 BENEFIT PROVISIONS 6
INFORMATION FOR COMPLIANCE WITH GASB STATEMENT NO. 27 6
SUMMARY OF MAJOR BENEFIT OPTIONS 7
6-22
SECTION 1 – PLAN SPECIFIC INFORMATION FOR THE MISCELLANEOUS PLAN OF THE CITY OF
RANCHO PALOS VERDES
CalPERS Actuarial Valuation – June 30, 2010 Page 1
Rate Plan belonging to Miscellaneous 2.5% at 55 Risk Pool
Actuarial Certification
Section 1 of this report is based on the member and financial data as of June 30, 2010 provided by your
agency and contained in our records, and the benefit provisions under your contract with CalPERS. Section
2 of this report is based on the member and financial data as of June 30, 2010 provided by employers
participating in the risk pool and contained in our records, and benefit provisions under the CalPERS
contracts for those agencies participating in the risk pool.
As set forth in Section 2 of this report, the Pool Actuary has certified that, in her opinion, the valuation of
the Risk Pool containing your MISCELLANEOUS PLAN has been performed in accordance with generally
accepted actuarial principles consistent with standards of practice prescribed by the Actuarial Standards
Board, and that the assumptions and methods are internally consistent and reasonable for the Risk Pool, as
prescribed by the CalPERS Board of Administration according to provisions set forth in the California Public
Employees’ Retirement Law.
Having relied upon the information set forth in Section 2 of this report and based on the census and benefit
provision information for your plan, it is my opinion as your Plan Actuary that the Side Fund as of June 30,
2010 and employer contribution rate as of July 1, 2012, have been properly and accurately determined in
accordance with the principles and standards stated above.
The undersigned is an actuary for CalPERS and a member of both the American Academy of Actuaries and
Society of Actuaries and meets the Qualification Standards of the American Academy of Actuaries to render
the actuarial opinion contained herein.
KUNG-PEI HWANG, ASA, MAAA
Senior Pension Actuary, CalPERS
Plan Actuary
1
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1
1
1
1
1
1
1
1
1
1
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1
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16-23
SECTION 1 – PLAN SPECIFIC INFORMATION FOR THE MISCELLANEOUS PLAN OF THE CITY OF
RANCHO PALOS VERDES
CalPERS Actuarial Valuation – June 30, 2010 Page
Rate Plan belonging to Miscellaneous 2.5% at 55 Risk Pool
3
Purpose of Section 1
Section 1 of this report was prepared by the Plan Actuary in order to:
Certify that the actuarially required employer contribution rate of the MISCELLANEOUS PLAN of the
CITY OF RANCHO PALOS VERDES for the fiscal year July 1, 2012 through June 30, 2013 is
13.914%;
Set forth the plan’s Employer Side Fund as of June 30, 2010;
Provide pension information as of June 30, 2010 to be used in financial reports subject to
Governmental Accounting Standards Board (GASB) Statement Number 27.
This section was prepared in order to provide actuarial information as of June 30, 2010 to the CalPERS
Board of Administration and other interested parties
The use of this report for any other purposes may be inappropriate. In particular, this report does not
contain information applicable to termination or alternative benefit costs. The employer should contact their
actuary before disseminating any portion of this report for any reason that is not explicitly described above.
Required Employer Contributions
Fiscal Year Fiscal Year
2011/2012 2012/2013
Employer Contribution Required (in Projected Dollars)
Risk Pool’s Net Employer Normal Cost $ 446,108 $ 457,529
Risk Pool’s Payment on Amortization Bases 206,495 235,903
Surcharge for Class 1 Benefits
a) FAC 1 30,918 31,631
Phase out of Normal Cost Difference 0 0
Amortization of Side Fund 0 0
Total Employer Contribution $ 683,521 $ 725,063
Annual Lump Sum Prepayment Option* $ 658,481 $ 698,501
Projected Payroll for the Contribution Fiscal Year $ 5,118,852 $ 5,211,033
Employer Contribution Required (Percentage of Payroll)
Risk Pool’s Net Employer Normal Cost 8.715% 8.780%
Risk Pool’s Payment on Amortization Bases 4.034% 4.527%
Surcharge for Class 1 Benefits
a) FAC 1 0.604% 0.607%
Phase out of Normal Cost Difference 0.000% 0.000%
Amortization of Side Fund 0.000% 0.000%
Total Employer Contribution 13.353% 13.914%
Appendix C of Section 2 of this report contains a list of Class 1 benefits and corresponding surcharges for
each benefit.
Risk pooling was implemented as of June 30, 2003. The normal cost difference was scheduled to be phased
out over a five year period. The phase out of normal cost difference began at 100% for the first year, and
was incrementally reduced by 20% of the original normal cost difference for each subsequent year.
*Payment must be received by CalPERS before the first payroll of the new fiscal year and after June 30.
6-24
SECTION 1 – PLAN SPECIFIC INFORMATION FOR THE MISCELLANEOUS PLAN OF THE CITY OF
RANCHO PALOS VERDES
CalPERS Actuarial Valuation – June 30, 2010 Page
Rate Plan belonging to Miscellaneous 2.5% at 55 Risk Pool
4
Projected Contributions
The rate shown below is an estimate for the employer contribution for Fiscal Year 2013/2014. The
estimated rate is based on a projection of the most recent information we have available, including an
estimate of the investment return for fiscal year 2010/2011, namely 20.0%:
Projected Employer Contribution Rate: 14.1%
The estimate also assumes that there are no liability gains or losses among the plans in your risk pool, that
your plan has no new amendments in the next year, and that your plan’s and your risk pool’s payrolls both
increase exactly 3.25% in the 2010/2011 fiscal year. Therefore, the projected employer contribution rate
for 2013/2014 is just an estimate. Your actual rate for 2013/2014 will be provided in next year’s report.
Rate Volatility
Your plan’s employer contribution rate will inevitably fluctuate, for many reasons. However, the biggest
fluctuations are generally due to changes in the side fund rate resulting from unexpected changes in payroll.
The following figure shows how much your 2013/2014 rate would change for each 1% deviation between
our 3.25% payroll growth assumption and your actual 2010/2011 payroll growth.
POTENTIAL 2013/2014 RATE IMPACT
FROM 2010/2011 PAYROLL DEVIATION
% Rate Change per 1% Deviation from Assumed 3.25% Payroll Growth: 0.000%
Examples: To see how your employer contribution rate might be affected by unexpected payroll change,
suppose the following:
The % Rate Change per 1% Deviation figure given above is -0.400%
Your plan’s payroll increased 10% in 2010/2011 (6.75% more than our 3.25% assumption).
Then your 2013/2014 rate would decrease -0.400% x (10 – 3.25) = -2.70% from that cause alone.
Or conversely, using the same % Rate Change per 1% Deviation figure given above, suppose your plan’s
payroll remained the same in 2010/2011 (3.25% less than our 3.25% assumption).
Then your 2013/2014 rate would increase -0.400% x (0 – 3.25) = 1.3% from that cause alone.
Note that if your plan had a negative side fund, an unexpected payroll increase would spread the payback of
the negative side fund over a bigger payroll, which would decrease your plan’s side fu nd percentage rate
and the total employer contribution rate. On the other hand, if your plan had a positive side fund, an
unexpected payroll increase would spread the payback of the positive side fund over a larger payroll, which
would increase your plan’s side fund percentage rate and the total employer contribution rate. In either
case, the Side Fund dollar amount would not change.
Employer Side Fund
At the time of joining a risk pool, a side fund was created to account for the difference between the funded
status of the pool and the funded status of your plan. The side fund for your plan as of the June 30, 2010
valuation is shown in the following table.
Your side fund will be credited, on an annual basis, with the actuarial investment return assumption. This
assumption is currently 7.75%. A positive side fund will cause your required employer contribution rate to
6-25
SECTION 1 – PLAN SPECIFIC INFORMATION FOR THE MISCELLANEOUS PLAN OF THE CITY OF
RANCHO PALOS VERDES
CalPERS Actuarial Valuation – June 30, 2010 Page
Rate Plan belonging to Miscellaneous 2.5% at 55 Risk Pool
5
be reduced by the Amortization of Side Fund shown above in Required Employer Contributions. A negative
side fund will cause your required employer contribution rate to be increased by the Amortization of Side
Fund. In the absence of subsequent contract amendments or funding changes, the side fund will disappear
at the end of the amortization period shown below.
Employer Side Fund Reconciliation
June 30, 2009 June 30, 2010
Side Fund as of valuation date* $ (1,767,892) $ 0
Adjustments 1,617,690 0
Side Fund Payment 217,429 0
Side Fund one year later $ 0 $ 0
Adjustments 0 0
Side Fund Payment 0 0
Side Fund two years later $ 0 $ 0
Amortization Period 14 13
Side Fund Payment during last year $ 0 $ 0
* If your agency employed vouchers in fiscal year 2009/2010 to pay employee contributions, the June 30,
2010 Side Fund amount has been adjusted by a like amount without any further adjustment to the Side
Fund’s amortization period. Similarly, the Side Fund has been adjusted for the increase in liability from any
recently adopted Class 1 or Class 2 contract amendments. Also, the Side Fund may be adjusted or
eliminated due to recent lump sum payments. Contract amendments and lump sum payments may result in
an adjustment to the Side Fund amortization period.
Superfunded Status
June 30, 2009 June 30, 2010
Is the plan Superfunded? No No
[Yes if Assets exceed PVB, No otherwise]
Summary of Participant Data
The table below shows a summary of your plan’s member data upon which this valuation is based:
June 30, 2009 June 30, 2010
Projected Payroll for Contribution Purposes $ 5,118,852 $ 5,211,033
Number of Members
Active 81 85
Transferred 53 53
Separated 94 95
Retired 33 34
6-26
SECTION 1 – PLAN SPECIFIC INFORMATION FOR THE MISCELLANEOUS PLAN OF THE CITY OF
RANCHO PALOS VERDES
CalPERS Actuarial Valuation – June 30, 2010 Page
Rate Plan belonging to Miscellaneous 2.5% at 55 Risk Pool
6
List of Class 1 Benefit Provisions
One Year Final Compensation
Information for Compliance with GASB Statement No. 27
for Cost-Sharing Multiple-Employer Defined Benefit Plan
Your plan is part of the Miscellaneous 2.5% at 55 Risk Pool, a cost-sharing multiple-employer defined benefit
plan. Under GASB 27, an employer should recognize annual pension expenditures/expense equal to its
contractually required contributions to the plan. Pension liabilities and assets result from the difference
between contributions required and contributions made. The contractually required contribution for the
period July 1, 2012 to June 30, 2013 has been determined by an actuarial valuation of the plan as of June
30, 2010. Your contribution rate for the indicated period is 13.914% of payroll. In order to calculate the
dollar value of the contractually required contributions for inclusion in financial statements prepared as of
June 30, 2013, this contribution rate, as modified by any subsequent financing changes or contract
amendments for the year, would be multiplied by the payroll of covered employees that was actually paid
during the period July 1, 2012 to June 30, 2013. However, if this contribution is fully prepaid in a lump sum,
then the dollar value of contractually required contributions is equal to the lump sum prepayment. The
employer and the employer’s auditor are responsible for determining the contractually required contributions.
Further, the required contributions in dollars and the percentage of that amount contributed for the current
year and each of the two preceding years is to be disclosed under GASB 27.
A summary of principal assumptions and methods used to determine the contractually required
contributions is shown below for the cost-sharing multiple-employer defined benefit plan.
Valuation Date June 30, 2010
Actuarial Cost Method Entry Age Normal Cost Method
Amortization Method Level Percent of Payroll
Average Remaining Period 19 Years as of the Valuation Date
Asset Valuation Method 15 Year Smoothed Market
Actuarial Assumptions
Investment Rate of Return 7.75% (net of administrative expenses)
Projected Salary Increases 3.55% to 14.45% depending on Age, Service, and type of employment
Inflation 3.00%
Payroll Growth 3.25%
Individual Salary Growth A merit scale varying by duration of employment coupled with an
assumed annual inflation growth of 3.00% and an annual production
growth of 0.25%.
Complete information on assumptions and methods is provided in Appendix A of Section 2 of the report.
Appendix B of Section 2 of the report contains a description of benefits included in the Risk Pool Actuarial
Valuation.
A Schedule of Funding for the Risk Pool’s actuarial value of assets, accrued liability, their relationship, and
the relationship of the unfunded liability (UL) to payroll for the risk pool(s) to which your plan belongs can
be found in Section 2 of the report.
6-27
SECTION 1 – PLAN SPECIFIC INFORMATION FOR THE MISCELLANEOUS PLAN OF THE CITY OF RANCHO PALOS VERDES
Summary of Major Benefit Options
Shown below is a summary of the major optional benefits for which your agency has contracted. A description of principal standard and optional plan provisions
is in Appendix B within Section 2 of this report.
Coverage Group
{sum_of_major_ben_1} 70002 70001*
Benefit Provision
Benefit Formula 2.5% @ 55 2.0% @ 55
Social Security Coverage no no
Full/Modified full full
Final Average Compensation Period 12 mos. 12 mos.
Sick Leave Credit yes yes
Non-Industrial Disability standard standard
Industrial Disability no no
Pre-Retirement Death Benefits
Optional Settlement 2W yes yes
1959 Survivor Benefit Level level 4 level 4
Special no no
Alternate (firefighters) no no
Post-Retirement Death Benefits
Lump Sum $500 $500
Survivor Allowance (PRSA) no no
COLA 2% 2%
Employee Contributions
Contractual employer paid no no
Contractual Employee Cost sharing 0% 0%
*Inactive Coverage Group
CalPERS Actuarial Valuation – June 30, 2010 Page 7
Rate Plan belonging to Miscellaneous 2.5% at 55 Risk Pool
6-28
Section 2
CALIFORNIA PUBLIC EM PLOYEES’ RETIREMENT SYSTEM
Miscellaneous 2.5% at 55 Risk Pool
as of June 30, 2010
6-29
TABLE OF CONTENTS
ACTUARIAL CERTIFICATION 1
HIGHLIGHTS AND EXECUTIVE SUMMARY
Purpose of Section 2 5
Risk Pool’s Required Employer Contribution 5
Risk Pool’s Required Base Employer Rate 5
Funded Status of the Risk Pool 6
Cost and Volatility 6
Changes Since the Prior Valuation 7
Subsequent Events 7
SUMMARY OF LIABILITIES AND RATES
Development of Pool’s Accrued and Unfunded Liabilities 11
(Gain)/Loss Analysis 06/30/09 - 06/30/10 12
Schedule of Amortization Bases for the Risk Pool 13
Development of Risk Pool’s Annual Required Base Contribution 14
Pool’s Employer Contribution Rate History 15
Funding History 15
SUMMARY OF ASSETS
Reconciliation of the Market Value of Assets 19
Development of the Actuarial Value of Assets 19
Asset Allocation 20
CalPERS History of Investment Returns 21
SUMMARY OF PARTICIPANT DATA
Source of the Participant Data 23
Data Validation Tests and Adjustments 23
Summary of Valuation Data 24
Active Members 25
Transferred and Terminated Members 26
Retired Members and Beneficiaries 27
APPENDIX A
Statement of Actuarial Data, Methods and Assumptions
APPENDIX B
Summary of Principal Plan Provisions
APPENDIX C
Classification of Optional Benefits
Example of Individual Agency’s Rate Calculation
Distribution of Class 1 Benefits
APPENDIX D
List of Participating Employers
APPENDIX E
Investment Return Sensitivity Analysis
APPENDIX F
Glossary of Actuarial Terms
Risk Pool Valuation Job ID: 391
6-30
ACTUARIAL CERTIFICATION
CalPERS Actuarial Valuation – June 30, 2010 1
Miscellaneous 2.5% at 55 Risk Pool
Actuarial Certification
To the best of my knowledge, Section 2 of this report is complete and accurate and contains sufficient
information to disclose, fully and fairly, the funded condition of the Miscellaneous 2.5% at 55 Risk Pool. This
valuation is based on the member and financial data as of June 30, 2010 provided by the various CalPERS
databases and the benefits under this Risk Pool with CalPERS as of the date this report was produced. It is
my opinion that the valuation has been performed in accordance with generally accepted actuarial
principles, in accordance with standards of practice prescribed by the Actuarial Standards Board, and that
the assumptions and methods are internally consistent and reasonable for this risk pool, as prescribed by
the CalPERS Board of Administration according to provisions set forth in the California Public Employees’
Retirement Law.
The undersigned is an actuary for CalPERS. She is a member of the American Academy of Actuaries and
the Society of Actuaries and meets the Qualification Standards of the American Academy of Actuaries to
render the actuarial opinion contained herein.
SHELLY CHU, ASA, MAAA
Associate Pension Actuary, CalPERS
Pool Actuary
6-31
HIGHLIGHTS AND EXECUTIVE SUMMARY
PURPOSE OF SECTION 2
RISK POOL’S REQUIRED EMPLOYER CONTRIBUTION
RISK POOL’S REQUIRED BASE EMPLOYER RATE
FUNDED STATUS OF THE RISK POOL
COST AND VOLATILITY
CHANGES SINCE THE PRIOR VALUATION
SUBSEQUENT EVENTS
6-32
HIGHLIGHTS AND EXECUTIVE SUMMARY
CalPERS Actuarial Valuation – June 30, 2010
Miscellaneous 2.5% at 55 Risk Pool
5
Purpose of Section 2
This Actuarial Valuation for the Miscellaneous 2.5% at 55 Risk Pool of the California Public Employees’ Retirement
System (CalPERS) was performed by CalPERS' staff actuaries using data as of June 30, 2010 in order to:
set forth the actuarial assets and accrued liabilities of this risk pool as of June 30, 2010
establish the actuarially required contribution rate of the pool for the fiscal year July 1, 2012 through
June 30, 2013
provide actuarial information as of June 30, 2010 to the CalPERS Board and other interested parties
The use of this report for any other purposes may be inappropriate. In particular, this report does not contain
information applicable to termination or alternative benefit costs. The employer should contact their actuary
before disseminating any portion of this report for any reason that is not explicitly described above.
Risk Pool's Required Employer Contribution
(figures net of employee contributions)
Fiscal Year Fiscal Year
2011/2012 2012/2013
Contribution in Projected Dollars
1. Pool’s Gross Employer Normal Cost $ 37,093,911 $ 37,114,812
2. Payment on Pool’s Amortization Base 15,769,799 17,571,554
3. Payment on Employer Side Funds 14,307,924 13,464,620
4. Total Required Employer Contribution* $ 67,170,901 $ 68,151,210
* Total may not add up due to rounding
Contribution as a % of Projected Pay
5. Pool’s Gross Employer Normal Cost 9.489% 9.562%
6. Payment on Pool’s Amortization Base 4.034% 4.527%
7. Payment on Employer Side Funds 3.660% 3.469%
8. Total Required Employer Contribution 17.183% 17.558%
These rates are the total required employer contributions by the pool for fiscal years 2011/2012 and 2012/2013.
The Pool’s Gross Employer Normal Cost includes the Class 1 surcharges for all employers that contract for the
Class 1 type benefits. The payment on the pool’s amortization base is the payment on the ongoing cumulative
gains and losses experienced by the pool since its June 30, 2003 inception. The payment on employer side funds
is the combination of all expected individual amortization payments on every side fund in the pool.
Risk Pool's Required Base Employer Rate
Fiscal Year Fiscal Year
2011/2012 2012/2013
1. Pool’s Gross Employer Normal Cost 9.489% 9.562%
Less: Surcharges for Class 1 Benefits 0.774% 0.782%
2. Pool’s Net Employer Normal Cost 8.715% 8.780%
3. Payment on Pool's Amortization Base 4.034% 4.527%
4. Pool’s Base Employer Rate 12.749% 13.307%
6-33
HIGHLIGHTS AND EXECUTIVE SUMMARY
CalPERS Actuarial Valuation – June 30, 2010
Miscellaneous 2.5% at 55 Risk Pool
6
The base employer contribution rate is the rate that each plan within the pool pays before any adjustments are
made. It represents the pool funding for basic benefits (no Class 1 surcharges) for the fiscal year shown. To
arrive at a plan's total contribution rate, several components must be added to this base rate. These components
are Class 1 benefit surcharges, normal cost phase-out and any side-fund payment. More information about those
additional components can be found in Section 1 of this report.
Funded Status of the Risk Pool
June 30, 2009 June 30, 2010
1. Entry Age Normal Accrued Liability $ 1,834,424,640 $ 1,972,910,641
2. Market Value of Assets Including Side Funds (MVA) $ 1,088,733,372 $ 1,261,453,576
Including Receivables
3. Funded Ratio (MVA) [(2) / (1)] 59.4% 63.9%
Cost and Volatility
Actuarial Cost Estimates in General
What will this pension plan cost? Unfortunately, there is no simple answer. There are two major reasons for the
complexity of the answer:
First, all actuarial calculations, including those in this report, are based on a number of assumptions about the
future. These assumptions can be divided into two categories.
Demographic assumptions include the percentage of employees that will terminate, die, become
disabled, and retire in each future year.
Economic assumptions include future salary increases for each active employee, and the assumption
with the greatest impact, future asset returns at CalPERS for each year into the future until the last
dollar is paid to current members of your plan.
While CalPERS has set these assumptions as our best estimate of the real future of your plan, it must be
understood that these assumptions are very long term predictors and will surely not be realized in any one year.
For example, while the asset earnings at CalPERS have averaged more than the assumed return of 7.75% for the
past twenty year period ending June 30, 2011, returns for each fiscal year ranged from -24% to +20.7%
Second, the very nature of actuarial funding produces the answer to the question of plan or pool cost as the sum
of two separate pieces:
The Normal Cost (i.e., the future annual premiums in the absence of surplus or unfunded liability)
expressed as a percentage of total active payroll, and
The Past Service Cost or Accrued Liability (i.e., representing the current value of the benefit for all
credited past service of current members) which is expressed as a lump sum dollar amount.
The cost is the sum of a percent of future pay and a lump sum dollar amount (the sum of an apple and an orange
if you will). To communicate the total cost, either the Normal Cost (i.e., future percent of payroll) must be
converted to a lump sum dollar amount (in which case the total cost is the present value of benefits), or the Past
Service Cost (i.e., the lump sum) must be converted to a percent of payroll (in which case the total cost is
expressed as the employer’s rate, part of which is permanent and part temporary). Converting the Past Service
Cost lump sum to a percent of payroll requires a specific amortization period, and the plan or pool rate will vary
depending on the amortization period chosen.
Rate Volatility
As is stated above, the actuarial calculations supplied in this communication are based on a number of
assumptions about very long term demographic and economic behavior. Unless these assumptions
(terminations, deaths, disabilities, retirements, salary growth, and investment return) are exactly realized each
year, there will be differences on a year to year basis. The year-to-year differences between actual experience
and the assumptions are called actuarial gains and losses and serve to lower or raise the plan or pool’s rates
from one year to the next. Therefore, the rates will inevitably fluctuate, especially due to the ups and downs of
6-34
HIGHLIGHTS AND EXECUTIVE SUMMARY
CalPERS Actuarial Valuation – June 30, 2010
Miscellaneous 2.5% at 55 Risk Pool
7
investment returns. Pools that have higher asset to payroll ratios produce more volatile employer rates. In the
table below we have shown the pool’s volatility index, based on the retirement formula, a measure of the pool’s
potential future rate volatility. It should be noted that this ratio increases over time but generally tends to
stabilize as the plan or pool matures.
A plan that has a volatility index that is three times the index of a second plan is expected to eventually have
three times the volatility in rates as compared to the second plan.
As of June 30, 2010
Market Value of Assets without Receivables $ 1,257,596,707
Payroll 352,637,380
Volatility Index 3.6
Changes since the Prior Valuation
Actuarial Assumptions
There were no changes made to the actuarial assumptions since the prior year’s actuarial valuation. The only
exception would be changes necessary to reflect a benefit amendment.
Actuarial Methods
A method change was adopted by the CalPERS Board in June 2009. We are in the second year of a 3-year
temporary change to the asset smoothing method and the amortization of gain and losses in order to phase in
the impact of the -24% investment loss experienced by CalPERS in fiscal year 2008-2009. The following changes
were adopted:
Increase the corridor limits for the actuarial value of assets from 80%-120% of market value to
60%-140% of market value on June 30, 2009
Reduce the corridor limits for the actuarial value of assets to 70%-130% of market value on June
30, 2010
Return to the 80%-120% of market value corridor limits for the actuarial value of assets on June
30, 2011 and thereafter
Isolate and amortize all gains and losses during fiscal year 2008-2009, 2009-2010 and 2010-2011
over fixed and declining 30 year periods (as opposed to the current rolling 30 year amortization)
A complete description of all methods is in Appendix A. The detailed calculation of the actuarial value of assets is
shown in the “Development of the Actuarial Value of Assets.”
Benefits
The standard actuarial practice at CalPERS is to recognize mandated legislative benefit changes in the first
annual valuation whose valuation date follows the effective date of the legislation. Voluntary benefit changes by
employers within the risk pool are generally included in the first valuation that is prepared after the amendment
becomes effective even if the valuation date is prior to the effective date of the amendment.
The valuation generally reflects plan changes by amendments effective prior to July 1, 2011. Please refer to
Appendix B for a summary of the plan provisions used in this valuation report. The provisions in Appendix B do
not indicate the class of benefits voluntarily contracted for by individual employers within the risk pool. Refer to
Section 1 of the valuation report for a list of your specific contracted benefits. The increase in the pool’s
unfunded liabilities due to Class 1 or 2 amendments by individual employers within the pool is embedded in the
Liability (Gain) / Loss shown in the (Gain) / Loss section of this report. This amount, however, is offset by
additional contributions through a surcharge for employers who voluntarily contract for those benefits.
Subsequent Events
There were no significant subsequent events to report in this valuation.
6-35
SUMMARY OF LIABILITIES AND RATES
DEVELOPMENT OF POOL’S ACCRUED AND UNFUNDED LIABILITIES
(GAIN)/LOSS ANALYSIS 06/30/09 - 06/30/10
SCHEDULE OF AMORTIZATION BASES FOR THE RISK POOL
DEVELOPMENT OF RISK POOL’S ANNUAL REQUIRED BASE CONTRIBUTION
POOL’S EMPLOYER CONTRIBUTION RATE HISTORY
FUNDING HISTORY
6-36
SUMMARY OF LIABILITY AND RATES
CalPERS Actuarial Valuation – June 30, 2010
Miscellaneous 2.5% at 55 Risk Pool
11
Development of Pool’s Accrued and Unfunded Liabilities
1. Present Value of Projected Benefits June 30, 2009 June 30, 2010
a) Active Members $ 1,326,239,932 $ 1,339,987,980
b) Transferred Members 177,385,802 177,631,215
c) Separated Members 49,024,072 51,059,941
d) Members and Beneficiaries Receiving Payments 747,017,292 864,471,903
e) Total $ 2,299,667,098 $ 2,433,151,039
2. Present Value of Future Employer Normal Costs $ 244,377,139 $ 242,963,283
3. Present Value of Future Employee Contributions $ 220,865,319 $ 217,277,115
4. Entry Age Normal Accrued Liability
a) Active Members [(1a) - (2) - (3)] $ 860,997,474 $ 879,747,582
b) Transferred Members (1b) 177,385,802 177,631,215
c) Separated Members (1c) 49,024,072 51,059,941
d) Members and Beneficiaries Receiving Payments (1d) 747,017,292 864,471,903
e) Total $ 1,834,424,640 $ 1,972,910,641
5. Actuarial Value of Assets (AVA) Including Receivables $ 1,493,430,831 $ 1,603,482,152
6. Unfunded Accrued Liability [(4e) - (5)] 340,993,809 369,428,489
7. Side Funds (AVA) $ (133,165,243) $ (131,287,074)
8. Actuarial Value of Assets excluding Side Funds [(5) - (7)] 1,626,596,074 1,734,769,226
Including Receivables
9. Unfunded Liability excluding Side Funds [(4e) - (8)] 207,828,566 238,141,415
10. Market Value of Assets (MVA) Including Receivables $ 1,088,733,372 $ 1,261,453,576
11. Funded Ratio (MVA) [(10) / (4e)] 59.4% 63.9%
6-37
SUMMARY OF LIABILITY AND RATES
CalPERS Actuarial Valuation – June 30, 2010
Miscellaneous 2.5% at 55 Risk Pool
12
(Gain)/Loss Analysis 06/30/09 - 06/30/10
We introduced the concepts of Actuarial Gains and Losses in the Cost and Volatility Section of this report. To
reiterate, when we calculate the cost requirements of your plan, we use assumptions about future events that
affect the amount and timing of benefits to be paid and assets to be accumulated. Each year actual experience is
contrasted against the expected experience based on the actuarial assumptions. The differences are reflected
below as your pool’s actuarial gains or losses.
1. Total (Gain)/Loss
a) Unfunded Liability/(Surplus) as of June 30, 2009 $ 207,828,566
b) Expected payment on the unfunded liability 1,839,203
c) Interest accumulation [.0775 X (1a) - ((1.0775)^.5 - 1) X (1b)] 16,036,775
d) Expected Unfunded Liability before other changes [(1a) - (1b) + (1c)] 222,026,138
e) Change due to assumption changes 0
f) Expected Unfunded Liability after changes[(1d) + (1e)] 222,026,138
g) Actual Unfunded Liability/(Surplus) as of June 30, 2010 238,141,415
h) Total (Gain)/Loss [(1g) - (1f)] $ 16,115,278
2. Contribution (Gain)/Loss
a) Expected contribution $ 82,534,025
b) Expected interest on contributions 3,138,519
c) Total expected contributions with interest [(2a) + (2b)] 85,672,544
d) Actual contributions 84,145,782
e) Expected interest on actual contributions 3,199,810
f) Total actual contributions with interest [(2d) + (2e)] 87,345,592
g) Contribution (Gain)/Loss [(2c) - (2f)] $ (1,673,048)
3. Asset (Gain)/Loss
a) Actuarial Value of Assets as of 06/30/09 Including Receivables $ 1,493,430,831
b) Receivables as of 06/30/09 4,276,919
c) Actuarial Value of Assets as of 06/30/09 1,489,153,912
d) Contributions received 84,145,782
e) Benefits, refunds and lump sums paid (70,732,389)
f) Transfers and miscellaneous adjustments (114,297)
g) Expected interest 115,915,153
h) Transfers into the pool (AVA Basis) 186,423,972
i) Transfers out of the pool (AVA Basis) (180,816,693)
j) Expected Assets as of 06/30/10 [Sum (3c) through (3i)] 1,623,975,440
k) Receivables as of 06/30/10 3,856,869
l) Expected Assets Including Receivables 1,627,832,309
m) Actual Actuarial Value of Assets as of 06/30/10 Including Receivables 1,603,482,152
n) Asset (Gain)/Loss [(3l) – (3m)] $ 24,350,157
4. Liability (Gain)/Loss
a) Total (Gain)/Loss (1h) $ 16,115,278
b) Contribution (Gain)/Loss (2g) (1,673,048)
c) Asset (Gain)/Loss excluding side fund (3n) 24,350,157
d) Liability (Gain)/Loss [(4a) - (4b) - (4c)]* $ (6,561,831)
* Includes (Gain)/Loss on plans transferring into the pool.
6-38
SUMMARY OF LIABILITY AND RATES
CalPERS Actuarial Valuation – June 30, 2010
Miscellaneous 2.5% at 55 Risk Pool
13
Schedule of Amortization Bases for the Risk Pool
The schedule below shows the development of the payment on the Pool’s amortization bases used to determine the Total Required Employer Contributions to the
Pool. Each row of the schedule gives a brief description of a base (or portion of the Unfunded Actuarial Liability), the balance of the base on the valuation date,
and the number of years remaining in the amortization period. In addition, we show the expected payments for the two years immediately following the valuation
date, the balances on the dates a year and two years after the valuation date, and the scheduled payment for fiscal year 2012-2013. Please refer to Appendix A
for an explanation of how amortization periods are determined.
Schedule of Amortization
Reason for Base
Amortization
Period
Balance on
June 30, 2010
Expected
Payment 10-11
Balance
June 30, 2011
Expected
Payment 11-12
Balance
June 30, 2012
Scheduled
Payment for
2012-2013
Payment as
a percentage
of payroll
2004 FRESH START 24 $4,896,892 $316,767 $4,947,588 $327,062 $4,991,527 $337,692 0.087%
2005 (GAIN)/LOSS 30 $73,792,611 $4,431,318 $74,911,710 $4,498,520 $76,047,782 $4,566,743 1.177%
2005 PAYMENT (GAIN)/LOSS 30 $(5,530,540) $(5,001,054) $(767,928) $778,131 $(1,635,163) $(98,194) (0.027%)
2009 ASSUMPTION CHANGE 19 $94,276,588 $(897,306) $102,514,451 $7,743,035 $102,421,842 $7,994,684 2.060%
2009 SPECIAL (GAIN)/LOSS 29 $54,590,587 $0 $58,821,357 $3,532,280 $59,713,410 $3,647,079 0.940%
2010 SPECIAL (GAIN)/LOSS 30 $16,115,277 $0 $17,364,211 $0 $18,709,937 $1,123,550 0.289%
Total $238,141,415 $(1,150,275) $257,791,389 $16,879,028 $260,249,335 $17,571,554 4.527%
The special (gain)/loss bases are special bases established for the gain/loss that is recognized in the 2009, 2010, and 2011 annual valuations. Unlike the gain/loss
occurring in previous and subsequent years, the gain/loss recognized in the 2009, 2010, and 2011 annual valuations will be amortized over fixed and declining 30 year
periods so that these annual gain/losses will be fully paid off in 30 years.
6-39
SUMMARY OF LIABILITY AND RATES
CalPERS Actuarial Valuation – June 30, 2010
Miscellaneous 2.5% at 55 Risk Pool
14
Development of Risk Pool’s Annual Required Base
Contribution
Fiscal Year Fiscal Year
2011/2012 2012/2013
1. Contribution in Projected Dollars
a) Total Normal Cost $ 68,265,463 $ 67,937,728
b) Employee Contribution 31,171,551 30,822,916
c) Pool’s Gross Employer Normal Cost [(1a) - (1b)] 37,093,911 37,114,812
d) Total Surcharges for Class 1 Benefits 3,025,681 3,035,326
e) Net Employer Normal Cost [(1c) - (1d)] 34,068,230 34,079,487
f) Payment on Pool’s Amortization Base $ 15,769,799 $ 17,571,554
g) Total Required Employer Contributions [(1e) + (1f)] 49,838,029 51,651,041
2. Annual Covered Payroll as of Valuation Date $ 355,150,151 $ 352,637,380
3. Projected Payroll for Contribution Fiscal Year $ 390,914,864 $ 388,149,050
4. Contribution as a % of Projected Pay
a) Total Normal Cost [(1a) / (3)] 17.463% 17.503%
b) Employee Contribution [(1b) / (3)] 7.974% 7.941%
c) Pool’s Gross Employer Normal Cost [(1c) / (3)] 9.489% 9.562%
d) Total Surcharges for Class 1 Benefits [(1d) / (3)] 0.774% 0.782%
e) Net Employer Normal Cost [(1e) / (3)] 8.715% 8.780%
f) Payment on Pool’s Amortization Base [(1f) / (3)] 4.034% 4.527%
g) Total Required Employer Contributions [(1g) / (3)] 12.749% 13.307%
6-40
SUMMARY OF LIABILITY AND RATES
CalPERS Actuarial Valuation – June 30, 2010
Miscellaneous 2.5% at 55 Risk Pool
15
Pool’s Employer Contribution Rate History
Valuation
Date
Net
Employer
Normal Cost
Total
Surcharges
for Class 1
Benefits
Gross
Employer
Normal
Cost
Payment on
Pool’s
Amortization
Bases
Total
Payment On
Employer
Side Funds
Total
Employer
Contribution
06/30/2006 8.377% 0.863% 9.240% 0.656% 4.503% 14.399%
06/30/2007 8.403% 0.775% 9.178% 0.762% 3.817% 13.757%
06/30/2008 8.478% 0.756% 9.234% 1.202% 3.690% 14.126%
06/30/2009 8.715% 0.774% 9.489% 4.034% 3.660% 17.183%
06/30/2010 8.780% 0.782% 9.562% 4.527% 3.469% 17.558%
Funding History
Valuation
Date
Accrued
Liabilities
(AL)
Market Value
of Assets
(MVA)
Funded
Ratio
(MVA/AL)
06/30/2006 $912,988,585 $831,688,706 91.1%
06/30/2007 $1,315,454,361 $1,322,660,245 100.6%
06/30/2008 $1,537,909,933 $1,353,157,484 88.0%
06/30/2009 $1,834,424,640 $1,088,733,372 59.4%
06/30/2010 $1,972,910,641 $1,261,453,576 63.9%
Valuation
Date
Accrued
Liabilities
(AL)
Actuarial
Value of
Assets (AVA)
Unfunded
Liabilities
(UL)
Funded
Ratio
(AVA/AL)
Annual
Covered
Payroll
UL As a %
of Payroll
06/30/2006 $912,988,585 $787,758,909 $125,229,676 86.3% $200,320,145 62.5%
06/30/2007 $1,315,454,361 $1,149,247,298 $166,207,063 87.4% $289,090,187 57.5%
06/30/2008 $1,537,909,933 $1,337,707,835 $200,202,098 87.0% $333,307,600 60.1%
06/30/2009 $1,834,424,640 $1,493,430,831 $340,993,809 81.4% $355,150,151 96.0%
06/30/2010 $1,972,910,641 $1,603,482,152 $369,428,489 81.3% $352,637,380 104.8%
Information shown here is for compliance with GASB No. 27 for a cost-sharing multiple-employer defined benefit
plan.
6-41
SUMMARY OF ASSETS
RECONCILIATION OF THE MARKET VALUE OF ASSETS
DEVELOPMENT OF THE ACTUARIAL VALUE OF ASSETS
ASSET ALLOCATION
CALPERS HISTORY OF INVESTMENT RETURNS
6-42
SUMMARY OF ASSETS
CalPERS Actuarial Valuation – June 30, 2010
Miscellaneous 2.5% at 55 Risk Pool
19
Reconciliation of the Market Value of Assets
1. Market Value of Assets as of June 30, 2009 Including Receivables $ 1,088,733,372
2. Receivables for Service Buybacks as of June 30, 2009 4,276,919
3. Market Value of Assets as of June 30, 2009 [1 - 2] 1,084,456,453
4. Employer Contributions 50,270,542
5. Employee Contributions 33,875,240
6. Benefit Payments to Retirees and Beneficiaries (68,445,167)
7. Refunds (1,759,508)
8. Lump Sum Payments (527,714)
9. Transfers and Miscellaneous Adjustments (114,297)
10. Investment Return 155,432,816
11. Market Value of Assets as of June 30, 2010 (w/o Pool Transfers) $ 1,253,188,365
12. Transfers into and out of the Risk Pool 4,408,342
13. Market Value of Assets as of June 30, 2010 $ 1,257,596,707
14. Receivables for Service Buybacks as of June 30, 2010 3,856,869
15. Market Value of Assets as of June 30, 2010 Including Receivables [13 + 14] 1,261,453,576
Development of the Actuarial Value of Assets
1. Actuarial Value of Assets as of June 30, 2009 Used for Rate Setting Purposes 1,493,430,831
2. Receivables for Service Buyback as of June 30, 2009 4,276,919
3. Actuarial Value of Assets as of June 30, 2009 [1 - 2] 1,489,153,912
4. Employer Contributions 50,270,542
5. Employee Contributions 33,875,240
6. Benefit Payments to Retirees and Beneficiaries (68,445,167)
7. Refunds (1,759,508)
8. Lump Sum Payments (527,714)
9. Transfers and Miscellaneous Adjustments (114,297)
10. Expected Investment Income at 7.75% 115,915,153
11. Expected Actuarial Value of Assets (w/o Pool Transfers) $ 1,618,368,161
12. Market Value of Assets June 30, 2010 (w/o Pool Transfers) 1,253,188,365
13. Preliminary Actuarial Value of Assets (w/o Pool Transfers) [(11) + ((12) - (11)) / 15] 1,594,022,841
14. Preliminary Actuarial Value to Market Value Ratio 127.20%
15. Final Actuarial Value to Market Value Ratio (minimum 70%, maximum 130%) 127.20%
16. Market Value of Assets June 30, 2010 1,257,596,707
17. Actuarial Value of Assets as of June 30, 2010 1,599,625,283
18. Receivables for Service Buybacks as of June 30, 2010 3,856,869
19. Actuarial Value of Assets as of June 30, 2010 Used for Rate Setting Purposes [17 + 18] 1,603,482,152
6-43
SUMMARY OF ASSETS
CalPERS Actuarial Valuation – June 30, 2010
Miscellaneous 2.5% at 55 Risk Pool
20
Asset Allocation
CalPERS follows a strategic asset allocation policy that identifies the percentage of funds to be invested in
each asset class. The current target allocation was adopted by the Board in December 2010
The asset allocation and market value of assets shown below reflect the values of the Public Employees
Retirement Fund (PERF) in its entirely as of June 30, 2010. The assets for Miscellaneous 2.5% at 55 Risk
Pool are part of the Public Employees Retirement Fund (PERF) and are invested accordingly.
(A)
Asset Class
(B)
Market Value
($ Billion)
(C)
Current
Allocation
(D)
Current
Target
1) Short-term Investments 9.3 4.6% 4.0%
2) Total Global Fixed Income 53.4 26.2% 16.0%
3) Total Equities 91.9 45.1% 49.0%
4) Inflation Linked (ILAC) 5.0 2.5% 4.0%
5) Total Real Estate 15.2 7.5% 13.0%
6) Alternative Investments 28.7 14.1% 14.0%
Total Fund 203.51 100.0% 100.0%
1 Differences between investment values above and the values on the Summary of Investments on
page 23 of the Comprehensive Annual Financial Report (Year Ended June 30, 2010) are due to
differences in reporting methods. The Summary of Investments includes Net Investment
Receivables/Payables.
26.2% Fixed
Income
45.1% Total
Equites
14.1%
Alternative
Investments
7.5% Real
Estate
2.5% ILAC
4.6% Short-term
Investments
6-44
SUMMARY OF ASSETS
CalPERS Actuarial Valuation – June 30, 2010
Miscellaneous 2.5% at 55 Risk Pool
21
CalPERS 20-Year History of Investment Returns
The following is a chart with historical annual returns of the Public Employees Retirement Fund for each
fiscal year ending on June 30. Beginning with June 30, 2002 the figures are reported as gross of fees.
25.0%N ~Q ~...~~
>#.U;:~...
20.0%~~in~'"~..>#.'">#.~
~U;:>#.~t:~
,.
N N
15.0%~r-~~w 00 >#.>#.>#.Q >#.in >#.
>#.
10.0%~I--l-I-l-I-
~
t ,.
I-~l-I-l-I-
5.0%~0.0%1;:::bi:-1;:::-1;:::-1;:::;::::1;:::-1;:::=r ~~
1 92 93 94 95 96 97 98 99 00 03 04 05 06 07 10
-5.0%-t---
'"'">:
-10.0%N >#.t---
>#.
-15.0%t---
I--20.0%
25.0%Q '-------,
6-45
SUMMARY OF PARTICIPANT DATA
SOURCE OF THE PARTICIPANT DATA
DATA VALIDATION TESTS AND ADJUSTMENTS
SUMMARY OF VALUATION DATA
ACTIVE MEMBERS
TRANSFERRED AND TERMINATED MEMBERS
RETIRED MEMBERS AND BENEFICIARIES
6-46
SUMMARY OF PARTICIPANT DATA
CalPERS Actuarial Valuation – June 30, 2010
Miscellaneous 2.5% at 55 Risk Pool
23
Source of the Participant Data
The data was extracted from various databases within CalPERS and placed in a database by a series of
extract programs. Included in this data are:
individual member and beneficiary information,
employment and payroll information,
accumulated contributions with interest,
service information,
benefit payment information,
information about the various organizations which contract with CalPERS, and
detailed information about the plan provisions applicable to each group of members.
Data Validation Tests and Adjustments
Once the information is extracted from the various computer systems into the database, update queries are
then run against this data to correct for flaws found in the data. This part of the process is intended to
validate the participant data for all CalPERS plans. The data is then checked for reasonableness and
consistency with data from the prior valuation.
Checks on the data include:
a reconciliation of the membership of the plans,
comparisons of various member statistics (average attained age, average entry age, average
salary, etc.) for each plan with those from the prior valuation,
comparisons of pension amounts for each retiree and beneficiary receiving payments with those
from the prior valuation,
checks for invalid ages and dates, and
reasonableness checks on various key data elements such as service and salary.
As a result of the tests on the data, a number of adjustments were determined to be necessary. These
included:
dates of hire and dates of entry were adjusted where necessary to be consistent with the service
fields, the date of birth and each other.
6-47
SUMMARY OF PARTICIPANT DATA
CalPERS Actuarial Valuation – June 30, 2010
Miscellaneous 2.5% at 55 Risk Pool
24
Summary of Valuation Data
June 30, 2009 June 30, 2010
1. Number of Plans in the Risk Pool 163 164
2. Active Members
a) Counts 5,492 5,441
b) Average Attained Age 45.59 45.76
c) Average Entry Age on Rate Plan 36.61 36.58
d) Average Years of Service 8.98 9.18
e) Average Annual Covered Pay $ 64,667 $ 64,811
f) Annual Covered Payroll $ 355,150,151 $ 352,637,380
g) Projected Annual Payroll for Contribution Year $ 390,914,864 $ 388,149,050
h) Present Value of Future Payroll $ 2,766,104,432 $ 2,731,254,788
3. Transferred Members
a) Counts 2,507 2,555
b) Average Attained Age 47.19 47.40
c) Average Years of Service 3.95 3.89
d) Average Annual Covered Pay $ 86,531 $ 85,281
4. Terminated Members
a) Counts 2,383 2,483
b) Average Attained Age 45.40 45.78
c) Average Years of Service 3.19 3.05
d) Average Annual Covered Pay $ 40,850 $ 40,968
5. Retired Members and Beneficiaries
a) Counts* 4,286 4,657
b) Average Attained Age 68.04 67.99
c) Average Annual Benefits* $ 14,587 $ 15,542
6. Active to Retired Ratio [(2a) / (5a)] 1.28 1.17
Counts of members included in the valuation are counts of the records processed by the valuation. Multiple
records may exist for those who have service in more than one valuation group. This does not result in double
counting of liabilities.
* Values may not match those on pages 27 and 28 due to inclusion of community property settlements.
6-48
SUMMARY OF PARTICIPANT DATA
CalPERS Actuarial Valuation – June 30, 2010
Miscellaneous 2.5% at 55 Risk Pool
25
Active Members
Counts of members included in the valuation are counts of the records processed by the valuation. Multiple
records may exist for those who have service in more than one valuation group. This does not result in double
counting of liabilities.
Distribution of Active Members by Age and Service
Years of Service at Valuation Date
Attained
Age 0-4 5-9 10-14 15-19 20-24 25+ Total
15-24 154 4 0 0 0 0 158
25-29 348 80 0 0 0 0 428
30-34 311 172 47 5 0 0 535
35-39 278 181 90 28 2 0 579
40-44 288 183 124 66 35 2 698
45-49 302 204 134 90 100 47 877
50-54 290 220 155 114 107 98 984
55-59 177 158 104 81 72 97 689
60-64 90 101 51 36 35 44 357
65 and over 38 33 24 20 9 12 136
All Ages 2276 1336 729 440 360 300 5,441
Distribution of Average Annual Salaries by Age and Service
Years of Service at Valuation Date
Attained
Age 0-4 5-9 10-14 15-19 20-24 25+ Average
15-24 $30,818 $46,596 $0 $0 $0 $0 $31,218
25-29 46,155 53,299 0 0 0 0 47,490
30-34 51,951 62,006 59,549 64,515 0 0 55,969
35-39 56,922 64,116 66,519 77,726 66,493 0 61,702
40-44 59,074 69,886 67,127 72,047 71,329 74,286 65,224
45-49 64,568 68,634 72,591 80,234 78,808 76,712 70,622
50-54 68,399 69,418 74,320 84,639 78,553 75,930 73,295
55-59 62,939 70,058 70,216 77,761 86,998 80,284 72,369
60-64 66,082 65,174 70,413 73,405 67,506 80,539 69,104
65 and over 44,387 64,032 63,787 50,315 58,057 61,260 55,843
Average 56,200 66,278 69,658 77,435 77,957 77,539 64,811
6-49
SUMMARY OF PARTICIPANT DATA
CalPERS Actuarial Valuation – June 30, 2010
Miscellaneous 2.5% at 55 Risk Pool
26
Transferred and Terminated Members
Distribution of Transfers to Other CalPERS Plans by Age and Service
Years of Service at Valuation Date
Attained
Age 0-4 5-9 10-14 15-19 20-25 25+ Total
Average
Salary
15-24 20 0 0 0 0 0 20 $50,817
25-29 105 5 0 0 0 0 110 63,876
30-34 193 24 0 0 0 0 217 63,895
35-39 198 39 9 1 0 0 247 75,224
40-44 253 78 11 9 1 0 352 84,149
45-49 339 115 31 11 2 1 499 89,152
50-54 326 110 50 21 3 0 510 93,076
55-59 269 69 34 6 5 0 383 89,978
60-64 120 40 14 6 0 0 180 99,871
65 and over 30 2 4 1 0 0 37 91,636
All Ages 1853 482 153 55 11 1 2,555 85,281
Distribution of Terminated Participants with Funds on Deposit by Age and Service
Years of Service at Valuation Date
Attained
Age 0-4 5-9 10-14 15-19 20-25 25+ Total
Average
Salary
15-24 48 0 0 0 0 0 48 $28,052
25-29 168 3 0 0 0 0 171 33,002
30-34 249 27 0 0 0 0 276 37,873
35-39 246 34 4 0 0 0 284 39,591
40-44 251 66 16 1 0 0 334 47,287
45-49 335 84 21 8 4 1 453 45,345
50-54 269 83 29 10 1 1 393 43,923
55-59 191 53 12 6 0 2 264 40,557
60-64 134 29 17 2 2 0 184 34,839
65 and over 56 16 3 0 0 1 76 30,568
All Ages 1947 395 102 27 7 5 2,483 40,968
6-50
SUMMARY OF PARTICIPANT DATA
CalPERS Actuarial Valuation – June 30, 2010
Miscellaneous 2.5% at 55 Risk Pool
27
Retired Members and Beneficiaries
Distribution of Retirees and Beneficiaries by Age and Retirement Type*
Attained
Age
Service
Retirement
Non-
Industrial
Disability
Industrial
Disability
Non-
Industrial
Death
Industrial
Death
Death
After
Retirement Total
Under 30 0 0 0 0 0 1 1
30-34 0 1 0 0 0 1 2
35-39 0 3 5 0 0 2 10
40-44 0 2 8 0 0 3 13
45-49 0 14 12 2 2 9 39
50-54 144 33 16 1 0 13 207
55-59 632 49 15 2 0 17 715
60-64 952 50 14 4 0 39 1,059
65-69 801 40 14 6 1 53 915
70-74 484 34 2 4 0 75 599
75-79 336 18 2 3 0 86 445
80-84 239 6 0 2 0 91 338
85 and Over 195 5 0 4 0 106 310
All Ages 3783 255 88 28 3 496 4,653
Distribution of Average Annual Amounts for Retirees and Beneficiaries by Age and Retirement
Type*
Attained
Age
Service
Retirement
Non-
Industrial
Disability
Industrial
Disability
Non-
Industrial
Death
Industrial
Death
Death After
Retirement Average
Under 30 $0 $0 $0 $0 $0 $6,671 $6,671
30-34 0 8,485 0 0 0 866 4,676
35-39 0 14,075 136 0 0 9,825 6,256
40-44 0 12,397 2,778 0 0 4,970 4,764
45-49 0 8,730 2,215 23,180 490 11,851 7,764
50-54 17,038 11,835 3,963 6,830 0 14,034 14,960
55-59 21,245 13,015 2,951 7,935 0 17,899 20,180
60-64 18,809 12,198 3,018 16,971 0 11,364 18,007
65-69 16,370 10,682 5,589 9,659 45 12,231 15,655
70-74 15,117 8,727 3,532 10,784 0 10,986 14,170
75-79 13,551 6,752 1,032 2,869 0 11,449 12,742
80-84 12,523 9,546 0 9,271 0 9,198 11,556
85 and Over 9,882 9,090 0 2,833 0 8,943 9,457
All Ages 16,836 10,918 3,259 9,875 341 10,727 15,551
6-51
SUMMARY OF PARTICIPANT DATA
CalPERS Actuarial Valuation – June 30, 2010
Miscellaneous 2.5% at 55 Risk Pool
28
Retired Members and Beneficiaries (continued)
Distribution of Retirees and Beneficiaries by Years Retired and Retirement Type*
Years
Retired
Service
Retirement
Non-
Industrial
Disability
Industrial
Disability
Non-
Industrial
Death
Industrial
Death
Death
After
Retirement Total
Under 5 Yrs 1556 37 31 9 0 191 1,824
5-9 943 56 20 4 0 128 1,151
10-14 580 65 21 4 2 76 748
15-19 330 49 8 6 0 36 429
20-24 215 26 5 2 0 19 267
25-29 120 12 3 2 0 22 159
30 and Over 39 10 0 1 1 24 75
All Years 3783 255 88 28 3 496 4,653
Distribution of Average Annual Amounts for Retirees and Beneficiaries by Years Retired and
Retirement Type*
Years
Retired
Service
Retirement
Non-
Industrial
Disability
Industrial
Disability
Non-
Industrial
Death
Industrial
Death
Death
After
Retirement Average
Under 5 Yrs $22,067 $14,688 $1,787 $13,642 $0 $13,587 $20,643
5-9 15,083 13,408 2,383 15,377 0 10,112 14,229
10-14 13,340 10,481 6,475 8,490 490 8,648 12,362
15-19 11,506 8,792 2,789 4,835 0 8,754 10,709
20-24 11,441 8,002 5,025 1,926 0 9,671 10,789
25-29 8,059 8,308 107 9,271 0 5,676 7,613
30 and Over 4,324 7,002 0 6,858 45 6,250 5,274
All Years 16,836 10,918 3,259 9,875 341 10,727 15,551
* Counts of members do not include alternate payees receiving benefits while the member is still working.
Therefore, the total counts may not match information on page 24 of the report. Multiple records may exist for
those who have service in more than one coverage group. This does not result in double counting of liabilities.
6-52
APPENDIX A
STATEMENT OF ACTUARIAL DATA, METHODS AND ASSUMPTIONS
6-53
APPENDIX A
CalPERS Actuarial Valuation – June 30, 2010
Miscellaneous 2.5% at 55 Risk Pool
A-1
Data
As stated in the Actuarial Certification, the data which serves as the basis of this valuation has been obtained from
the various CalPERS databases. We have reviewed the valuation data and believe that it is reasonable and
appropriate in aggregate. We are unaware of any potential data issues that would have a material effect on the
results of this valuation, except that data does not always contain the latest salary information for former members
now in reciprocal systems and does not recognize the potential for usually large salary deviation in certain cases such
as elected officials. Therefore, salary information in these cases may not be accurate. These situations are relatively
infrequent, however, and when they do occur, they generally do not have a material impact on the employer
contribution rates.
Actuarial Methods
Funding Method
The actuarial funding method used for the Retirement Program is the Entry Age Normal Cost Method. Under this
method, projected benefits are determined for all members and the associated liabilities are spread in a manner that
produces level annual cost as a percent of pay in each year from the age of hire (entry age) to the assumed
retirement age. The cost allocated to the current fiscal year is called the normal cost.
The actuarial accrued liability for active members is then calculated as the portion of the total cost of the plan
allocated to prior years. The actuarial accrued liability for members currently receiving benefits, for active members
beyond the assumed retirement age, and for members entitled to deferred benefits, is equal to the present value of
the benefits expected to be paid. No normal costs are applicable for these participants.
The excess of the total actuarial accrued liability over the actuarial value of plan assets is called the unfunded
actuarial accrued liability. Funding requirements are determined by adding the normal cost and an amortization of
the unfunded liability as a level percentage of assumed future payrolls. All changes in liability due to plan
amendments, changes in actuarial assumptions, or changes in actuarial methodology are amortized separately over a
20-year period. All gains or losses are tracked and amortized over a rolling 30-year period with the exception of
gains and losses in fiscal years 2008-2009, 2009-2010 and 2010-2011 in which each year’s gains or losses will be
isolated and amortized over fixed and declining 30 year periods (as opposed to the current rolling 30-year
amortization). If a pool’s accrued liability exceeds the actuarial value of assets, the annual contribution with respect
to the total unfunded liability may not be less than the amount produced by a 30-year amortization of the unfunded
liability.
Additional contributions will be required for any plan or pool if their cash flows hamper adequate funding progress by
preventing the expected funded status on a market value of assets basis of the plan to either:
Increase by at least 15% by June 30, 2043; or
Reach a level of 75% funded by June 30, 2043
The necessary additional contribution will be obtained by changing the amortization period of the gains and losses
prior to 2009 to a period which will result in the satisfaction of the above criteria. CalPERS actuaries will reassess the
criteria above when performing each future valuation to determine whether or not additional contributions are
necessary.
An exception to the funding rules above is used whenever the application of such rules results in inconsistencies. In
these cases a “fresh start” approach is used. This simply means that the current unfunded actuarial liability is
projected and amortized over a set number of years. For instance, if the annual contribution on the total unfunded
liability was less than the amount produced by a 30-year amortization of the unfunded liability, the plan actuary
would implement a 30-year fresh start. In addition, a fresh start is needed in the following situations:
1) when a positive payment would be required on a negative unfunded actuarial liability (or conversely a
negative payment on a positive unfunded actuarial liability); or
6-54
APPENDIX A
CalPERS Actuarial Valuation – June 30, 2010
Miscellaneous 2.5% at 55 Risk Pool
A-2
2) when there are excess assets, rather than an unfunded liability. In this situation a 30-year fresh start is
used, unless a larger fresh start is needed to avoid a negative total rate.
It should be noted that the actuary may choose to use a fresh start under other circumstances. In all cases, the
period of the fresh start is chosen by the actuary according to his or her best judgment, and will not be less than five
years nor greater than 30 years.
Asset Valuation Method
In order to dampen the effect of short term market value fluctuations on employer contribution rates, the following
asset smoothing technique is used. First an Expected Value of Assets is computed by bringing forward the prior
year’s Actuarial Value of Assets and the contributions received and benefits paid during the year at the assu med
actuarial rate of return. The Actuarial Value of Assets is then computed as the Expected Value of Assets plus one-
fifteenth of the difference between the actual Market Value of Assets and the Expected Value of Assets as of the
valuation date. However in no case will the Actuarial Value of Assets be less than 80% nor greater than 120% of the
actual Market Value of Assets.
In June 2009, the CalPERS Board adopted changes to the asset smoothing method in order to phase in over a three
year period the impact of the -24% investment loss experienced by CalPERS in fiscal year 2008-2009. The following
changes were adopted:
Increase the corridor limits for the actuarial value of assets from 80%-120% of market value to 60%-140%
of market value on June 30, 2009
Reduce the corridor limits for the actuarial value of assets to 70%-130% of market value on June 30, 2010
Return to the 80%-120% of market value corridor limits for the actuarial value of assets on June 30, 2011
and thereafter
Miscellaneous
Superfunded Status
If a rate plan is superfunded (actuarial value of assets exceeds the present value of benefits), as of the most
recently completed annual valuation, the employer may cover their employees’ member contributions (both taxed
and tax-deferred) using their employer assets during the fiscal year for which this valuation applies. This would
entail transferring assets within the Public Employees’ Retirement Fund (PERF) from the employer account to the
member accumulated contribution accounts. This change was implemented effective January 1, 1999 pursuant to
Chapter 231 (Assembly Bill 2099) which added Government Code Section 20816.
Superfunded status applies only to individual plans, not risk pools. For rate plans within a risk pool, actuarial value
of assets is the sum of the rate plan’s side fund plus the rate plan’s pro -rata share of non-side fund assets.
Superfunded status is determined only on annual valuation dates.
Internal Revenue Code Section 415
The limitations on benefits imposed by Internal Revenue Code Section 415 were not taken into account in this
valuation. The effect of these limitations has been deemed immaterial on the overall results of this valuation.
Internal Revenue Code Section 401(a)(17)
The limitations on compensation imposed by Internal Revenue Code Section 401(a)(17) were taken into account in
this valuation. It was determined that this change generally had minimal impact on the employer rates and no
special amortization base has been created.
6-55
APPENDIX A
CalPERS Actuarial Valuation – June 30, 2010
Miscellaneous 2.5% at 55 Risk Pool
A-3
ACTUARIAL ASSUMPTIONS
Economic Assumptions
Investment Return
7.75% compounded annually (net of expenses). This assumption is used for all plans.
Salary Growth
Annual increases vary by category, entry age, and duration of service. Sample assumed increases are shown
below.
Public Agency Miscellaneous
Duration of Service Entry Age 20 Entry Age 30 Entry Age 40
0 0.1445 0.1265 0.1005
1 0.1215 0.1075 0.0875
2 0.1035 0.0935 0.0775
3 0.0905 0.0825 0.0695
4 0.0805 0.0735 0.0635
5 0.0725 0.0675 0.0585
10 0.0505 0.0485 0.0435
15 0.0455 0.0435 0.0385
20 0.0415 0.0395 0.0355
25 0.0385 0.0385 0.0355
30 0.0385 0.0385 0.0355
Public Agency Fire
Duration of Service Entry Age 20 Entry Age 30 Entry Age 40
0 0.1075 0.1075 0.1045
1 0.0975 0.0965 0.0875
2 0.0895 0.0855 0.0725
3 0.0825 0.0775 0.0625
4 0.0765 0.0705 0.0535
5 0.0715 0.0645 0.0475
10 0.0535 0.0485 0.0375
15 0.0435 0.0415 0.0365
20 0.0395 0.0385 0.0355
25 0.0375 0.0375 0.0355
30 0.0375 0.0375 0.0355
Public Agency Police
Duration of Service Entry Age 20 Entry Age 30 Entry Age 40
0 0.1115 0.1115 0.1115
1 0.0955 0.0955 0.0955
2 0.0835 0.0835 0.0805
3 0.0745 0.0725 0.0665
4 0.0675 0.0635 0.0575
5 0.0615 0.0575 0.0505
10 0.0475 0.0445 0.0365
15 0.0435 0.0415 0.0355
20 0.0395 0.0385 0.0355
25 0.0375 0.0365 0.0355
30 0.0375 0.0365 0.0355
6-56
APPENDIX A
CalPERS Actuarial Valuation – June 30, 2010
Miscellaneous 2.5% at 55 Risk Pool
A-4
Public Agency County Peace Officers
Duration of Service Entry Age 20 Entry Age 30 Entry Age 40
0 0.1315 0.1315 0.1315
1 0.1115 0.1085 0.1055
2 0.0965 0.0915 0.0865
3 0.0845 0.0795 0.0735
4 0.0755 0.0695 0.0635
5 0.0685 0.0625 0.0555
10 0.0485 0.0445 0.0405
15 0.0435 0.0405 0.0385
20 0.0395 0.0385 0.0365
25 0.0375 0.0365 0.0355
30 0.0375 0.0365 0.0355
Schools
Duration of Service Entry Age 20 Entry Age 30 Entry Age 40
0 0.1105 0.0985 0.0845
1 0.0965 0.0875 0.0765
2 0.0865 0.0795 0.0695
3 0.0775 0.0725 0.0645
4 0.0715 0.0665 0.0595
5 0.0655 0.0625 0.0555
10 0.0475 0.0465 0.0435
15 0.0415 0.0405 0.0375
20 0.0385 0.0375 0.0345
25 0.0365 0.0365 0.0345
30 0.0365 0.0365 0.0345
The Miscellaneous salary scale is used for Local Prosecutors.
The Police salary scale is used for Other Safety, Local Sheriff, and School Police.
Overall Payroll Growth
3.25% compounded annually (used in projecting the payroll over which the unfunded liability is amortized).
This assumption is used for all plans.
Inflation
3.00% compounded annually. This assumption is used for all plans.
Non-valued Potential Additional Liabilities
The potential liability loss for a cost-of-living increase exceeding the 3% inflation assumption, and any
potential liability loss from future member service purchases are not reflected in the valuation.
6-57
APPENDIX A
CalPERS Actuarial Valuation – June 30, 2010
Miscellaneous 2.5% at 55 Risk Pool
A-5
Miscellaneous Loading Factors
Credit for Unused Sick Leave
Final Average Salary is increased by 1% for those agencies that have accepted the provision providing
Credit for Unused Sick Leave.
Conversion of Employer Paid Member Contributions (EPMC)
Final Average Salary is increased by the Employee Contribution Rate for those agencies that have
contracted for the provision providing for the Conversion of Employer Paid Member Contributions (EPMC)
during the final compensation period.
Norris Decision (Best Factors)
Employees hired prior to July 1, 1982 have projected benefit amounts increased in order to reflect the use of
“Best Factors” for these employees in the calculation of optional benefit forms. This is due to a 1983
Supreme Court decision, known as the Norris decision, which required males and females to be treated
equally in the determination of benefit amounts. Consequently, anyone already employed at that time is
given the best possible conversion factor when optional benefits are determined. No loading is necessary for
employees hired after July 1, 1982.
6-58
APPENDIX A
CalPERS Actuarial Valuation – June 30, 2010
Miscellaneous 2.5% at 55 Risk Pool
A-6
Demographic Assumptions
Pre-Retirement Mortality
Non-Industrial Death Rates vary by age and gender. Industrial Death rates vary by age. See sample rates
in table below. The non-industrial death rates are used for all plans. The industrial death rates are used for
Safety Plans (except for Local Prosecutor safety members where the corresponding Miscellaneous Plan does
not have the Industrial Death Benefit).
Non-Industrial Death Industrial Death
(Not Job-Related) (Job-Related)
Age Male Female Male and Female
20 0.00047 0.00016 0.00003
25 0.00050 0.00026 0.00007
30 0.00053 0.00036 0.00010
35 0.00067 0.00046 0.00012
40 0.00087 0.00065 0.00013
45 0.00120 0.00093 0.00014
50 0.00176 0.00126 0.00015
55 0.00260 0.00176 0.00016
60 0.00395 0.00266 0.00017
65 0.00608 0.00419 0.00018
70 0.00914 0.00649 0.00019
75 0.01220 0.00878 0.00020
80 0.01527 0.01108 0.00021
Miscellaneous Plans usually have Industrial Death rates set to zero unless the agency has specifically
contracted for Industrial Death benefits. If so, each Non-Industrial Death rate shown above will be split into
two components: 99% will become the Non-Industrial Death rate and 1% will become the Industrial Death
rate.
Post-Retirement Mortality
Rates vary by age, type of retirement and gender. See sample rates in table below. These rates are used
for all plans.
Healthy Recipients
Non-Industrially Disabled Industrially Disabled
(Not Job-Related) (Job-Related)
Age Male Female Male Female Male Female
50 0.00239 0.00125 0.01632 0.01245 0.00443 0.00356
55 0.00474 0.00243 0.01936 0.01580 0.00563 0.00546
60 0.00720 0.00431 0.02293 0.01628 0.00777 0.00798
65 0.01069 0.00775 0.03174 0.01969 0.01388 0.01184
70 0.01675 0.01244 0.03870 0.03019 0.02236 0.01716
75 0.03080 0.02071 0.06001 0.03915 0.03585 0.02665
80 0.05270 0.03749 0.08388 0.05555 0.06926 0.04528
85 0.09775 0.07005 0.14035 0.09577 0.11799 0.08017
90 0.16747 0.12404 0.21554 0.14949 0.16575 0.13775
95 0.25659 0.21556 0.31025 0.23055 0.26108 0.23331
100 0.34551 0.31876 0.45905 0.37662 0.40918 0.35165
105 0.58527 0.56093 0.67923 0.61523 0.64127 0.60135
110 1.00000 1.00000 1.00000 1.00000 1.00000 1.00000
6-59
APPENDIX A
CalPERS Actuarial Valuation – June 30, 2010
Miscellaneous 2.5% at 55 Risk Pool
A-7
Marital Status
For active members, a percentage married upon retirement is assumed according to the following table.
Member Category Percent Married
Miscellaneous Member 85%
Local Police 90%
Local Fire 90%
Other Local Safety 90%
School Police 90%
Age of Spouse
It is assumed that female spouses are 3 years younger than male spouses. This assumption is used for all
plans.
Terminated Members
It is assumed that terminated members refund immediately if non-vested. Terminated members who are
vested are assumed to follow the same service retirement pattern as active members but with a load to
reflect the expected higher rates of retirement, especially at lower ages. The following table shows the load
factors that are applied to the service retirement assumption for active members to obtain the service
retirement pattern for separated vested members:
Age Load Factor
50 450%
51 250%
52 through 56 200%
57 through 60 150%
61 through 64 125%
65 and above 100% (no change)
Termination with Refund
Rates vary by entry age and service for Miscellaneous Plans. Rates vary by service for Safety Plans. See
sample rates in tables below.
Public Agency Miscellaneous
Duration of
Service Entry Age 20 Entry Age 25 Entry Age 30 Entry Age 35 Entry Age 40 Entry Age 45
0 0.1742 0.1674 0.1606 0.1537 0.1468 0.1400
1 0.1545 0.1477 0.1409 0.1339 0.1271 0.1203
2 0.1348 0.1280 0.1212 0.1142 0.1074 0.1006
3 0.1151 0.1083 0.1015 0.0945 0.0877 0.0809
4 0.0954 0.0886 0.0818 0.0748 0.0680 0.0612
5 0.0212 0.0193 0.0174 0.0155 0.0136 0.0116
10 0.0138 0.0121 0.0104 0.0088 0.0071 0.0055
15 0.0060 0.0051 0.0042 0.0032 0.0023 0.0014
20 0.0037 0.0029 0.0021 0.0013 0.0005 0.0001
25 0.0017 0.0011 0.0005 0.0001 0.0001 0.0001
30 0.0005 0.0001 0.0001 0.0001 0.0001 0.0001
35 0.0001 0.0001 0.0001 0.0001 0.0001 0.0001
6-60
APPENDIX A
CalPERS Actuarial Valuation – June 30, 2010
Miscellaneous 2.5% at 55 Risk Pool
A-8
Public Agency Safety
Duration of Service Fire Police County Peace Officer
0 0.0710 0.1013 0.0997
1 0.0554 0.0636 0.0782
2 0.0398 0.0271 0.0566
3 0.0242 0.0258 0.0437
4 0.0218 0.0245 0.0414
5 0.0029 0.0086 0.0145
10 0.0009 0.0053 0.0089
15 0.0006 0.0027 0.0045
20 0.0005 0.0017 0.0020
25 0.0003 0.0012 0.0009
30 0.0003 0.0009 0.0006
35 0.0003 0.0009 0.0006
The Police Termination and Refund rates are used for Public Agency Local Prosecutors, Other Safety, Local Sheriff,
and School Police.
Schools
Duration of
Service Entry Age 20 Entry Age 25 Entry Age 30 Entry Age 35 Entry Age 40 Entry Age 45
0 0.1730 0.1627 0.1525 0.1422 0.1319 0.1217
1 0.1585 0.1482 0.1379 0.1277 0.1174 0.1071
2 0.1440 0.1336 0.1234 0.1131 0.1028 0.0926
3 0.1295 0.1192 0.1089 0.0987 0.0884 0.0781
4 0.1149 0.1046 0.0944 0.0841 0.0738 0.0636
5 0.0278 0.0249 0.0221 0.0192 0.0164 0.0135
10 0.0172 0.0147 0.0122 0.0098 0.0074 0.0049
15 0.0115 0.0094 0.0074 0.0053 0.0032 0.0011
20 0.0073 0.0055 0.0038 0.0020 0.0002 0.0002
25 0.0037 0.0023 0.0010 0.0002 0.0002 0.0002
30 0.0015 0.0003 0.0002 0.0002 0.0002 0.0002
35 0.0002 0.0002 0.0002 0.0002 0.0002 0.0002
Termination with Vested Benefits
Rate vary by entry age and service for Miscellaneous Plans. Rates vary by service for Safety Plans. See
sample rates in tables below.
Public Agency Miscellaneous
Duration of
Service Entry Age 20 Entry Age 25 Entry Age 30 Entry Age 35 Entry Age 40
5 0.0656 0.0597 0.0537 0.0477 0.0418
10 0.0530 0.0466 0.0403 0.0339 0.0000
15 0.0443 0.0373 0.0305 0.0000 0.0000
20 0.0333 0.0261 0.0000 0.0000 0.0000
25 0.0212 0.0000 0.0000 0.0000 0.0000
30 0.0000 0.0000 0.0000 0.0000 0.0000
35 0.0000 0.0000 0.0000 0.0000 0.0000
6-61
APPENDIX A
CalPERS Actuarial Valuation – June 30, 2010
Miscellaneous 2.5% at 55 Risk Pool
A-9
Public Agency Safety
Duration of
Service Fire Police
County Peace
Officer
5 0.0162 0.0163 0.0265
10 0.0061 0.0126 0.0204
15 0.0058 0.0082 0.0130
20 0.0053 0.0065 0.0074
25 0.0047 0.0058 0.0043
30 0.0045 0.0056 0.0030
35 0.0000 0.0000 0.0000
When a member is eligible to retire, the termination with vested benefits probability is set to zero.
After termination with vested benefits, a miscellaneous member is assumed to retire at age 59 and a
safety member at age 54.
The Police Termination with vested benefits rates are used for Public Agency Local Prosecutors, Other
Safety, Local Sheriff, and School Police.
Schools
Duration of
Service Entry Age 20 Entry Age 25 Entry Age 30 Entry Age 35 Entry Age 40
5 0.0816 0.0733 0.0649 0.0566 0.0482
10 0.0629 0.0540 0.0450 0.0359 0.0000
15 0.0537 0.0440 0.0344 0.0000 0.0000
20 0.0420 0.0317 0.0000 0.0000 0.0000
25 0.0291 0.0000 0.0000 0.0000 0.0000
30 0.0000 0.0000 0.0000 0.0000 0.0000
35 0.0000 0.0000 0.0000 0.0000 0.0000
6-62
APPENDIX A
CalPERS Actuarial Valuation – June 30, 2010
Miscellaneous 2.5% at 55 Risk Pool
A-10
Non-Industrial (Not Job-Related) Disability
Rates vary by age and gender for Miscellaneous Plans.
Rates vary by age for Safety Plans
Miscellaneous Fire Police County Peace Officer Schools
Age Male Female Male and Female Male and Female Male and Female Male Female
20 0.0001 0.0001 0.0001 0.0001 0.0001 0.0001 0.0001
25 0.0001 0.0001 0.0001 0.0001 0.0001 0.0001 0.0001
30 0.0002 0.0002 0.0001 0.0002 0.0001 0.0002 0.0001
35 0.0006 0.0009 0.0001 0.0003 0.0004 0.0006 0.0004
40 0.0015 0.0016 0.0001 0.0004 0.0007 0.0014 0.0009
45 0.0025 0.0024 0.0002 0.0005 0.0013 0.0028 0.0017
50 0.0033 0.0031 0.0005 0.0008 0.0018 0.0044 0.0030
55 0.0037 0.0031 0.0010 0.0013 0.0010 0.0049 0.0034
60 0.0038 0.0025 0.0015 0.0020 0.0006 0.0043 0.0024
The Miscellaneous Non-Industrial Disability rates are used for Local Prosecutors.
The Police Non-Industrial Disability rates are used for Other Safety, Local Sheriff, and School Police.
Industrial (Job-Related) Disability
Rates vary by age and category.
Age Fire Police County Peace Officer
20 0.0002 0.0007 0.0003
25 0.0012 0.0032 0.0015
30 0.0025 0.0064 0.0031
35 0.0037 0.0097 0.0046
40 0.0049 0.0129 0.0063
45 0.0061 0.0161 0.0078
50 0.0074 0.0192 0.0101
55 0.0721 0.0668 0.0173
60 0.0721 0.0668 0.0173
The Police Industrial Disability rates are used for Local Sheriff and Other Safety.
Fifty Percent of the Police Industrial Disability rates are used for School Police.
One Percent of the Police Industrial Disability rates are used for Local Prosecutors.
Normally, rates are zero for Miscellaneous Plans unless the agency has specifically contracted for
Industrial Disability benefits. If so, each Miscellaneous Non-Industrial Disability rate will be split into two
components: 50% will become the Non-Industrial Disability rate and 50% will become the Industrial
Disability rate.
Service Retirement
Retirement rate vary by age, service, and formula, except for the safety ½ @ 55 and 2% @ 55 formulas, where
retirement rates vary by age only.
6-63
APPENDIX A
CalPERS Actuarial Valuation – June 30, 2010
Miscellaneous 2.5% at 55 Risk Pool
A-11
Public Agency Miscellaneous 1.5% @ 65
Duration of Service
Age 5 Years 10 Years 15 Years 20 Years 25 Years 30 Years
50 0.008 0.011 0.013 0.015 0.017 0.019
51 0.007 0.010 0.012 0.013 0.015 0.017
52 0.010 0.014 0.017 0.019 0.021 0.024
53 0.008 0.012 0.015 0.017 0.019 0.022
54 0.012 0.016 0.019 0.022 0.025 0.028
55 0.018 0.025 0.031 0.035 0.038 0.043
56 0.015 0.021 0.025 0.029 0.032 0.036
57 0.020 0.028 0.033 0.038 0.043 0.048
58 0.024 0.033 0.040 0.046 0.052 0.058
59 0.028 0.039 0.048 0.054 0.060 0.067
60 0.049 0.069 0.083 0.094 0.105 0.118
61 0.062 0.087 0.106 0.120 0.133 0.150
62 0.104 0.146 0.177 0.200 0.223 0.251
63 0.099 0.139 0.169 0.191 0.213 0.239
64 0.097 0.136 0.165 0.186 0.209 0.233
65 0.140 0.197 0.240 0.271 0.302 0.339
66 0.092 0.130 0.157 0.177 0.198 0.222
67 0.129 0.181 0.220 0.249 0.277 0.311
68 0.092 0.129 0.156 0.177 0.197 0.221
69 0.092 0.130 0.158 0.178 0.199 0.224
70 0.103 0.144 0.175 0.198 0.221 0.248
Public Agency Miscellaneous 2% @ 60
Duration of Service
Age 5 Years 10 Years 15 Years 20 Years 25 Years 30 Years
50 0.011 0.015 0.018 0.021 0.023 0.026
51 0.009 0.013 0.016 0.018 0.020 0.023
52 0.013 0.018 0.022 0.025 0.028 0.031
53 0.011 0.016 0.019 0.022 0.025 0.028
54 0.015 0.021 0.025 0.028 0.032 0.036
55 0.023 0.032 0.039 0.044 0.049 0.055
56 0.019 0.027 0.032 0.037 0.041 0.046
57 0.025 0.035 0.042 0.048 0.054 0.060
58 0.030 0.042 0.051 0.058 0.065 0.073
59 0.035 0.049 0.060 0.068 0.076 0.085
60 0.062 0.087 0.105 0.119 0.133 0.149
61 0.079 0.110 0.134 0.152 0.169 0.190
62 0.132 0.186 0.225 0.255 0.284 0.319
63 0.126 0.178 0.216 0.244 0.272 0.305
64 0.122 0.171 0.207 0.234 0.262 0.293
65 0.173 0.243 0.296 0.334 0.373 0.418
66 0.114 0.160 0.194 0.219 0.245 0.274
67 0.159 0.223 0.271 0.307 0.342 0.384
68 0.113 0.159 0.193 0.218 0.243 0.273
69 0.114 0.161 0.195 0.220 0.246 0.276
70 0.127 0.178 0.216 0.244 0.273 0.306
6-64
APPENDIX A
CalPERS Actuarial Valuation – June 30, 2010
Miscellaneous 2.5% at 55 Risk Pool
A-12
Public Agency Miscellaneous 2% @ 55
Duration of Service
Age 5 Years 10 Years 15 Years 20 Years 25 Years 30 Years
50 0.015 0.020 0.024 0.029 0.033 0.039
51 0.013 0.016 0.020 0.024 0.027 0.033
52 0.014 0.018 0.022 0.027 0.030 0.036
53 0.017 0.022 0.027 0.032 0.037 0.043
54 0.027 0.034 0.041 0.049 0.056 0.067
55 0.050 0.064 0.078 0.094 0.107 0.127
56 0.045 0.057 0.069 0.083 0.095 0.113
57 0.048 0.061 0.074 0.090 0.102 0.122
58 0.052 0.066 0.080 0.097 0.110 0.131
59 0.060 0.076 0.092 0.111 0.127 0.151
60 0.072 0.092 0.112 0.134 0.153 0.182
61 0.089 0.113 0.137 0.165 0.188 0.224
62 0.128 0.162 0.197 0.237 0.270 0.322
63 0.129 0.164 0.199 0.239 0.273 0.325
64 0.116 0.148 0.180 0.216 0.247 0.294
65 0.174 0.221 0.269 0.323 0.369 0.439
66 0.135 0.171 0.208 0.250 0.285 0.340
67 0.133 0.169 0.206 0.247 0.282 0.336
68 0.118 0.150 0.182 0.219 0.250 0.297
69 0.116 0.147 0.179 0.215 0.246 0.293
70 0.138 0.176 0.214 0.257 0.293 0.349
Public Agency Miscellaneous 2.5% @ 55
Duration of Service
Age 5 Years 10 Years 15 Years 20 Years 25 Years 30 Years
50 0.026 0.033 0.040 0.048 0.055 0.062
51 0.021 0.026 0.032 0.038 0.043 0.049
52 0.021 0.026 0.032 0.038 0.043 0.049
53 0.026 0.033 0.040 0.048 0.055 0.062
54 0.043 0.054 0.066 0.078 0.089 0.101
55 0.088 0.112 0.136 0.160 0.184 0.208
56 0.055 0.070 0.085 0.100 0.115 0.130
57 0.061 0.077 0.094 0.110 0.127 0.143
58 0.072 0.091 0.111 0.130 0.150 0.169
59 0.083 0.105 0.128 0.150 0.173 0.195
60 0.088 0.112 0.136 0.160 0.184 0.208
61 0.083 0.105 0.128 0.150 0.173 0.195
62 0.121 0.154 0.187 0.220 0.253 0.286
63 0.105 0.133 0.162 0.190 0.219 0.247
64 0.105 0.133 0.162 0.190 0.219 0.247
65 0.143 0.182 0.221 0.260 0.299 0.338
66 0.105 0.133 0.162 0.190 0.219 0.247
67 0.105 0.133 0.162 0.190 0.219 0.247
68 0.105 0.133 0.162 0.190 0.219 0.247
69 0.105 0.133 0.162 0.190 0.219 0.247
70 0.125 0.160 0.194 0.228 0.262 0.296
6-65
APPENDIX A
CalPERS Actuarial Valuation – June 30, 2010
Miscellaneous 2.5% at 55 Risk Pool
A-13
Public Agency Miscellaneous 2.7% @ 55
Duration of Service
Age 5 Years 10 Years 15 Years 20 Years 25 Years 30 Years
50 0.028 0.035 0.043 0.050 0.058 0.065
51 0.022 0.028 0.034 0.040 0.046 0.052
52 0.022 0.028 0.034 0.040 0.046 0.052
53 0.028 0.035 0.043 0.050 0.058 0.065
54 0.044 0.056 0.068 0.080 0.092 0.104
55 0.091 0.116 0.140 0.165 0.190 0.215
56 0.061 0.077 0.094 0.110 0.127 0.143
57 0.063 0.081 0.098 0.115 0.132 0.150
58 0.074 0.095 0.115 0.135 0.155 0.176
59 0.083 0.105 0.128 0.150 0.173 0.195
60 0.088 0.112 0.136 0.160 0.184 0.208
61 0.085 0.109 0.132 0.155 0.178 0.202
62 0.124 0.158 0.191 0.225 0.259 0.293
63 0.107 0.137 0.166 0.195 0.224 0.254
64 0.107 0.137 0.166 0.195 0.224 0.254
65 0.146 0.186 0.225 0.265 0.305 0.345
66 0.107 0.137 0.166 0.195 0.224 0.254
67 0.107 0.137 0.166 0.195 0.224 0.254
68 0.107 0.137 0.166 0.195 0.224 0.254
69 0.107 0.137 0.166 0.195 0.224 0.254
70 0.129 0.164 0.199 0.234 0.269 0.304
Public Agency Miscellaneous 3% @ 60
Duration of Service
Age 5 Years 10 Years 15 Years 20 Years 25 Years 30 Years
50 0.026 0.033 0.040 0.048 0.055 0.062
51 0.021 0.026 0.032 0.038 0.043 0.049
52 0.019 0.025 0.030 0.035 0.040 0.046
53 0.025 0.032 0.038 0.045 0.052 0.059
54 0.039 0.049 0.060 0.070 0.081 0.091
55 0.083 0.105 0.128 0.150 0.173 0.195
56 0.055 0.070 0.085 0.100 0.115 0.130
57 0.061 0.077 0.094 0.110 0.127 0.143
58 0.072 0.091 0.111 0.130 0.150 0.169
59 0.080 0.102 0.123 0.145 0.167 0.189
60 0.094 0.119 0.145 0.170 0.196 0.221
61 0.088 0.112 0.136 0.160 0.184 0.208
62 0.127 0.161 0.196 0.230 0.265 0.299
63 0.110 0.140 0.170 0.200 0.230 0.260
64 0.110 0.140 0.170 0.200 0.230 0.260
65 0.149 0.189 0.230 0.270 0.311 0.351
66 0.110 0.140 0.170 0.200 0.230 0.260
67 0.110 0.140 0.170 0.200 0.230 0.260
68 0.110 0.140 0.170 0.200 0.230 0.260
69 0.110 0.140 0.170 0.200 0.230 0.260
70 0.132 0.168 0.204 0.240 0.276 0.312
6-66
APPENDIX A
CalPERS Actuarial Valuation – June 30, 2010
Miscellaneous 2.5% at 55 Risk Pool
A-14
Public Agency Fire ½ @ 55 and 2% @ 55
Age
50
51
52
53
54
55
Rate
0.01588
0.00000
0.03442
0.01990
0.04132
0.07513
Age
56
57
58
59
60
Rate
0.11079
0.00000
0.09499
0.04409
1.00000
Public Agency Police ½ @ 55 and 2% @ 55
Age
50
51
52
53
54
55
Rate
0.02552
0.00000
0.01637
0.02717
0.00949
0.16674
Age
56
57
58
59
60
Rate
0.06921
0.05113
0.07241
0.07043
1.00000
Public Agency Police 2%@ 50
Duration of Service
Age 5 Years 10 Years 15 Years 20 Years 25 Years 30 Years
50 0.014 0.014 0.014 0.014 0.025 0.045
51 0.012 0.012 0.012 0.012 0.023 0.040
52 0.026 0.026 0.026 0.026 0.048 0.086
53 0.052 0.052 0.052 0.052 0.096 0.171
54 0.070 0.070 0.070 0.070 0.128 0.227
55 0.090 0.090 0.090 0.090 0.165 0.293
56 0.064 0.064 0.064 0.064 0.117 0.208
57 0.071 0.071 0.071 0.071 0.130 0.232
58 0.063 0.063 0.063 0.063 0.115 0.205
59 0.140 0.140 0.140 0.140 0.174 0.254
60 0.140 0.140 0.140 0.140 0.172 0.251
61 0.140 0.140 0.140 0.140 0.172 0.251
62 0.140 0.140 0.140 0.140 0.172 0.251
63 0.140 0.140 0.140 0.140 0.172 0.251
64 0.140 0.140 0.140 0.140 0.172 0.251
65 1.000 1.000 1.000 1.000 1.000 1.000
These rates also apply to Local Prosecutors, Local Sheriff, School Police, and Other Safety.
6-67
APPENDIX A
CalPERS Actuarial Valuation – June 30, 2010
Miscellaneous 2.5% at 55 Risk Pool
A-15
Public Agency Fire 2%@50
Duration of Service
Age 5 Years 10 Years 15 Years 20 Years 25 Years 30 Years
50 0.007 0.007 0.007 0.007 0.010 0.015
51 0.008 0.008 0.008 0.008 0.013 0.019
52 0.017 0.017 0.017 0.017 0.027 0.040
53 0.047 0.047 0.047 0.047 0.072 0.107
54 0.064 0.064 0.064 0.064 0.098 0.147
55 0.087 0.087 0.087 0.087 0.134 0.200
56 0.078 0.078 0.078 0.078 0.120 0.180
57 0.090 0.090 0.090 0.090 0.139 0.208
58 0.079 0.079 0.079 0.079 0.122 0.182
59 0.073 0.073 0.073 0.073 0.112 0.168
60 0.114 0.114 0.114 0.114 0.175 0.262
61 0.114 0.114 0.114 0.114 0.175 0.262
62 0.114 0.114 0.114 0.114 0.175 0.262
63 0.114 0.114 0.114 0.114 0.175 0.262
64 0.114 0.114 0.114 0.114 0.175 0.262
65 1.000 1.000 1.000 1.000 1.000 1.000
Public Agency Police 3%@ 55
Duration of Service
Age 5 Years 10 Years 15 Years 20 Years 25 Years 30 Years
50 0.019 0.019 0.019 0.019 0.040 0.060
51 0.024 0.024 0.024 0.024 0.049 0.074
52 0.024 0.024 0.024 0.024 0.051 0.077
53 0.059 0.059 0.059 0.059 0.121 0.183
54 0.069 0.069 0.069 0.069 0.142 0.215
55 0.116 0.116 0.116 0.116 0.240 0.363
56 0.076 0.076 0.076 0.076 0.156 0.236
57 0.058 0.058 0.058 0.058 0.120 0.181
58 0.076 0.076 0.076 0.076 0.157 0.237
59 0.094 0.094 0.094 0.094 0.193 0.292
60 0.141 0.141 0.141 0.141 0.290 0.438
61 0.094 0.094 0.094 0.094 0.193 0.292
62 0.118 0.118 0.118 0.118 0.241 0.365
63 0.094 0.094 0.094 0.094 0.193 0.292
64 0.094 0.094 0.094 0.094 0.193 0.292
65 1.000 1.000 1.000 1.000 1.000 1.000
These rates also apply to Local Prosecutors, Local Sheriff, School Police, and Other Safety.
6-68
APPENDIX A
CalPERS Actuarial Valuation – June 30, 2010
Miscellaneous 2.5% at 55 Risk Pool
A-16
Public Agency Fire 3%@55
Duration of Service
Age 5 Years 10 Years 15 Years 20 Years 25 Years 30 Years
50 0.012 0.012 0.012 0.018 0.028 0.033
51 0.008 0.008 0.008 0.012 0.019 0.022
52 0.018 0.018 0.018 0.027 0.042 0.050
53 0.043 0.043 0.043 0.062 0.098 0.114
54 0.057 0.057 0.057 0.083 0.131 0.152
55 0.092 0.092 0.092 0.134 0.211 0.246
56 0.081 0.081 0.081 0.118 0.187 0.218
57 0.100 0.100 0.100 0.146 0.230 0.268
58 0.081 0.081 0.081 0.119 0.187 0.219
59 0.078 0.078 0.078 0.113 0.178 0.208
60 0.117 0.117 0.117 0.170 0.267 0.312
61 0.078 0.078 0.078 0.113 0.178 0.208
62 0.098 0.098 0.098 0.141 0.223 0.260
63 0.078 0.078 0.078 0.113 0.178 0.208
64 0.078 0.078 0.078 0.113 0.178 0.208
65 1.000 1.000 1.000 1.000 1.000 1.000
Public Agency Police 3%@ 50
Duration of Service
Age 5 Years 10 Years 15 Years 20 Years 25 Years 30 Years
50 0.070 0.070 0.070 0.131 0.193 0.249
51 0.050 0.050 0.050 0.095 0.139 0.180
52 0.061 0.061 0.061 0.116 0.171 0.220
53 0.069 0.069 0.069 0.130 0.192 0.247
54 0.071 0.071 0.071 0.134 0.197 0.255
55 0.090 0.090 0.090 0.170 0.250 0.322
56 0.069 0.069 0.069 0.130 0.191 0.247
57 0.080 0.080 0.080 0.152 0.223 0.288
58 0.087 0.087 0.087 0.164 0.242 0.312
59 0.090 0.090 0.090 0.170 0.251 0.323
60 0.135 0.135 0.135 0.255 0.377 0.485
61 0.090 0.090 0.090 0.170 0.251 0.323
62 0.113 0.113 0.113 0.213 0.314 0.404
63 0.090 0.090 0.090 0.170 0.251 0.323
64 0.090 0.090 0.090 0.170 0.251 0.323
65 1.000 1.000 1.000 1.000 1.000 1.000
These rates also apply to Local Prosecutors, Local Sheriff, School Police, and Other Safety.
6-69
APPENDIX A
CalPERS Actuarial Valuation – June 30, 2010
Miscellaneous 2.5% at 55 Risk Pool
A-17
Public Agency Fire 3%@50
Duration of Service
Age 5 Years 10 Years 15 Years 20 Years 25 Years 30 Years
50 0.034 0.034 0.034 0.048 0.068 0.080
51 0.046 0.046 0.046 0.065 0.092 0.109
52 0.069 0.069 0.069 0.097 0.138 0.163
53 0.084 0.084 0.084 0.117 0.166 0.197
54 0.103 0.103 0.103 0.143 0.204 0.241
55 0.127 0.127 0.127 0.177 0.252 0.298
56 0.121 0.121 0.121 0.169 0.241 0.285
57 0.101 0.101 0.101 0.141 0.201 0.238
58 0.118 0.118 0.118 0.165 0.235 0.279
59 0.100 0.100 0.100 0.140 0.199 0.236
60 0.150 0.150 0.150 0.210 0.299 0.354
61 0.100 0.100 0.100 0.140 0.199 0.236
62 0.125 0.125 0.125 0.175 0.249 0.295
63 0.100 0.100 0.100 0.140 0.199 0.236
64 0.100 0.100 0.100 0.140 0.199 0.236
65 1.000 1.000 1.000 1.000 1.000 1.000
Schools 2%@ 55
Duration of Service
Age 5 Years 10 Years 15 Years 20 Years 25 Years 30 Years
50 0.005 0.009 0.013 0.015 0.016 0.018
51 0.005 0.010 0.014 0.017 0.019 0.021
52 0.006 0.012 0.017 0.020 0.022 0.025
53 0.007 0.014 0.019 0.023 0.026 0.029
54 0.012 0.024 0.033 0.039 0.044 0.049
55 0.024 0.048 0.067 0.079 0.088 0.099
56 0.020 0.039 0.055 0.065 0.072 0.081
57 0.021 0.042 0.059 0.070 0.078 0.087
58 0.025 0.050 0.070 0.083 0.092 0.103
59 0.029 0.057 0.080 0.095 0.105 0.118
60 0.037 0.073 0.102 0.121 0.134 0.150
61 0.046 0.090 0.126 0.149 0.166 0.186
62 0.076 0.151 0.212 0.250 0.278 0.311
63 0.069 0.136 0.191 0.225 0.251 0.281
64 0.067 0.133 0.185 0.219 0.244 0.273
65 0.091 0.180 0.251 0.297 0.331 0.370
66 0.072 0.143 0.200 0.237 0.264 0.295
67 0.067 0.132 0.185 0.218 0.243 0.272
68 0.060 0.118 0.165 0.195 0.217 0.243
69 0.067 0.133 0.187 0.220 0.246 0.275
70 0.066 0.131 0.183 0.216 0.241 0.270
6-70
APPENDIX B
SUMMARY OF PRINCIPAL PLAN PROVISIONS
6-71
APPENDIX B
CalPERS Actuarial Valuation – June 30, 2010 B-1
Miscellaneous 2.5% at 55 Risk Pool
The following is a description of the principal plan provisions used in calculating the liabilities of the Miscellaneous
2.5% at 55 Risk Pool. Plan provisions are divided based on whether they are standard, Class 1, Class 2 or Class 3
benefits. Standard benefits are applicable to all members of the risk pool while Class 1, 2 or 3 benefits vary
among employers. Provided at the end of the listing is a table providing the percentage of members participating
in the pool that are subject to each benefit.
Many of the statements in this summary are general in nature, and are intended to provide an easily understood
summary of the complex Public Employees’ Retirement Law. The law itself governs in all situations.
Service Retirement
Eligibility
A CalPERS member becomes eligible for Service Retirement upon attainment of age 50 with at least 5 years of
credited service (total service across all CalPERS employers, and with certain other Retirement Systems with
which CalPERS has reciprocity agreements). For employees hired into a plan with the 1.5% at 65 formula,
eligibility for service retirement is age 55 with at least 5 years of service.
Benefit
The Service Retirement benefit calculated for service earned by this group of employees is a monthly allowance
equal to the product of the benefit factor, years of service, and final compensation, where
The benefit factor for this group of employees comes from the 2.5% at 55 Miscellaneous benefit formula
factor table. The factor depends on the member’s age at retirement. Listed below are the factors for
retirement at whole year ages:
Retirement Age 2.5% at 55 Miscellaneous
Factor
50 2.0%
51 2.1%
52 2.2%
53 2.3%
54 2.4%
55 & Up 2.5%
The years of service is the amount credited by CalPERS to a member while he or she is employed in this
group (or for other periods that are recognized under the employer’s contract with CalPERS). For a member
who has earned service with multiple CalPERS employers, the benefit from each employer is calculated
separately according to each employer’s contract, and then added together for the total allowance. Any
unused sick leave accumulated at the time of retirement will be converted to credited service at a rate of
0.004 years of service for each day of sick leave.
The final compensation is the monthly average of the member’s highest 36 or 12 consecutive months’ full-
time equivalent monthly pay (no matter which CalPERS employer paid this compensation). The standard
benefit available to all members is 36 months. Employers have the option of providing a final compensation
equal to the highest 12 consecutive months by contracting for this class 1 optional benefit.
For employees covered by the modified formula, the final compensation is offset by $133.33 (or by one third
if the final compensation is less than $400). Employers have the option to contract for the class 3 benefit
that will eliminate the offset applicable to the final compensation of employees covered by a modified
formula.
6-72
APPENDIX B
CalPERS Actuarial Valuation – June 30, 2010 B-2
Miscellaneous 2.5% at 55 Risk Pool
The Miscellaneous Service Retirement benefit is not capped. The Safety Service Retirement benefit is capped
at 90% of final compensation.
Vested Deferred Retirement
Eligibility for Deferred Status
A CalPERS member becomes eligible for a deferred vested retirement benefit when he or she leaves employment,
keeps his or her contribution account balance on deposit with CalPERS, and has earned at least 5 years of
credited service (total service across all CalPERS employers, and with certain other Retirement Systems with
which CalPERS has reciprocity agreements).
Eligibility to Start Receiving Benefits
The CalPERS member becomes eligible to receive the deferred retirement benefit upon satisfying the eligibility
requirements for Deferred Status and upon attainment of age 50.
Benefit
The vested deferred retirement benefit is the same as the Service Retirement benefit, where the benefit factor is
based on the member’s age at allowance commencement. For members who have earned service with multiple
CalPERS employers, the benefit from each employer is calculated separately according to each employer’s
contract, and then added together for the total allowance.
Non-Industrial (Non-Job Related) Disability Retirement
Eligibility
A CalPERS member is eligible for Non-Industrial Disability Retirement if he or she becomes disabled and has at
least 5 years of credited service (total service across all CalPERS employers, and with certain other Retirement
Systems with which CalPERS has reciprocity agreements). There is no special age requirement. Disabled means
the member is unable to perform his or her job because of an illness or injury which is expected to be permanent
or to last indefinitely. The illness or injury does not have to be job related. A CalPERS member must be actively
working with any CalPERS employer at the time of disability in order to be eligible for this benefit.
Standard Benefit
The standard Non-Industrial Disability Retirement benefit is a monthly allowance equal to 1.8% of final
compensation, multiplied by service, which is determined as follows:
service is CalPERS credited service, for members with less than 10 years of service or greater than 18.518
years of service; or
service is CalPERS credited service plus the additional number of years that the member would have worked
until age 60, for members with at least 10 years but not more than 18.518 years of service. The maximum
benefit in this case is 33 1/3% of Final Compensation.
Members who are eligible for a larger service retirement benefit may choose to receive that benefit in lieu of a
disability benefit. Members eligible to retire, and who have attained the normal retirement age determined by
their service retirement benefit formula, will receive the same dollar amount for disability retirement as that
payable for service retirement. For members who have earned service with multiple CalPERS employers, the
benefit attributed to each employer is the total disability allowance multiplied by the ratio of service with a
particular employer to the total CalPERS service.
Improved Benefit
Employers have the option of providing this improved benefit by contracting for this class 3 optional benefit.
The improved Non-Industrial Disability Retirement benefit is a monthly allowance equal to 30% of final
compensation for the first 5 years of service, plus 1% for each additional year of service to a maximum of 50% of
final compensation.
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APPENDIX B
CalPERS Actuarial Valuation – June 30, 2010 B-3
Miscellaneous 2.5% at 55 Risk Pool
Members who are eligible for a larger service retirement benefit may choose to receive that benefit in lieu of a
disability benefit. Members eligible to retire, and who have attained the normal retirement age determined by
their service retirement benefit formula, will receive the same dollar amount for disability retirement as that
payable for service retirement. For members who have earned service with multiple CalPERS employers, the
benefit attributed to each employer is the total disability allowance multiplied by the ratio of service with a
particular employer to the total CalPERS service.
Industrial (Job Related) Disability Retirement
Employers have the option of providing this improved benefit by contracting for this class 1 optional benefit.
Eligibility
An employee is eligible for Industrial Disability Retirement if he or she becomes disabled while working, where
disabled means the member is unable to perform the duties of the job because of a work-related illness or injury
which is expected to be permanent or to last indefinitely. A CalPERS member who has left active employment
within this group is not eligible for this benefit, except to the extent described in the next paragraph.
Standard Benefit
The standard Industrial Disability Retirement benefit is a monthly allowance equal to 50% of final compensation.
For a CalPERS member not actively employed in this group who became disabled while employed by some other
CalPERS employer, the benefit is a return of or annuitization of the accumulated member contributions with
respect to employment in this group. However, if a member is eligible for Service Retirement and if the Service
Retirement benefit is more than the Industrial Disability Retirement benefit, the member may choose to receive
the larger benefit.
Increased Benefit (75% of Final Compensation)
The increased Industrial Disability Retirement benefit is a monthly allowance equal to 75% of final compensation
for total disability. For a CalPERS member not actively employed in this group who became disabled while
employed by some other CalPERS employer, the benefit is a return of or annuitization of the accumulated
member contributions with respect to employment in this group. However, if a member is eligible for Service
Retirement and if the Service Retirement benefit is more than the Industrial Disability Retirement benefit, the
member may choose to receive the larger benefit.
Post-Retirement Death Benefit
Standard Lump Sum Payment
Upon the death of a retiree, a one-time lump sum payment of $500 will be made to the retiree’s designated
survivor(s), or to the retiree’s estate.
Improved Lump Sum Payment
Employers have the option of providing any of these improved lump sum death benefit by contracting for any of
these class 3 optional benefits.
Upon the death of a retiree, a one-time lump sum payment of $600, $2,000, $3,000, $4,000 or $5,000 will be
made to the retiree’s designated survivor(s), or to the retiree’s estate.
Form of Payment for Retirement Allowance
Standard Form of Payment
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APPENDIX B
CalPERS Actuarial Valuation – June 30, 2010 B-4
Miscellaneous 2.5% at 55 Risk Pool
Generally, the retirement allowance is paid to the retiree in the form of an annuity for as long as he or she is
alive. The retiree may choose to provide for a portion of his or her allowance to be paid to any designated
beneficiary after the retiree’s death. CalPERS provides for a variety of such benefit options, which the retiree
pays for by taking a reduction in his or her retirement allowance. The larger the amount to be provided to the
beneficiary is, and the younger the beneficiary is, the greater the reduction to the r etiree’s allowance.
Improved Form of Payment (Post Retirement Survivor Allowance)
Employers have the option to contract for this class 1 benefit providing an improved post retirement survivor
allowance.
For retirement allowances with respect to service subject to the modified formula, 25% of the retirement
allowance will automatically be continued to certain statutory beneficiaries upon the death of the retiree, without
a reduction in the retiree’s allowance. For retirement allowances with respect to service subject to the full
formula, 50% of the retirement allowance will automatically be continued to certain statutory beneficiaries upon
the death of the retiree, without a reduction in the retiree’s allowance. This additional benefit is often referred to
as post retirement survivor allowance (PRSA) or simply as survivor continuance.
In other words, 25% or 50% of the allowance, the continuance portion, is paid to the retiree for as long as he or
she is alive, and that same amount is continued to the ret iree’s spouse (or if no eligible spouse, to unmarried
children until they attain age 18; or, if no eligible children, to a qualifying dependent parent) for the rest of his or
her lifetime. This benefit will not be discontinued in the event the spouse remarries.
The remaining 75% or 50% of the retirement allowance, which may be referred to as the option portion of the
benefit, is paid to the retiree as an annuity for as long as he or she is alive. Or, the retiree may choose to
provide for some of this option portion to be paid to any designated beneficiary after the retiree’s death. CalPERS
offers a variety of such benefit options, which the retiree pays for by taking a reduction to the option portion of
his or her retirement allowance.
Pre-Retirement Death Benefits
Basic Death Benefit
Eligibility
An employee’s beneficiary (or estate) may receive the Basic Death benefit if the member dies while actively
employed. A CalPERS member must be actively employed with the CalPERS employer providing this benefit to be
eligible for this benefit. A member’s survivor who is eligible for any other pre-retirement death benefit described
below may choose to receive that death benefit instead of this Basic Death benefit.
Standard Benefit
The Basic Death Benefit is a lump sum in the amount of the member’s accumulated contributions, where interest
is currently credited at 7.75% per year, plus a lump sum in the amount of one month's salary for each completed
year of current service, up to a maximum of six months' salary. For purposes of this benefit, one month's salary
is defined as the member's average monthly full-time rate of compensation during the 12 months preceding
death.
1957 Survivor Benefit
Eligibility
An employee’s eligible survivor(s) may receive the 1957 Survivor benefit if the member dies while actively
employed, has attained at least age 50, and has at least 5 years of credited service (total service across all
CalPERS employers and with certain other Retirement Systems with which CalPERS has reciprocity agreements).
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APPENDIX B
CalPERS Actuarial Valuation – June 30, 2010 B-5
Miscellaneous 2.5% at 55 Risk Pool
A CalPERS member must be actively employed with the CalPERS employer providing this benefit to be eligible for
this benefit. An eligible survivor means the surviving spouse to whom the member was married at least one year
before death or, if there is no eligible spouse, to the member's unmarried children under age 18. A member’s
survivor may choose this benefit in lieu of the Basic Death benefit or the Special Death benefit.
Standard Benefit
The 1957 Survivor benefit is a monthly allowance equal to one-half of the unmodified Service Retirement benefit
that the member would have been entitled to receive if the member had retired on the date of his or her death.
If the benefit is payable to the spouse, the benefit is discontinued upon the death of the spouse. If the benefit is
payable to a dependent child, the benefit will be discontinued upon death or attainment of age 18, unless the
child is disabled. There is a guarantee that the total amount paid will at least equal the Basic Death benefit.
Optional Settlement 2W Death Benefit
Eligibility
An employee’s eligible survivor may receive the Optional Settlement 2W Death benefit if the member dies while
actively employed, has attained at least age 50, and has at least 5 years of credited service (total service across
all CalPERS employers and with certain other Retirement Systems with which CalPERS has reciprocity
agreements). A CalPERS member who is no longer actively employed with any CalPERS employer is not eligible
for this benefit. An eligible survivor means the surviving spouse to whom the member was married at least one
year before death. A member’s survivor may choose this benefit in lieu of the Basic Death benefit or the 1957
Survivor benefit.
Standard Benefit
The Optional Settlement 2W Death benefit is a monthly allowance equal to the Service Retirement benefit that
the member would have received had the member retired on the date of his or her death and elected Optional
Settlement 2W. (A retiree who elects Optional Settlement 2W receives an allowance that has been reduced so
that it will continue to be paid after his or her death to a surviving beneficiary.) The allowance is payable as long
as the surviving spouse lives, at which time it is continued to any unmarried children under age 18, if applicable.
There is a guarantee that the total amount paid will at least equal the Basic Death Benefit.
Special Death Benefit
Eligibility
An employee’s eligible survivor(s) may receive the Special Death benefit if the member dies while actively
employed and the death is job-related. A CalPERS member who is no longer actively employed with any CalPERS
employer is not eligible for this benefit. An eligible survivor means the surviving spouse to whom the member
was married prior to the onset of the injury or illness that resulted in death. If there is no eligible spouse, an
eligible survivor means the member's unmarried children under age 22. An eligible survivor who chooses to
receive this benefit will not receive any other death benefit.
Improved Benefit
The Special Death benefit is a monthly allowance equal to 50% of final compensation, and will be increased
whenever the compensation paid to active employees is increased but ceasing to increase when the member
would have attained age 50. The allowance is payable to the surviving spouse until death at which time the
allowance is continued to any unmarried children under age 22. There is a guarantee that the total amount paid
will at least equal the Basic Death Benefit.
If the member’s death is the result of an accident or injury caused by external violence or physical force incurred
in the performance of the member’s duty, and there are eligible surviving children (eligible means unmarried
children under age 22) in addition to an eligible spouse, then an additional monthly allowance is paid equal
to the following:
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APPENDIX B
CalPERS Actuarial Valuation – June 30, 2010 B-6
Miscellaneous 2.5% at 55 Risk Pool
if 1 eligible child: 12.5% of final compensation
if 2 eligible children: 20.0% of final compensation
if 3 or more eligible children: 25.0% of final compensation
Cost-of-Living Adjustments (COLA)
Standard Benefit
Beginning the second calendar year after the year of retirement, retirement and survivor allowances will be
annually adjusted on a compound basis by 2%. However, the cumulative adjustment may not be greater than
the cumulative change in the Consumer Price Index since the date of retirement.
Improved Benefit
Employers have the option of providing any of these improved cost-of-living adjustments by contracting for any
one of these class 1 optional benefits.
Beginning the second calendar year after the year of retirement, retirement and survivor allowances will be
annually adjusted on a compound basis by either 3%, 4% or 5%. However, the cumulative adjustment may not
be greater than the cumulative change in the Consumer Price Index since the date of retirement.
Purchasing Power Protection Allowance (PPPA)
Retirement and survivor allowances are protected against inflation by PPPA. PPPA benefits are cost-of-living
adjustments that are intended to maintain an individual’s allowance at 80% of the initial allowance at retirement
adjusted for inflation since retirement. The PPPA benefit will be coordinated with other cost-of-living adjustments
provided under the plan.
Employee Contributions
Each employee contributes toward his or her retirement based upon the following schedule.
The percent contributed below the monthly compensation breakpoint is 0%.
The monthly compensation breakpoint is $0 for full and supplemental formula members, except for those
members in the CSU auxiliary organizations where the breakpoint is $513.
The monthly compensation breakpoint is $133.33 for employees covered by the modified formula.
The percent contributed above the monthly compensation breakpoint is 8% except for those members in the
CSU auxiliary organizations where the contribution rate has been set at the State member level.
The employer may choose to “pick-up” these contributions for the employees (Employer Paid Member
Contributions or EMPC). An employer may also include Employee Cost Sharing in the contract, where employees
contribute an additional percentage of compensation based on any optional benefit for which a contract
amendment was made on or after January 1, 1979.
Refund of Employee Contributions
If the member’s service with the employer ends, and if the member does not satisfy the eligibility conditions for
any of the retirement benefits above, the member may elect to receive a refund of his or her employee
contributions, which are credited annually with 6% interest.
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APPENDIX B
CalPERS Actuarial Valuation – June 30, 2010 B-7
Miscellaneous 2.5% at 55 Risk Pool
1959 Survivor Benefit
This is a pre-retirement death benefit available only to members not covered by Social Security. Any agency
joining CalPERS subsequent to 1993 was required to provide this benefit if the members were not covered by
Social Security. The benefit is optional for agencies joining CalPERS prior to 1994. Levels 1, 2 and 3 are now
closed. Any new agency or any agency wishing to add this benefit or increase the current level must choose the
4th or Indexed Level.
This benefit is not included in the results presented in this valuation. More information on this benefit is available
on the CalPERS website at www.calpers.ca.gov.
6-78
APPENDIX C
CLASSIFICATION OF OPTIONAL BENEFITS
EXAMPLE OF INDIVIDUAL AGENCY’S RATE CALCULATION
DISTRIBUTION OF CLASS 1 BENEFITS
6-79
APPENDIX C
CalPERS Actuarial Valuation – June 30, 2010 C-1
Miscellaneous 2.5% at 55 Risk Pool
Classification of Optional Benefits
Below is the list of the available optional benefit provisions and their initial classification upon establishment
of risk pools. When new benefits become available as a result of legislation, the Chief actuary will determine
their classification in accordance with the criteria established in the board policy.
Class 1
Class 1 benefits have been identified to be the more expensive ancillary benefits. These benefits vary by
employer across the risk pool. Agencies contracting for a Class 1 benefit will be responsible for the past
service liability associated with such benefit and will be required to pay a surcharge established by the
actuary to cover the ongoing cost (normal cost) of the Class 1 benefit.
The table below shows the list of Class 1 benefits and their applicable surcharge for the Miscellaneous 2.5%
at 55 Risk Pool. Last year’s surcharges are shown for comparison.
{classification_optional_benefits} June 30, 2009 June 30, 2010
One Year Final Compensation 0.604% 0.607%
EPMC 7% 1.066% 1.069%
EPMC 8% 1.219% 1.221%
EPMC 9% N/A N/A
25% PRSA 0.903% 0.908%
50% PRSA 0.903% 0.908%
3% Annual COLA 1.363% 1.367%
4% Annual COLA 1.363% 1.367%
5% Annual COLA 1.363% 1.367%
IDR For Local Miscellaneous Members 0.464% 0.469%
Increased IDR Allowance to 75% of Compensation 0.813% 0.821%
Improved Industrial Disability Allowance for Local Safety Members N/A N/A
1% Employee Cost Sharing (1.000%) (1.000%)
2% Employee Cost Sharing (2.000%) (2.000%)
.75% Employee Cost Sharing (0.750%) (0.750%)
7% Employee Contribution Reduction 7.000% 7.000%
3.50% Employee Contribution Reduction 3.500% 3.500%
Employee Contribution Rate for CSUC Auxiliary Organizations
Reduced to State Member Level - Covered by Social Security 2.000% 2.000%
Employee Contribution Rate for CSUC Auxiliary Organizations
Reduced to State Member Level - Not Covered by Social Security 1.000% 1.000%
For employers contracting for more than one Class 1 benefit, the surcharges listed in this table will be added
together.
Class 2
Class 2 benefits have been identified to be the ancillary benefits providing one-time increases in benefits.
These benefits vary by employer across the risk pool. Agencies contracting for a Class 2 benefit will be
responsible for the past service liability associated with such benefit.
The following benefits shall be classified as Class 2:
One-time 1% to 6% Ad Hoc COLA Increases for members who retired or died prior to
January 1, 1998 (Section 21328)
"Golden Handshakes" – Section 20903 Two Years Additional Service Credit
Credit for Prior Service Paid for by the Employer
Military Service Credit (Section 20996)
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APPENDIX C
CalPERS Actuarial Valuation – June 30, 2010 C-2
Miscellaneous 2.5% at 55 Risk Pool
Credit for Local Retirement System Service for Employees of Agencies Contracted on a Prospective
basis (Section 20530.1)
Prior Service Credit for Employees of an Assumed Agency Function (Section 20936)
Limit Prior Service to Members Employed on Contract Date (Section 20938)
Public Service Credit for Limited Prior Service (Section 21031)
Public Service Credit for Employees of an Assumed Agency or Function (Section 21025)
Class 3
Class 3 benefits have been identified to be the less expensive ancillary benefits. Class 3 benefits may
vary by rate plan within each risk pool. However, the employer contribution rate will not vary within
the risk pool due to the Class 3 benefits.
The following benefits shall be classified as Class 3:
Full formula plus social security
Post Retirement Lump Sum Death Benefit
$600 lump sum retired death benefit (Section 21622)
$2,000 lump sum retired death benefit (Section 21623.5)
$3,000 lump sum retired death benefit (Section 21623.5)
$4,000 lump sum retired death benefit (Section 21623.5)
$5,000 lump sum retired death benefit (Section 21623.5)
Improved non-industrial disability allowance (Section 21427)
Special death benefit for local miscellaneous members (Section 21540.5)
Service Credit Purchased by Member
Partial Service Retirement (Section 21118)
Optional Membership for Part Time Employees (Section 20325)
Extension of Reciprocity Rights for Elective Officers (Section 20356)
Removal of Contract Exclusions Prospectively Only (Section 20503)
Alternate Death Benefit for Local Fire Members credited with 20 or more years of service (Section
21547.7)
6-81
APPENDIX C
CalPERS Actuarial Valuation – June 30, 2010 C-3
Miscellaneous 2.5% at 55 Risk Pool
Example Of Individual Agency's Rate Calculation
An individual employer rate is comprised of several components. These include the pool's net employer normal cost,
payment on the pool's unfunded liability, additional surcharge payments for contracted Class 1 benefits, the normal
cost phase-out and an agency’s payment for their own side fund. An example of the total rate for an employer might
look something like this:
Net Pool's Employer Normal Cost 8.780%
Rate Plan Surcharges 0.607%
Total Employer Normal Cost 9.387%
Plus: Pool's Payment on the Amortization Bases 4.527%
Side Fund Amortization Payment 2.600%
Total Employer Rate for fiscal year 2012-2013 16.514%
Details regarding your individual agency's normal cost phase out, side fund and surcharges can be found in
Section 1.
Distribution of Class 1 Benefits
% of members in the pool
Final Compensation with contracted benefit
One Year Final Compensation 79.3%
Three Years Final Compensation 20.8%
Post Retirement Survivor Continuance (PRSA)
No PRSA 75.6%
With PRSA 24.4%
Cost-of-Living Adjustments (COLA)
2% COLA 96.6%
3% COLA 0.9%
4% COLA 1.6%
5% COLA 1.0%
Industrial Disability Benefit
None 95.3%
Standard Industrial Disability Benefit (50% of Final Compensation) 3.4%
Improved Industrial Disability Benefit (75% of Final Compensation) 1.3%
Improved Industrial Disability Benefit (50% - 90% of Final Compensation) 0.0%
6-82
APPENDIX D
LIST OF PARTICIPATING EMPLOYERS
6-83
APPENDIX D
CalPERS Actuarial Valuation – June 30, 2010 D-1
Miscellaneous 2.5% at 55 Risk Pool
Employer Name
ALAMEDA COUNTY CONGESTION MANAGEMENT AGENCY
ALAMEDA COUNTY SCHOOLS INSURANCE GROUP
ALAMEDA COUNTY TRANSPORTATION IMPROVEMENT AUTHORITY
ALAMEDA COUNTY WASTE MANAGEMENT AUTHORITY
ALBANY MUNICIPAL SERVICES JOINT POWERS AUTHORITY
ANDERSON FIRE PROTECTION DISTRICT
ARROYO GRANDE DISTRICT CEMETERY
ASSOCIATION OF BAY AREA GOVERNMENTS
ASSOCIATION OF CALIFORNIA WATER AGENCIES
BEAUMONT DISTRICT LIBRARY
BUTTE COUNTY MOSQUITO AND VECTOR CONTROL DISTRICT
CALIFORNIA ASSOCIATION FOR PARK AND RECREATION INDEMNITY
CAYUCOS SANITARY DISTRICT
CAYUCOS-MORRO BAY CEMETERY DISTRICT
CENTRAL COUNTY FIRE DEPARTMENT
CENTRAL FIRE PROTECTION DISTRICT OF SANTA CRUZ COUNTY
CHESTER PUBLIC UTILITY DISTRICT
CHINO BASIN WATERMASTER
CHINO VALLEY INDEPENDENT FIRE DISTRICT
CITY OF ALBANY
CITY OF ARROYO GRANDE
CITY OF ATASCADERO
CITY OF BLUE LAKE
CITY OF BLYTHE
CITY OF CALISTOGA
CITY OF CAPITOLA
CITY OF CHOWCHILLA
CITY OF CRESCENT CITY
CITY OF DIXON
CITY OF DUARTE
CITY OF EAST PALO ALTO
CITY OF FIREBAUGH
CITY OF FOUNTAIN VALLEY
CITY OF GRASS VALLEY
CITY OF GROVER BEACH
CITY OF GUSTINE
CITY OF HEALDSBURG
CITY OF HOLLISTER
CITY OF IONE
CITY OF JACKSON
CITY OF LA PUENTE
CITY OF LA QUINTA
CITY OF LA VERNE
CITY OF LAKE ELSINORE
CITY OF LAKEPORT
CITY OF LARKSPUR
CITY OF LEMON GROVE
CITY OF LOMITA
CITY OF MILL VALLEY
CITY OF NEVADA CITY
CITY OF OAKDALE
CITY OF OAKLEY
CITY OF PINOLE
CITY OF PISMO BEACH
CITY OF PLACERVILLE
CITY OF RANCHO MIRAGE
CITY OF RANCHO PALOS VERDES
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APPENDIX D
CalPERS Actuarial Valuation – June 30, 2010 D-2
Miscellaneous 2.5% at 55 Risk Pool
CITY OF RANCHO SANTA MARGARITA
CITY OF SAN CARLOS
CITY OF SAN PABLO
CITY OF SANGER
CITY OF SANTA PAULA
CITY OF SAUSALITO
CITY OF SCOTTS VALLEY
CITY OF SIERRA MADRE
CITY OF SOLANA BEACH
CITY OF SOLVANG
CITY OF SOUTH EL MONTE
CITY OF TEMPLE CITY
CITY OF TWENTYNINE PALMS
CITY OF WATERFORD
COASTSIDE COUNTY WATER DISTRICT
CRESTLINE VILLAGE WATER DISTRICT
DE LUZ COMMUNITY SERVICES DISTRICT
DENAIR COMMUNITY SERVICES DISTRICT
DESERT WATER AGENCY
EAST BAY DISCHARGERS AUTHORITY
EASTERN SIERRA TRANSIT AUTHORITY
EXPOSITION METRO LINE CONSTRUCTION AUTHORITY
FALLBROOK PUBLIC UTILITY DISTRICT
FEATHER RIVER AIR QUALITY MANAGEMENT DISTRICT
GOLDEN SIERRA JOB TRAINING AGENCY
GREAT BASIN UNIFIED AIR POLLUTION CONTROL DISTRICT
HEBER PUBLIC UTILITY DISTRICT
HERITAGE RANCH COMMUNITY SERVICES DISTRICT
HI-DESERT WATER DISTRICT
HIDDEN VALLEY LAKE COMMUNITY SERVICES DISTRICT
HIGGINS AREA FIRE PROTECTION DISTRICT
KERN COUNTY COUNCIL OF GOVERNMENTS
KIRKWOOD MEADOWS PUBLIC UTILITIES DISTRICT
LAKE ARROWHEAD COMMUNITY SERVICES DISTRICT
LOS ANGELES COUNTY AREA E CIVIL DEFENSE AND DISASTER BOARD
LOS ANGELES COUNTY LAW LIBRARY
LOS ANGELES MEMORIAL COLISEUM COMMISSION
LOS ANGELES TO PASADENA METRO BLUE LINE CONSTRUCTION
MADERA HOUSING AUTHORITY, THE CITY OF
MC FARLAND RECREATION AND PARK DISTRICT
MIDPENINSULA REGIONAL OPEN SPACE DISTRICT
MONTE VISTA COUNTY WATER DISTRICT
NAPA COUNTY TRANSPORTATION AND PLANNING AGENCY
NEVADA COUNTY RESOURCE CONSERVATION DISTRICT
NORTH MARIN WATER DISTRICT
OLIVENHAIN MUNICIPAL WATER DISTRICT
ORO LOMA SANITARY DISTRICT
OXNARD HARBOR DISTRICT
PEBBLE BEACH COMMUNITY SERVICES DISTRICT
PLEASANT VALLEY RECREATION AND PARK DISTRICT
PUBLIC AGENCY RISK SHARING AUTHORITY OF CALIFORNIA
RAINBOW MUNICIPAL WATER DISTRICT
RANCHO CUCAMONGA FIRE PROTECTION DISTRICT
REDWOOD EMPIRE SCHOOL INSURANCE GROUP
REGIONAL COUNCIL OF RURAL COUNTIES
ROSAMOND COMMUNITY SERVICES DISTRICT
ROSE BOWL OPERATING COMPANY
ROWLAND WATER DISTRICT
SACRAMENTO AREA COUNCIL OF GOVERNMENTS
6-85
APPENDIX D
CalPERS Actuarial Valuation – June 30, 2010 D-3
Miscellaneous 2.5% at 55 Risk Pool
SACRAMENTO TRANSPORTATION AUTHORITY
SACRAMENTO-YOLO MOSQUITO AND VECTOR CONTROL DISTRICT
SAN BENITO COUNTY WATER DISTRICT
SAN BERNARDINO VALLEY WATER CONSERVATION DISTRICT
SAN ELIJO JOINT POWERS AUTHORITY
SAN FRANCISCO BAY AREA WATER EMERGENCY TRANSPORTATION AUTHORITY
SAN LUIS WATER DISTRICT
SAN MATEO COUNTY HARBOR DISTRICT
SANTA CLARA COUNTY LAW LIBRARY
SANTA CRUZ PORT DISTRICT
SEWERAGE COMMISSION--OROVILLE REGION
SHASTA LAKE FIRE PROTECTION DISTRICT
SHASTA LOCAL AGENCY FORMATION COMMISSION
SOQUEL CREEK WATER DISTRICT
SOUTH COUNTY SUPPORT SERVICES AGENCY
SOUTH ORANGE COUNTY WASTE WATER AUTHORITY
SOUTH SAN JOAQUIN IRRIGATION DISTRICT
SOUTH SAN LUIS OBISPO COUNTY SANITATION DISTRICT
SOUTHEAST AREA SOCIAL SERVICES FUNDING AUTHORITY
SOUTHERN CALIFORNIA PUBLIC POWER AUTHORITY
SOUTHWEST TRANSPORTATION AGENCY
SUMMIT CEMETERY DISTRICT
SUSANVILLE CONSOLIDATED SANITARY DISTRICT
TOWN OF COLMA
TOWN OF CORTE MADERA
TOWN OF FAIRFAX
TOWN OF WOODSIDE
TRABUCO CANYON WATER DISTRICT
TRI-DAM HOUSING AND PERSONNEL AGENCY
TRINDEL INSURANCE FUND
TWIN CITIES POLICE AUTHORITY
UNITED WATER CONSERVATION DISTRICT
VALLEY OF THE MOON WATER DISTRICT
VALLEY SANITARY DISTRICT
VALLEY-WIDE RECREATION AND PARK DISTRICT
VICTOR VALLEY WASTEWATER RECLAMATION AUTHORITY
WATER FACILITIES AUTHORITY-JOINT POWERS AGENCY
WEST BAY SANITARY DISTRICT
WEST CONTRA COSTA INTEGRATED WASTE MANAGEMENT AUTHORITY
WEST VALLEY MOSQUITO AND VECTOR CONTROL DISTRICT
WEST VALLEY SANITATION DISTRICT OF SANTA CLARA COUNTY
WESTERN MUNICIPAL WATER DISTRICT
WILLOW COUNTY WATER DISTRICT
WILLOW CREEK COMMUNITY SERVICES DISTRICT
WINTERS CEMETERY DISTRICT
YOLO COUNTY PUBLIC AGENCY RISK MANAGEMENT INSURANCE AUTHORITY
YOLO COUNTY TRANSPORTATION DISTRICT
6-86
APPENDIX E
INVESTMENT RETURN SENSITIVITY ANALYSIS
6-87
APPENDIX E
CalPERS Actuarial Valuation – June 30, 2010 E-1
Miscellaneous 2.5% at 55 Risk Pool
Investment Return Sensitivity Analysis
In July 2011, the investment return for fiscal year 2010-2011 was announced to be 20.7%. Note that this return is
before administrative expenses and also does not reflect final investment return information for real estate and
private equities. The final return information for these two asset classes is expected to be available later in
October. Our estimated preliminary 20.0% return for the 2010-2011 fiscal year is good news as it will help reduce
the impact of the -24% return in 2008-2009 and the impact of the three-year phase in adopted by the Board in
June 2009. For purposes of projecting future employer rates, we are assuming a 20% investment return for fiscal
year 2010-2011.
The investment return realized during a fiscal year first affects the contribution rate for the fiscal year 2 years later.
Specifically, the investment return for 2010-2011 will first be reflected in the June 30, 2011 actuarial valuation that
will be used to set the 2013-2014 employer contribution rates, the 2011-2012 investment return will first be
reflected in the June 30, 2012 actuarial valuation that will be used to set the 2014-2015 employer contribution
rates and so forth.
Based on a 20% investment return for fiscal year 2010-2011 and assuming that all other actuarial assumptions will
be realized and that no further changes to assumptions, contributions, benefits, or funding will occur between now
and the beginning of the fiscal year 2013-2014, the effect on the 2013-2014 Employer Rate is as follows:
Estimated 2013-2014 Pool’s Base
Employer Rate
Estimated Increase in Pool’s Base Employer Rate
between 2012-2013 and 2013-2014
13.5% 0.2%
As part of this report, a sensitivity analysis was performed to determine the effects of various investment returns
during fiscal years 2011-2012, 2012-2013 and 2013-2014 on the 2014-2015, 2015-2016 and 2016-2017 employer
rates. Once again, the projected rate increases assume that all other actuarial assumptions will be realized and
that no further changes to assumptions, contributions, benefits, or funding will occur.
Five different 2011-2012 investment return scenarios were selected.
The first scenario is what one would expect if the markets were to give us a 5th percentile return from
July 1, 2011 through June 30, 2014. The 5th percentile return corresponds to a -3.64% return for the
each of the 2011-2012, 2012-2013 and 2013-2014 fiscal years.
The second scenario is what one would expect if the markets were to give us a 25th percentile return
from July 1, 2011 through June 30, 2014. The 25th percentile return corresponds to a 2.93% return for
the each of the 2011-2012, 2012-2013 and 2013-2014 fiscal years.
The third scenario assumed the return for 2011-2012, 2012-2013, 2013-2014 would be our assumed
7.75% investment return which represents about a 49th percentile event.
The fourth scenario is what one would expect if the markets were to give us a 75th percentile return
from July 1, 2011 through June 30, 2014. The 75th percentile return corresponds to a 12.25% return for
the each of the 2011-2012, 2012-2013 and 2013-2014 fiscal years.
Finally, the last scenario is what one would expect if the markets were to give us a 95th percentile return
from July 1, 2011 through June 30, 2014. The 95th percentile return corresponds to a 19.02% return for
the each of the 2011-2012, 2012-2013 and 2013-2014 fiscal years.
The table below shows the estimated changes in the Pool’s Base rate for 2014-2015, 2015-2016 and 2016-2017
under the five different scenarios.
2011-2014 Investment
Return Scenario
Estimated Change in Pool’s Base Rate Between
Year Shown and Preceding Year
Total Estimated
Increase in Pool’s Base
Employer Rate
between 2013-2014
and 2016-2017 2014-2015 2015-2016 2016-2017
-3.64% (5th percentile) 1.5% 3.2% 3.0% 7.8%
2.93% (25th percentile) 0.3% 0.6% 1.4% 2.3%
7.75% 0.2% 0.2% 0.2% 0.6%
12.25%(75th percentile) 0.1% 0.1% 0.0% 0.2%
19.02%(95th percentile) 0.0% -0.2% -0.5% -0.6%
6-88
APPENDIX F
GLOSSARY OF ACTUARIAL TERMS
6-89
APPENDIX F
CalPERS Actuarial Valuation – June 30, 2010 F-1
Miscellaneous 2.5% at 55 Risk Pool
Glossary of Actuarial Terms
Accrued Liability
The total dollars needed as of the valuation date to fund all benefits earned in the past for current
members.
Actuarial Assumptions
Assumptions made about certain events that will affect pension costs. Assumptions generally can be
broken down into two categories: demographic and economic. Demographic assumptions include such
things as mortality, disability and retirement rates. Economic assumptions include investment return,
salary growth and inflation.
Actuarial Methods
Procedures employed by actuaries to achieve certain goals of a pension plan. These may include things
such as funding method, setting the length of time to fund the past service liability and determining the
actuarial value of assets.
Actuarial Valuation
The determination, as of a valuation date of the normal cost, actuarial accrued liability, actuarial value of
assets and related actuarial present values for a pension plan. These valuations are performed annually
or when an employer is contemplating a change to their plan provisions.
Actuarial Value of Assets
The actuarial value of assets used for funding purposes is obtained through an asset smoothing technique
where investment gains and losses are partially recognized in the year they are incurred, with the
remainder recognized in subsequent years.
This method helps to dampen large fluctuations in the employer contribution rate.
Amortization Bases
Separate payment schedules for different portions of the unfunded liability. The total unfunded liability of
a risk pool or non-pooled plan can be segregated by "cause", creating “bases” and each such base will be
separately amortized and paid for over a specific period of time. This can be likened to a home mortgage
that has 24 years of remaining payments and a second on that mortgage that has 10 years left. Each
base or each mortgage note has its own terms (payment period, principal, etc.)
Generally in an actuarial valuation, the separate bases consist of changes in liability (principal) due to
amendments, actuarial assumption changes, or methodology changes and gains and losses. Payment
periods are determined by Board policy and vary based on the cause of the change.
Amortization Period
The number of years required to pay off an amortization base.
Annual Required Contributions (ARC)
The employer's periodic required annual contributions to a defined benefit pension plan, calculated in
accordance with the plan assumptions. The ARC is determined by multiplying the employer contribution
rate by the payroll reported to CalPERS for the applicable fiscal year. However, if this contribution is fully
prepaid in a lump sum, then the dollar value of the ARC is equal to the Lump Sum Prepayment.
Class 1 Benefits
Class 1 benefits have been identified to be the more expensive ancillary benefits. These benefits vary by
employer across the risk pool. Agencies contracting for a Class 1 benefit will be responsible for the past
service liability associated with such benefit and will be required to pay a surcharge established by the
actuary to cover the ongoing cost (normal cost) of the Class 1 benefit.
6-90
APPENDIX F
CalPERS Actuarial Valuation – June 30, 2010 F-2
Miscellaneous 2.5% at 55 Risk Pool
Class 2 Benefits
Class 2 benefits have been identified to be the ancillary benefits providing one-time increases in
benefits. These benefits vary by employer across the risk pool. Agencies contracting for a Class 2
benefit will be responsible for the past service liability associated with such benefit.
Class 3 Benefits
Class 3 benefits have been identified to be the less expensive ancillary benefits. Class 3 benefits may
vary by rate plan within each risk pool. However, the employer contribution rate will not vary within the
risk pool due to the Class 3 benefits.
Entry Age
The earliest age at which a plan member begins to accrue benefits under a defined benefit pension Plan
or risk pool. In most cases, this is the same as the date of hire.
(The assumed retirement age less the entry age is the amount of time required to fund a member's total
benefit. Generally, the older a member is at hire, the greater the entry age normal cost. This is mainly
because there is less time to earn investment income to fund the future benefits.)
Excess Assets
When a plan or pool’s actuarial value of assets is greater than its accrued liability, the difference is the
plan or pool’s excess assets. A plan with excess assets is said to be overfunded. The result is that the
plan or pool can temporarily reduce future contributions.
Entry Age Normal Cost Method
An actuarial cost method designed to fund a member's total plan benefit over the course of his or her
career. This method is designed to produce stable employer contributions in amounts that increase at
the same rate as the employer’s payroll (i.e. level % of payroll).
Fresh Start
When multiple amortization bases are collapsed into one base and amortized over a new funding period.
At CalPERS, fresh starts are used to avoid inconsistencies that would otherwise occur.
Funded Status
A measure of how well funded a plan or risk pool is. Or equivalently, how "on track" a plan or risk pool
is with respect to assets vs. accrued liabilities. We calculate a funded ratio by dividing the market value
of assets by the accrued liabilities. A ratio greater than 100% means the plan or risk pool has more
assets than liabilities and a ratio less than 100% means liabilities are greater than assets.
Normal Cost
The annual cost of service accrual for the upcoming fiscal year for active employees. The normal cost,
including surcharges for applicable class 1 benefit should be viewed as the long term contribution rate.
Pension Actuary
A person who is responsible for the calculations necessary to properly fund a pension plan.
Prepayment Contribution
A payment made by the employer to reduce or eliminate the year’s required employer contribution.
Present Value of Benefits
The total dollars needed as of the valuation date to fund all benefits earned in the past or expected to
be earned in the future for current members.
Risk Pools
Using the benefit of the law of large numbers, it is a collection of employers for the purpose of sharing
risk.
Rolling Amortization Period
An amortization period that remains the same each year, rather than declining.
6-91
APPENDIX F
CalPERS Actuarial Valuation – June 30, 2010 F-3
Miscellaneous 2.5% at 55 Risk Pool
Side Fund
At the time of joining a risk pool, a side fund was created to account for the difference between the
funded status of the pool and the funded status of your plan. Your side fund will be amortized on an
annual basis, with the actuarial investment return assumption. This assumption is currently 7.75%. A
positive side fund will cause your required employer contribution rate to be reduced by the Amortization
of Side Fund rate component shown in the Required Employer Contributions section. A negative side
fund will cause your required employer contribution rate to be increased by the Amortization of Side
Fund rate component. In the absence of subsequent contract amendments or funding changes, the
Side Fund will disappear at the end of the amortization period.
Superfunded
A condition existing when the actuarial value of assets exceeds the present value of benefits. When this
condition exists on a given valuation date for a given plan, employee contributions for the rate year
covered by that valuation may be waived.
Unfunded Liability
When a plan or pool’s actuarial value of assets is less than its accrued liability, the difference is the plan
or pool’s unfunded liability. The plan or pool will have to temporarily increase contributions.
6-92
411 Borel Avenue, Suite 101 San Mateo, California 94402
main: 650/377-1600 fax: 650/345-8057 web: www.bartel-associates.com
January 18, 2011
Honorable Mayor Long, Members of the City Council and Carolyn Lehr, City Manager
City of Rancho Palos Verdes
30940 Hawthorne Blvd.
Rancho Palos Verdes, CA 90275
Re: City of Rancho Palos Verdes CalPERS Unfunded Liability
Background
Bartel Associates has been asked to provide the City of Rancho Palos Verdes CalPERS related
unfunded liability. Beginning with the June 30, 2003 actuarial valuation, all CalPERS participating
agencies with fewer than 100 active members (including the City), were pooled with other agencies
with the same benefit formulas. The City participates in the 2.5%@55 CalPERS Risk Pool. This Risk
Pool’s most recent (June 30, 2009) actuarial valuation was provided to the City at the end of
November. This valuation is used to determine the City’s (as well as other agencies participating in
the Risk Pool) 2011/12 fiscal year contribution rates.
Actuarial valuations show an unfunded liability when the Actuarial Accrued Liability exceeds the
Actuarial Value of Assets. The difference between these two is usually referred to as the Unfunded
Actuarial Accrued Liability (or UAAL). CalPERS Risk Pool actuarial valuations do not provide
individual agency actuarial information, other than the contribution rate. The valuations only provide
the total Risk Pool’s unfunded liability.
The UAAL is not a liability requiring full payment within one year. The information provided below
is based on CalPERS June 30, 2009 actuarial valuation. When completed, the June 30, 2010 CalPERS
UAAL will be different. However, if the agency withdraws from CalPERS, the UAAL will be more
precisely calculated (resulting in different amounts than estimated below) and will be due and payable
over a short period.
City of Rancho Palos Verdes Estimate CalPERS Unfunded Actuarial Accrued Liability
As mentioned above, CalPERS only provides the total Risk Pool’s UAAL, it does not provide
agencies their respective UAAL, or their allocated portion of the UAAL. We provided the City an
estimate (based on the Actuarial Asset Value) of the City’s portion of the Risk Pool UAAL for the
November 30th City Council meeting. This letter documents the information we provided and expands
it to include an estimate of the City’s portion of the Risk Pool’s Market Value based UAAL.
Because the City’s 2011/12 contribution will be a function of the Risk Pool’s UAAL and expected
2011/12 PERSable wages, in conjunction with the City’s actual 2011/12 PERSable wages; the City’s
portion of the UAAL can be estimated by prorating the City’s expected 2011/12 PERSable wages
($5.1 million) and the Risk Pool’s PERSable wages ($390.9 million). The following table summarizes
this calculation on both a market and an actuarial (Smoothed market) value basis (results shown in
millions of dollars):
Attachment B
6-93
Mayor Long, Members of the City Council and Carolyn Lehr, City Manager
January 18, 2011
Page 2
411 Borel Avenue, Suite 101 San Mateo, California 94402
main: 650/377-1600 fax: 650/345-8057 web: www.bartel-associates.com
Actuarial Market
1. June 30, 2009 Actuarial Accrued Liability $1,834.4 $1,834.4
2. June 30, 2009 Asset Value 1,626.6 1,088.7
3. June 30, 2009 Unfunded Actuarial Accrued Liability
(UAAL)
207.8 754.7
4. Pool’s Expected 2011/12 PERSable Wages 390.9 390.9
5. City’s Expected 2011/12 PERSable Wages 5.1 5.1
6. City’s Estimated June 30, 2009 UAAL
[(3) x (5) / (4)]
2.7 9.8
I recall the City Manager, in response to a Council question, mentioned that our estimated City portion
of the Risk Pool’s Actuarial Value based UAAL was $2.7 million, consistent with the above amounts.
As stated before, the market value provides an estimate of the UAAL if there were no asset smoothing.
It also approximates (but somewhat understates) the City’s termination UAAL if the City withdrew
from CalPERS.. Please note the above estimates are as of June 30, 2009 and will vary into the future
based on CalPERS actual investment experience and the Risk Pool’s non-investment experience.
During the November 30th Council meeting, CalPERS’ Senior Pension Actuary, Kung-Pei Hwang,
mentioned that CALPERS June 30, 2010 investment return was 13.3%. This will have a favorable
impact on the Risk Pool’s Market Value based UAAL. However, despite this favorable investment
return, we expect the City’s CalPERS contribution rates will continue to increase.
The City could get precise UAAL information from CalPERS by either requesting a Contract
Amendment Cost Analysis or a Termination/Withdrawal Study. However, if the City does not
implement a benefit improvement or does not withdraw, this precise calculation will only be of
theoretical use, since the City’s contribution is based on the Risk Pool’s Actuarial Value based UAAL
contribution rate multiplied by the City’s PERSable wages.
Please call me (650/377-1601) with any questions about this letter.
Sincerely,
John E. Bartel
President
jb: JEB:
c:\documents and settings\jbartel\my documents\clients\city of rancho palos verdes\calpers\6-30-09\ba rpvci 11-01-18 ual letter draft.doc
6-94
Kathryn Downs
From: Hwang, Kung-Pei [Kung-Pei_Hwang@CalPERS.CA.GOV]
Sent: Monday, January 23, 2012 2:09 PM
To: 'Kathryn Downs'
Subject: RE: Actuarial for UL
3/9/2012
Kathryn:
I am not aware of the $400 valuation fee for the information requested. The Actuarial Office does not
normally provide individual unfunded liabilities for pooled plans. We will provide such information only
when a plan leaves a pool. e.g. by termination or by benefit improvement.
Since your City has paid off its side fund, you do not have any unfunded liability of your own. However,
you are responsible for a share of the pool’s unfunded liability (the 2.5% @ 55 Miscellaneous pool). In
any case, we could not provide you with an up-to-date individual unfunded liability for your plan, since our
calculation would be based on the June 30, 2010 information, the latest such information available to the
Actuarial Office. The calculation would not reflect the 20.7% return from CalPERS investments in
2010/2011 or the membership changes in the 2.5% @ 55 pool since 6/30/2010.
I hope this information is useful. Please let me know if you have any questions.
H a v e a N i c e D a y !
Kung-pei Hwang
Senior Pension Actuary
CalPERS
(916) 795-3411
From: Kathryn Downs [mailto:kathrynd@rpv.com]
Sent: Monday, January 23, 2012 10:21 AM
To: Hwang, Kung-Pei
Subject: Actuarial for UL
Hi Kung-Pei; I bet the number of questions that you receive about pension has increased over the last
couple of years. I know it sure has for us.
I understand that since we are in a risk pool, CalPERS does not calculate our individual unfunded
liability. We can only estimate that number, based on our estimated share of the pool’s unfunded liability.
It was also my understanding that CalPERS will provide an individual actuarial calculation of unfunded
liability for an agency, only if that agency adopts a resolution of intent to separate from CalPERS.
My City Manager was at a meeting with other City Managers and heard that CalPERS will prepare this
individual actuarial calculation without a resolution of intent. All we have to do is pay CalPERS $400. Is
that true? Please clarify the steps to obtaining a calculation of RPV’s unfunded liability. I don’t want to
misinform our City Council Members about what is available to us.
Thanks!
Kathryn Downs
Deputy Director of Finance & Information Technology
(310) 544-5216
http://www.palosverdes.com/rpv/
Attachment C
6-95
1 10/27/2011
Twelve Point Pension Reform Plan
October 27, 2011
The pension reform plan I am proposing will apply to all California state, local, school and other
public employers, new public employees, and current employees as legally permissible. It also
will begin to reduce the taxpayer burden for state retiree health care costs and will put California
on a more sustainable path to providing fair public retirement benefits.
1. Equal Sharing of Pension Costs: All Employees and Employers
While many public employees make some contribution to their retirement – state employees
contribute at least 8 percent of their salaries – some make none. Their employers pay the full
amount of the annual cost of their pension benefits. The funding of annual normal pension costs
should be shared equally by employees and employers.
My plan will require that all new and current employees transition to a contribution level of at
least 50 percent of the annual cost of their pension benefits. Given the different levels of
employee contributions, the move to a contribution level of at least 50 percent will be phased in
at a pace that takes into account current contribution levels, current contracts and the collective
bargaining process.
Regardless of pacing, this change delivers real near-term savings to public employers, who will
see their share of annual employee pension costs decline.
2. “Hybrid” Risk-Sharing Pension Plan: New Employees
Most public employers provide employees with a defined benefit pension plan. The employer
(and ultimately the taxpayer) guarantees annual pension benefits and bears all of the risk of
investment losses under those plans. Most private sector employers, and some public employers,
offer only 401(k)-type defined contribution plans that place the entire risk of loss on investments
on employees and deliver no guaranteed benefit.
I believe that all public employees should have a pension plan that strikes a fair balance between
a guaranteed benefit and a benefit subject to investment risk. The “hybrid” plan I am proposing
will include a reduced defined benefit component and a defined contribution component that will
be managed professionally to reduce the risk of employee investment loss. The hybrid plan will
combine those two components with Social Security and envisions payment of an annual
retirement benefit that replaces 75 percent of an employee’s salary. That 75 percent target will
Attachment D
6-96
2 10/27/2011
be based on a full career of 30 years for safety employees, and 35 years for non-safety
employees. The defined benefit component, the defined contribution component, and Social
Security should make up roughly equal portions of the targeted retirement income level. For
employees who don’t participate in Social Security, the goal will be that the defined benefit
component will make up two-thirds, and the defined contribution component will make up the
remaining one-third, of the targeted retirement benefit.
The State Department of Finance will study and design hybrid plans for safety and non-safety
employees, and will fashion a cap on the defined benefit portion of the plans to ensure that
employers do not bear an unreasonable liability for high-income earners.
3. Increase Retirement Ages: New Employees
Over time, enriched retirement formulas have allowed employees to retire at ever-earlier ages.
Many non-safety employees may now retire at age 55, and many safety employees may retire at
age 50, with full retirement benefits. As a consequence, employers have been required to pay for
benefits over longer and longer periods of time.
The retirement age for non-safety workers in 1932, when the state created its retirement system,
was 65. The retirement age for a state highway patrol officer in 1935 was 60. The life
expectancy of a twenty-year old who began working at that time was mid-to-late 60s, meaning
that life expectancy beyond retirement was a relatively short period of time. Now with a growing
life expectancy, pensions will pay out not just for a few years, but for several decades, requiring
public employers to pay pension benefits over much longer periods of time. Under current
conditions, many years can separate retirement age from the age when an employee actually
stops working. No one anticipated that retirement benefits would be paid to those working
second careers.
We have to align retirement ages with actual working years and life expectancy. Under my plan,
all new public employees will work to a later age to qualify for full retirement benefits. For most
new employees, retirement ages will be set at the Social Security retirement age, which is now
67. The retirement age for new safety employees will be less than 67, but commensurate with
the ability of those employees to perform their jobs in a way that protects public safety.
Raising the retirement age will reduce the amount of time retirement benefits must be paid and
will significantly reduce retiree health care premium costs. Employees will have fewer, if any,
years between retirement and reaching the age of Medicare eligibility, when a substantial portion
of retiree health care costs shift to the federal government under Medicare.
4. Require Three-Year Final Compensation to Stop Spiking: New Employees
Pension benefits for some public employees are still calculated based on a single year of “final
compensation.” That one-year rule encourages games and gimmicks in the last year of
employment that artificially increase the compensation used to determine pension benefits. My
plan will require that final compensation be defined, as it is now for new state employees, as the
highest average annual compensation over a three-year period.
6-97
3 10/27/2011
5. Calculate Benefits Based on Regular, Recurring Pay to Stop Spiking: New Employees
Where not controlled, pension benefits can be manipulated by supplementing salaries with
special bonuses, unused vacation time, excessive overtime and other pay perks. My plan will
require that compensation be defined as the normal rate of base pay, excluding special bonuses,
unplanned overtime, payouts for unused vacation or sick leave, and other pay perks.
6. Limit Post-Retirement Employment: All Employees
Retirement with a pension should not translate into retiring on a Friday, returning to full-time
work the following Monday, and collecting a pension and a salary. Retired employees often have
experience that can deliver real value to public employers, though, so striking a reasonable
balance in limiting post-retirement employment is appropriate. Most employees who retire from
state service, and from other CalPERS member agencies, are currently limited to working 960
hours per year for a public employer, and do not earn any additional retirement benefits for that
work. My plan will limit all employees who retire from public service to working 960 hours or
120 days per year for a public employer. It also will prohibit all retired employees who serve on
public boards and commissions from earning any retirement benefits for that service.
7. Felons Forfeit Pension Benefits: All Employees
Although infrequent, recent examples of public officials committing crimes in the course of their
public duties have exposed the difficulty of cutting off pension benefits those officials earned
during the course of that criminal conduct. My plan will require that public officials and
employees forfeit pension and related benefits if they are convicted of a felony in carrying out
official duties, in seeking an elected office or appointment, or in connection with obtaining salary
or pension benefits.
8. Prohibit Retroactive Pension Increases: All Employees
In the past, a number of public employers applied pension benefit enhancements like earlier
retirement and increased benefit amounts to work already performed by current employees and
retirees. Of course, neither employee nor employer pension contributions for those past years of
work accounted for those increased benefits. As a result, billions of dollars in unfunded liabilities
continue to plague the system. My plan will ban this irresponsible practice.
9. Prohibit Pension Holidays: All Employees and Employers
During the boom years on Wall Street, when unsustainable investment returns supported “fully-
funded” pension plans, many public employers stopped making annual pension contributions and
gave employees a similar pass. The failure to make annual contributions left pension plans in a
significantly weakened position following the recent market collapse. My plan will prohibit all
employers from suspending employer and/or employee contributions necessary to fund annual
pension costs.
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4 10/27/2011
10. Prohibit Purchases of Service Credit: All Employees
Many pension systems allow employees to buy “airtime,” additional retirement service credit for
time not actually worked. When an employee buys airtime, the public employer assumes the full
risk of delivering retirement income based on those years of purchased service credit. Pensions
are intended to provide retirement stability for time actually worked. Employers, and ultimately
taxpayers, should not bear the burden of guaranteeing the additional employee investment risk
that comes with airtime purchases. My plan will prohibit them.
11. Increase Pension Board Independence and Expertise
In the past, the lack of independence and financial sophistication on public retirement boards has
contributed to unaffordable pension benefit increases. Retirement boards need members with real
independence and sophistication to ensure that retirement funds deliver promised retirement
benefits over the long haul without exposing taxpayers to large unfunded liabilities.
As a starting point, my plan will add two independent, public members with financial expertise
to the CalPERS Board. “Independence” means that neither the board member nor anyone in the
board member’s family, who is a CalPERS member, is eligible to receive a pension from the
CalPERS system, is a member of an organization that represents employees eligible to or who
receive a pension from the CalPERS system, or has any material financial interest in an entity
that contracts with CalPERS. My plan also will replace the State Personnel Board representative
on the CalPERS board with the Director of the California Department of Finance.
True independence and expertise may require more. And while my plan starts with changes to
the CalPERS board, government entities that control other public retirement boards should make
similar changes to those boards to achieve greater independence and greater sophistication.
12. Reduce Retiree Health Care Costs: State Employees
The state and the nation have seen the costs of health care skyrocket. The state’s retiree health
care premium costs have increased by more than 60 percent in the last five years and will almost
double over ten years. This approach has to change.
My plan will reduce the taxpayer burden for health care premium costs by requiring more state
service to become eligible for health care benefits at retirement. New state employees will be
required to work for 15 years to become eligible for the state to pay a portion of their retiree
health care premiums. They will be required to work for 25 years to become eligible for the
maximum state contribution to those premiums. My plan also will change the anomaly of
retirees paying less for health care premiums than current employees.
Contrary to current practice, rules requiring all retirees to look to Medicare to the fullest extent
possible when they become eligible will be fully enforced.
Local governments should make similar changes.
6-99
Public Pension and Retiree Health Benefi ts:
An Initial Response
To the Governor’s Proposal
MAC TAYLOR • LEGISLATIVE ANALYST • NOVEMBER 8, 2011
Attachment E
6-100
AN LAO REPORT
2 Legislative Analyst’s Offi ce www.lao.ca.gov 6-101
EXECUTIVE SUMMARY
Th e Governor presented a 12-point plan to change pension and retiree health benefi ts for California’s
state and local government workers on October 27, 2011. Th is report provides background on the state’s
retirement policy issues and our initial response to the Governor’s proposals.
Our Offi ce’s Key Principles on Public Retirement Benefi ts. As we have noted in the past, we do not
view the current system of defi ned benefi t pensions for California’s public employees as an intrinsically bad
thing at all. Rather, we view pensions and retiree health benefi ts as just one part of overall public employee
compensation—in many cases, as benefi ts off ered in lieu of what otherwise might be higher salaries over
the course of a public-service career. Moreover, we believe that encouraging public or private workers to
defer a portion of their compensation to retirement represents sound public policy. Well-managed and
properly funded retirement systems, therefore, are meritorious.
What Is the Problem With Public Retirement Benefi ts?
California’s current structure of public employee pension and retiree health benefi ts has some
substantial problems. Th ere is a notable tendency in the current system for public employers and employees
to defer retirement benefi t costs—which should be paid for entirely during the careers of retirement system
members—to future generations. Th is leads to unfunded liabilities that have spiraled higher in recent years
and are producing cost pressures for the state and many local governments that will persist for years to
come. Under the current system, governments have very little fl exibility under case law to alter benefi t and
funding arrangements for current employees—even when public budgets are stretched, as they are today.
Finally, there is a substantial disparity between retirement benefi ts that are off ered to public workers and
those off ered to other workers in the economy.
Sustaining a fi nancially manageable system of public employee retirement benefi ts—one that is more
closely aligned with the benefi ts off ered private-sector workers—will require substantial, complex, and
diffi cult changes by the Legislature, the Governor, local governments, and voters.
Governor’s Proposal Is a Bold, Excellent Starting Point
Would Help Increase Public Confi dence in California’s Retirement Systems. We view the Governor’s
proposal as a bold starting point for legislative deliberations—a proposal that would implement substantial
changes to retirement benefi ts, particularly for future public workers. His proposals would shift more of
the fi nancial risk for public pensions—now borne largely by public employers—to employees and retirees.
In so doing, these proposals would substantially ameliorate this key area of long-term fi nancial risk for
California’s governments. At the same time, the Governor’s proposals aim for a future in which career
public workers receive a package of retirement benefi ts that would be (1) suffi cient to sustain employees’
standards of living during their retirement years and (2) more closely aligned with benefi t packages off ered
to private-sector workers. For all of these reasons, we believe that the Governor’s proposals could increase
public confi dence in the state’s retirement benefi t systems.
Many Details Left Unaddressed in Governor’s October 27 Presentation. Despite the strengths of the
Governor’s pension and retiree health proposal, it leaves many questions unanswered. In particular, we do
not understand key details of how his hybrid benefi t and retirement age proposals would work. Moreover,
AN LAO REPORT
www.lao.ca.gov Legislative Analyst’s Offi ce 36-102
the Governor’s plan leaves unaddressed many important pension and retiree health issues, including
how to address the huge funding problems facing the state’s teachers’ retirement fund, the University of
California’s (UC’s) signifi cant pension funding problem, retiree health benefi t liabilities, and other issues.
In making signifi cant changes to pension and retiree health benefi ts, we would urge the Legislature also to
tackle these very diffi cult issues concerning the funding of benefi ts.
Raising Current Workers’ Contributions Is a Legal and Collective Bargaining Minefi eld. Th e
Governor proposes that many current public employees be required to contribute more to their pension
benefi ts. Others have proposed reducing the rate at which current employees accrue pension benefi ts
during their remaining working years. Our reading of California’s pension case law is that it will be very
diffi cult—perhaps impossible—for the Legislature, local governments, or voters to mandate such changes
for many current public workers and retirees. Moreover, employer savings from these changes likely will be
off set to some extent by higher salaries or other benefi ts for aff ected workers. Given all of these challenges,
we advise the Legislature to focus primarily on changes to future workers’ benefi ts. Such changes should
produce net taxpayer savings only over the long run but are certain to be legally viable.
A Golden Opportunity to Make These Benefi ts More Sustainable
Clearly, there is signifi cant public concern about public pension and retiree health benefi ts. In our
view, the current structure of these benefi ts—wherein state and local governments provide compensation
in forms that are very diff erent from that off ered in the private sector—impairs the public’s ability to assess
whether government is carefully managing its funds and can aff ect the public’s trust in government itself.
We believe that the Legislature, the Governor, and voters should change these benefi ts—as well as the way
in which governments and workers fund the benefi ts—in order to address these problems. Th ese changes
will involve diffi cult, complex choices. In the end, however, we believe that such changes can result in the
public becoming more comfortable with public retirement benefi ts. Th is, in turn, will help ensure that the
state and local governments can continue off ering such benefi ts in the future.
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BACKGROUND: PUBLIC PENSION AND
RETIREMENT BENEFITS TODAY
A Complex System of Public Pensions
Not Just One Pension System…But Many.
During the fi rst half of the 20th Century, California
began to implement a public policy to provide
a comprehensive set of retirement benefi ts to
its retired public employees. Public employees
typically begin to accumulate rights to receive
future benefi ts the moment that they are hired,
and the longer that they work in the state or local
government sector in the state, the more pension
and other retirement benefi ts they accumulate. Th is
policy continues today.
Today, pension and retiree health benefi ts for
California’s public employees are determined in
a largely decentralized fashion. Th is means that
employees of the state, the public universities,
school districts, community college districts, cities,
counties, special districts, and other local govern-
ments earn a variety of diff erent pension and retiree
health benefi ts during their careers. As such, any
eff ort to modify pension and retiree health benefi ts
for public employees will prove complex, dealing
as it may with a variety of diff erent governments,
benefi t plans, and pension systems.
A Variety of “Defi ned Benefi t” Pension Plans.
California has both statewide and local public
pension plans that off er defi ned benefi ts. Defi ned
benefi t pensions provide a specifi c amount aft er
retirement that is generally based on an employee’s
age at retirement, years of service, salary at or
near the end of his or her career, and type of
work assignment (for instance, public safety or
non-public safety work assignment). In total,
about four million Californians—11 percent of the
population—are members of one or more of the
state’s 85 defi ned benefi t public pension systems.
Th is four million fi gure includes about one million
people who now receive benefi t payments and
around 700,000 “inactive” members—that is,
individuals who were once, but are not currently,
public employees and who do not yet receive
pension benefi ts.
Th e two largest entities managing state and
local pension systems in the state are the California
Public Employees’ Retirement System (CalPERS)
and the California State Teachers’ Retirement
System (CalSTRS). Combined, these two statewide
systems serve 3.1 million active and inactive
members, including around 750,000 members
and benefi ciaries now receiving benefi t payments.
While both CalPERS and CalSTRS operate
pursuant to state law, they are very diff erent.
Members of CalPERS include current and
past employees of state government and California
State University (CSU), as well as judges and
classifi ed (nonteacher) public school employees. In
addition, hundreds of local governmental entities
(including some cities, counties, special districts,
and county offi ces of education) choose to contract
with CalPERS to provide pension benefi ts for their
employees. Local governments can choose from
a variety of plan options in CalPERS, as allowed
in the state’s Public Employees’ Retirement Law.
Governmental employers make contributions to
their current and past employees’ pension benefi ts,
as in most cases, do public employees themselves.
Each employer generally is responsible for its
own employees’ costs in CalPERS, meaning that
the state does not directly contribute to CalPERS
to cover pension costs for local government
employees. (Local governments, however, oft en
do use a portion of various funding streams they
receive from the state government to pay a part of
their own pension costs.)
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Diff erent governmental entities in CalPERS
have a variety of pension contribution arrange-
ments with their employee groups, meaning that
some employees pay more or less than other,
similarly situated employees of other governmental
entities. In practice, various elements of CalPERS
benefi ts—benefi t amounts and employee contribu-
tions—now are determined in collective bargaining
with unions that represent rank-and-fi le state and
local government employees.
Compared to CalPERS, CalSTRS off ers
an entirely diff erent—oft en less generous—set
of benefi ts to teachers and administrators of
California’s public school and community college
districts. Benefi ts off ered by CalSTRS, as well as
required payments by employees, districts, and the
state, are specifi ed on a statewide basis in the state’s
Education Code—that is, they apply on a generally
equal basis to all districts. As such, CalSTRS
benefi ts generally are not determined through
collective bargaining. Unlike many CalPERS
members, CalSTRS members generally do not
participate in Social Security.
In addition to CalPERS and CalSTRS, about
80 other defi ned benefi t state and local pension
systems (such as the University of California
Retirement Plan [UCRP], the Los Angeles County
Employees Retirement Association, and the Los
Angeles City Employees’ Retirement System)
serve about one million other Californians,
including about 300,000 who currently receive
benefi t payments. County pension plans generally
are governed by the state’s County Employees
Retirement Law of 1937 (known as the “1937
Act”). Benefi ts and employee and employer
contributions in these various other plans can
vary widely—typically, subject to negotiation with
rank-and-fi le employee unions.
“Defi ned Contribution” Plans Also Now in
Place for Some Public Employees. Many public
employees currently are enrolled in defi ned
contribution plans, which are intended to
supplement their defi ned benefi t pensions aft er they
retire. Defi ned contribution plans include 401(k),
403(b), and 457 plans in which the rate of contri-
bution by the employer is fi xed, sometimes serving
in practice as a “match” to amounts deposited
to those funds by employees. Accordingly, an
employee’s defi ned contribution plan benefi ts
equal what amount the accumulated employee and
employer contributions can provide at retirement,
plus investment earnings. Unlike defi ned benefi t
plans, therefore, defi ned contribution plans do not
promise a specifi c amount to be paid to the retiree
each month or each year. Some governmental
entities manage defi ned contribution plans, oft en
in conjunction with private-sector investment
managers. For example, state employees can
enroll in defi ned contributions plans managed by
the Savings Plus Program of the Department of
Personnel Administration (DPA). Some teachers
also enroll in CalSTRS’ Pension2 supplemental
savings plan. A variety of other public and private
defi ned contribution plans serve California’s local
governments and school districts.
Social Security. Social Security—established
in the 1930s—initially did not provide benefi ts
to public employees, but in the 1950s, the federal
government approved amendments to the Social
Security Act to allow states to enter into agree-
ments with the Social Security Administration to
provide such benefi ts to their public employees.
Over time, Congress has added to these require-
ments, essentially mandating Social Security
for specifi ed public employees not covered by a
qualifi ed public pension plan.
It has been estimated that only about one-half
of California’s public employees participate in the
federal Social Security program. Teachers and most
public safety offi cers, including corrections offi cers,
police, and fi refi ghters, generally are not enrolled
in Social Security. Th ere are a variety of reasons
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why this is so. Public safety offi cers generally
are eligible for retirements at earlier ages than
envisioned under Social Security’s benefi t formulas.
Moreover, it is expensive for a government to
initiate enrollment of its employees into Social
Security without, at the same time, enacting reduc-
tions in its other pension benefi ts. While there has
been some discussion over the years at the federal
level of requiring all state and local employees to
be enrolled in Social Security, this proposal has
not been accepted to date, in part because of the
cost pressures for state and local governments that
would be aff ected.
Generally speaking, employees and employers in
Social Security each contribute 6.2 percent of pay—
up to the Social Security earnings cap (now
$106,800 per year)—to the federal government in
the form of Social Security payroll taxes. (Congress
reduced employee payroll taxes in 2011 to help
stimulate the economy.) Th e federal government
essentially uses these funds—in addition to amounts
paid from the federal government’s general fund—to
pay Social Security benefi ts to current retirees. (Th is
means that Social Security benefi ts—unlike state and
local pension benefi ts—are paid on a “pay-as-you-
go” basis, essentially making Social Security a social
insurance system, rather than a pension system, as
we think of it here in California.) Over time, as baby
boomers age and the ratio of workers to retirees in
the United States falls further, the federal general
fund will have to pay more and more to cover the
cost of Social Security benefi ts. For this reason, in
the future it is likely that Congress will have to enact
revenue increases and/or benefi t reductions in order
to keep the federal budget on a sustainable path.
For individuals born between 1943 and
1954, the Social Security “normal retirement
age”—at which full Social Security benefi ts can
be received—is now 66. For individuals born in
the years 1955 through 1959, the Social Security
normal retirement age is somewhere between
age 66 and 67, as specifi ed in law. For individuals
born in 1960 and aft er, the Social Security normal
retirement age is 67. (Individuals generally can receive
reduced benefi ts if they retire earlier than the normal
retirement age, provided that they are at least 62.)
Even More Variety for Retiree Health Benefi ts
Medicare. Medicare is a federal health program
that covers individuals age 65 and older. It was
established in 1965 and has long enrolled many
state and local government employees. State and
local government employees hired or rehired
aft er March 31, 1986, are subject to mandatory
coverage by Medicare. Employers and employees
each currently pay a 1.45 percent tax on earnings
to cover part of Medicare program costs, which
consist of Part A (hospital insurance), Part B
(outpatient medical insurance), Part C (Medicare
Advantage plans), and Part D (prescription drug
insurance). Individuals are eligible for premium-
free Medicare Part A if they are age 65 or older
and worked for at least 10 years (40 quarters)
in Social Security and/or Medicare-covered
employment. Accordingly, Medicare is now the
core element of retiree health coverage for both
public and private retirees in the United States. In
many public pension plans, including CalPERS,
Medicare-eligible retirees generally must enroll
in Part B benefi ts at age 65 (or earlier, if they are
qualifi ed due to a disability). In 2011, Medicare Part
B premiums typically have been around
$100 per month.
Retiree Health Programs of State and Local
Governments. While Medicare is now the core
component of retiree health coverage for state and
local workers, there is much variety among state
and local governments in the area of retiree health
care. Many local governments—especially school
districts—off er virtually no retiree health care
benefi ts. Th e state and many other local govern-
ments, however, off er a range of retiree health
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www.lao.ca.gov Legislative Analyst’s Offi ce 76-106
benefi ts that vary from small to expansive. Of these
governments, many, including the state, provide
health benefi ts to pre-Medicare retirees, and
others—also including the state—off er Medicare
supplement plans to retirees aft er age 65. Retiree
health benefi ts have been subject to extreme cost
pressures in recent years due to the general growth
of health care expenses, a rise in the number of
retirees drawing the benefi ts, and costs resulting
from growing unfunded liabilities, which are
discussed below.
For Many Career Employees, a
Generous Set of Benefi ts
As described above, there is considerable
variety among California’s public retirement
systems. As such, it is diffi cult to generalize about
the specifi c benefi t packages provided to public
workers and retirees today. Moreover, there have
been numerous changes to benefi ts in recent
years—some enacted through legislation and others
negotiated at the bargaining table. In the late 1990s
and early 2000s, a wave of benefi t enhancements—
most notably, those related to Chapter 555, Statutes
of 1999
(SB 400, Ortiz)—aff ected benefi ts for state and many
local employees. More recently, governmental budget
problems, combined with growing public concern
about retirement benefi t costs, have resulted in a
wave of benefi t reductions—particularly for future
employees—and employee contribution increases.
Th ese have aff ected most state employee groups, as
well as some local employee groups.
Replacement Ratio: Less Income Generally
Needed in Retirement. A person’s income needs
generally are less in retirement than when working.
Th is is because clothing and daily travel expenses
decline, home mortgages may be paid off at this
point in life, and retirees may be in a lower tax
bracket than when working. As a result, retirees
typically need less income to maintain the same
standard of living as when they worked.
Th e percentage of income a person has in
retirement compared to his working income prior
to retirement is called the “replacement ratio” or
“replacement rate” by retirement experts. When
pension benefi ts are compared to each other, it
is typically this replacement ratio that is being
compared. When we speak of pension benefi ts
being “generous,” we mean that they provide a
relatively high replacement ratio compared to other
benefi t plans in the public and/or private sectors.
In 2005, a publication of Boston College’s
Center for Retirement Research said, “Overall,
the range of studies that have examined [the]
issue consistently fi nds that middle class people
need between 65 percent and 75 percent of their
pre-retirement earnings to maintain their lifestyle
when they stop working.” Th is paper indicated
“that the majority of households retiring today are
in pretty good shape,” with about two-thirds of
households then in that 65 percent to 75 percent
replacement ratio range. Th e paper, however,
suggested that “the coming way of baby boom
retirees…will see lower replacement rates from
Social Security and less certain income from
employer pensions.” Similar to the 2005 study,
a 2010 U.S. Census Bureau paper found that
replacement rates for the median individual—as of
2004—was between 66 percent and 75 percent of
pre-retirement income.
State and Local Government Benefi ts (Not
Including Teachers). In our 2005 publication, Th e
2005-06 Budget: Perspectives and Issues (see page
132), we compared state “miscellaneous” (non-public
safety) pensions then in place with those of 15 other
states. Of the states we surveyed, California off ered
the highest retirement benefi ts. We also discussed
the generous nature of public safety pension benefi ts
and local government benefi ts then in place.
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Since 2005, the state and some local govern-
ments have enacted pension benefi t changes—
particularly for new employees hired aft er a given
date—and increased employee contributions,
oft en through negotiation with rank-and-fi le
union representatives. Nevertheless, some local
governments have continued to off er particularly
generous pension benefi ts, including “2.5 percent
at 55,” “2.7 percent at 55” and “3 percent at 60” for
miscellaneous employees, as well as “3 percent at
50” benefi ts for public safety employees. In pension
parlance, for example, 2.5 percent at 55 means—in
simplifi ed terms—that a retiree can receive a
benefi t equal to 2.5 percent (the benefi t factor or
multiplier) of his or her fi nal compensation multi-
plied by the number of years of service if retiring at
55. Lesser benefi ts are available if they retire earlier
than 55, and higher benefi ts may be available in a
formula if a person retires aft er the age indicated
in the formula. As we suggested in our 2005
report, these kinds of generous benefi t levels result
in some career public service workers receiving
pension benefi ts above—and in some cases, well
above—the 65 percent to 75 percent replacement
ratio described above, particularly when Social
Security and other sources of retirement income
are considered. While the state and some other
public entities have negotiated with employees
for reductions in these generous benefi t formulas,
CalPERS’ most recent annual report shows that
a few governments were still switching to some
of these particularly costly benefi t packages as
recently as 2009-10.
Th e most recent version of a public pension
comparison report prepared periodically by the
Wisconsin Legislative Council indicates that,
for public employees in Social Security, pension
benefi t “multipliers” of 2.1 percent or higher are
rare—available for only 7 percent of surveyed plans.
Th e report found that, among comparable plans, the
average pension benefi t multiplier was 1.94 percent.
For pension plans serving public employees not in
Social Security, the report found the average benefi t
multiplier was 2.3 percent.
We believe that the data shows that defi ned
pension benefi ts off ered to California’s state, city,
county, and special district employees have been
among the most generous in the country in recent
years. While there have been some reductions in
these benefi ts recently, some California govern-
ments still off er among the most generous defi ned
pension benefi ts available anywhere in the United
States public or private labor market today. In many
cases, California public pension benefi ts for career
public employees—coupled with other sources of
retirement income—can replace far more than the
65 percent to 75 percent income replacement ratio
described earlier.
Teachers. Several reports have indicated that
teachers enrolled in CalSTRS receive less generous
benefi ts than other kinds of public employees in
California. In 2009, CalSTRS staff presented to
the Teachers’ Retirement Board a study examining
replacement ratios for teachers under CalSTRS
benefi t formulas that were to be in eff ect in 2011.
Th e CalSTRS report found that the median
CalSTRS retiree as of 2011 (retiring aft er
29 years of service) would have a retirement
income replacement ratio of 78 percent. Th is
consisted of a CalSTRS defi ned benefi t of
$3,914 per month, a defi ned benefi t supplement
program payment of $93 per month, and a
supplemental annuity payment from a defi ned
contribution plan of $613 per month. (Th is
defi ned contribution component represented
about 13 percent of the total assumed retirement
income for the median CalSTRS retiree.) Th e
study assumed that the median CalSTRS retiree
invested $100 per month over a 25-year career in a
defi ned contribution account.
In addition to considering the median
CalSTRS retiree, the study also showed
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www.lao.ca.gov Legislative Analyst’s Offi ce 96-108
replacement ratios for CalSTRS retirees at the 25th
and 75th percentiles of income, respectively. Th e
replacement ratio for the 25th percentile retiree
(retiring aft er 18 years of service) was 42 percent,
while the replacement ratio for the 75th percentile
retiree (retiring aft er 35 years of service) was
103 percent. Th e report said that teachers retiring
without employer-subsidized health coverage
would need more income to maintain a suitable
replacement ratio. Specifi cally, it listed a “recom-
mended replacement ratio” of around 77 percent
of fi nal compensation for those retired teachers
with health care benefi ts and around 89 percent
for those without health care benefi ts.
Retirees With Benefi ts of $100,000 Per Year or
More. In recent years, there has been considerable
public attention related to retired California public
employees receiving annual pension benefi ts of
$100,000 or more. Th ese individuals are a small,
but growing, segment of California’s public sector
retirees. About 2 percent of CalPERS and CalSTRS
retirees currently receive such payments. Payments
to these retirees now equal around 7 percent to
9 percent of total pension payments from the two
systems. During their working lives, these retirees
generally were among the longest-serving and
highest-paid public employees—for example, senior
executives and managers of some state and local
agencies, school districts, and community colleges,
as well as some employees in public safety agencies.
Th e percentage of CalPERS, CalSTRS, and
other public retirees receiving pension benefi ts of
over $100,000 per year will grow in the future for
several reasons. Th ese reasons include the eff ects of
infl ation (which tends to increase all employees’ pay
and pension benefi ts over time) and the eff ects of
increased pension benefi t provisions put in place in
the late 1990s and early 2000s.
Beyond the group of retirees receiving
payments of $100,000 or more per year, many
public retirement systems can expect to see the
percentage of their retirees with higher pension
benefi ts—and the amounts of those benefi ts—grow
for these same reasons. Th is trend is already
apparent in data provided by the pension systems.
In its fi nancial reports, for example, CalPERS
publishes statistics on the characteristics of
employees retiring in each fi scal year. In 2003-04,
4,831 people retired with 30 or more years of
service, and this group retired with an average
monthly pension of $4,553 (equating to $54,636
per year). In 2008-09, there were 5,801 retirees
with 30 or more years of service, and they had an
average monthly pension of
$5,569 ($66,828 per year)—up 22 percent in
non-infl ation adjusted terms compared to the
initial benefi t of the 2003-04 retiree group. Growth
in monthly pension benefi ts was even greater in
percentage terms during this period for employees
retiring with 10 to 30 years of service. For retirees
with 25 to 30 years of service for example, the
average initial pension grew from $3,308 per month
($39,696 per year) for 2003-04 retirees to $4,432 per
month ($53,184 per year) for 2008-09 retirees—up
34 percent in non-infl ation adjusted terms.
Th is data from CalPERS’ annual report
suggests that while the average pension benefi t for
all CalPERS retirees (including those who retired
decades ago) is around $25,000 per year, such
average retirees are not responsible for the bulk of
benefi ts that CalPERS will pay out in the future.
For public employees who retired in 2008-09, the
newest retiree group for which data is available,
it appears that around 60 percent of CalPERS
benefi t costs are being paid to retirees with 25 or
more years of service. Th e average annual benefi t
for this group is somewhere between $53,000 and
$66,000—over double the amount paid to the
average retiree in the system. For those 2008-09
retirees with 25 to 30 years of service, their monthly
defi ned benefi t pension is replacing an average
67 percent of their fi nal career compensation; for
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10 Legislative Analyst’s Offi ce www.lao.ca.gov 6-109
those retirees with 30 or more years of service, the
monthly defi ned benefi t pension is replacing an
average 79 percent of their fi nal career compen-
sation. Some of these retirees also receive Social
Security benefi ts, and some also have defi ned
contribution savings, which would increase their
replacement ratios further. Over time, retirees like
the 2008-09 cohort will become more of the norm
in CalPERS and other public pension systems.
Tendency to Defer Costs to Future Generations
Unfunded Pension Liabilities. A troubling
trend of California’s state and local public pension
systems has been the growth of substantial
unfunded actuarial accrued liabilities (UAAL).
Put in very simple terms, an unfunded liability is
the amount that would need to be invested into a
public pension plan today such that, when coupled
with amounts already deposited in the fund plus
assumed future investment earnings, all benefi ts
earned to date by public employees would be
funded upon their retirement. While there is some
disagreement on how to value unfunded liabilities
of pension systems, it is clear that California’s state
and local systems are coping with very large short-
falls. Th ese shortfalls will push costs upward—
above what they otherwise might be—for years to
come, in some cases.
As of June 30, 2009, CalPERS reported that
its UAAL in its main pension fund for state and
local governments was over $49 billion—consisting
of about $23 billion for the state and $26 billion
for other public agencies. Because the UAAL
uses data that “smoothes” investment gains and
losses over extraordinarily long periods of time,
CalPERS tends to communicate its funded status
by another, more volatile measure that relies on
the market value of its investments at any given
time. By this measure, CalPERS’ main pension
fund was 61 percent funded with a $115 billion
unfunded liability, split between the state and other
public agencies. In 2009-10, buoyed by favorable
investment performance, CalPERS reports that
its funded status improved somewhat—to around
65 percent when measured based on the market
value of assets. Fiscal year 2010-11 saw even more
favorable investment returns.
Unlike CalPERS, but like most other pension
systems, CalSTRS recognizes investment gains and
losses in its actuarial valuations over a multiyear
period. Due to the near-collapse of world fi nancial
markets in 2008, CalSTRS and other pension
systems sustained heavy losses, and the continued
recognition of those losses is the major driver of the
system’s growing reported UAAL. Th e most recent
CalSTRS valuation indicates the system’s UAAL
grew from $40.5 billion as of the 2009 valuation to
just over $56 billion as of June 30, 2010. Th is means
that CalSTRS’ reported funded ratio dropped from
78 percent as of the 2009 valuation to 71 percent in
the June 30, 2010 valuation.
Pension systems in California and elsewhere
reported growth in their UAALs aft er the 2008
market collapse and then experienced a recovery
in their funded status during the relatively strong
investment markets of 2009-10 and 2010-11.
Th ese trends illustrate a primary reason that
unfunded liabilities emerge: weaker-than-expected
investment returns. Lower-than-expected
investment returns have been a primary reason
for growth of unfunded pension liabilities in the
last decade. Such investment weakness—relative to
some pension systems’ assumption of 7.5 percent
to 8 percent investment return per year—has given
fuel to critics, who believe that these assumptions
are imprudent and understate costs that govern-
ments and employees should contribute for a given
set of benefi ts.
Other reasons for unfunded liabilities include
benefi t increases that are implemented retroactively
(that is, applied to previous years of service before
the benefi t enhancement is implemented) and
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demographic and pay changes among employees
and retirees. If retirees live longer than expected
by plan actuaries, unfunded liabilities can result. If
employees are paid more than expected during their
career relative to assumptions of plan actuaries, this
also can contribute to unfunded liabilities.
Unfunded Retiree Health Liabilities. For many
governments, the size of unfunded retiree health
liabilities has rivaled or exceeded their unfunded
pension liabilities. In contrast to pensions, govern-
ments typically have not “pre-funded” their retiree
health liabilities. In other words, they generally
have never set aside funds—or required employees
to do so—to cover the future costs of retiree health
benefi ts earned during their working lives. Th is
means that future taxpayers may bear a larger
cost burden for these benefi ts. Unlike pensions,
there are no investment returns under this type
of funding structure to cover a large portion of
benefi t costs. While a small portion of governments
have begun to pay down their unfunded retiree
health liabilities, such liabilities will remain a
pressing burden for many California public entities
as the decades progress. Th e state government’s
unfunded retiree health liabilities alone total about
$60 billion, as of June 30, 2010, according to the
State Controller’s Offi ce. A report released by a
commission in early 2008 estimated that all public
entities in the state had a combined retiree health
unfunded liability of over $118 billion as of that
time; that total probably has grown since then.
Unfunded Liabilities and Growing Benefi ts
Have Increased Costs. Increased benefi ts and
the emergence of large unfunded liabilities have
increased pension and retiree health costs for many
California governments in recent years. In Figure 1,
we show the trend of increasing state General Fund
costs for retirement benefi ts in nominal dollars. A
major reason for the magnitude of recent growth
in state costs is the fact that public employers
generally benefi ted from
“pension holidays” in the
late 1990s and early 2000s
due to the stock market
bubble that temporarily
resulted in systems like
CalPERS being fully
funded or close to it.
Figure 2 shows the
contribution rates paid by
the state as a percentage
of pay for several key
employee groups. (While
state contributions as
a percentage of pay
were slightly higher in
1980—before the period
covered in Figure 2—that
period is not directly
comparable to the present
day since CalPERS at
State Retirement Costs Have Been Growing
General Fund (In Billions)
Figure 1
1
2
3
4
5
$6
1990-91 1993-94 1996-97 1999-00 2002-03 2005-06 2008-09 2011-12
CalSTRS
CalPERS Retirement Programsa
CalPERS Retiree Health Programb
Other
aAmount for 1997-98 includes an over $1 billion state payment related to a major court case involving
CalPERS.
bIncludes the budget item for these costs and LAO estimate of the General Fund share of the implicit
subsidy for annuitant benefits that is paid along with employees’ health premiums.
AN LAO REPORT
12 Legislative Analyst’s Offi ce www.lao.ca.gov 6-111
that time invested primarily in fi xed-income bond
instruments and assumed an annual investment
return of only 6.5 percent.
Infl exible Benefi ts, Infl exible Costs
Strict Legal Limits on Changing Benefi ts
and Reducing Government Costs. In our view,
perhaps the most signifi cant retirement benefi t
challenge facing California governments is that
there is very little fl exibility for governmental
employers under decades of case law that are
extremely protective of employee and retiree
pension rights. In California, pension benefi ts
for public employees are an element of a public
employee’s compensation. He or she begins to
accumulate pension rights at the moment of hiring,
and these benefi ts accumulate throughout a public
service career. Th ere is a detailed case law in the
state that protects these benefi ts as contracts under
the State and U.S. Constitutions. Pension benefi t
packages, once promised to an employee, generally
cannot be reduced—either retrospectively or
prospectively—without a government’s off ering
comparable and off setting advantages (which,
themselves, can be quite expensive). Th e case law
suggests that governments do have some power to
alter benefi ts when they face emergency situations,
but these powers are very limited, and govern-
ments, according to case law, generally will have to
alter benefi ts temporarily, with interest accruing
to employees and retirees in the meantime. In
some cases, local governments may be able to
alter contracts when they seek protection under
Chapter 9 of the U.S. Bankruptcy Code.
Negotiations Can Help, but Unions Must
Represent Th eir Members. In general, the primary
way that the state and local governments can
change pension benefi ts for current and past
employees is to negotiate with employee groups. As
discussed above, the state and some local govern-
ments have successfully reduced pension costs
recently through such negotiations. Th e challenge
with this approach, however, is that unions have an
obligation to represent their members, and so, in
State Retirement Contribution Rates Have Increased
As Percent of Payroll by Retirement Category
Figure 2
Miscellaneous Tier 1
Correctional Officer and Firefighter
California Highway Patrol Officers
5
10
15
20
25
30
35
40%
1990-91 1992-93 1994-95 1996-97 1998-99 2000-01 2002-03 2004-05 2006-07 2008-09 2010-11
AN LAO REPORT
www.lao.ca.gov Legislative Analyst’s Offi ce 136-112
exchange for pension concessions, they generally
will be duty bound to seek comparable, off setting
benefi ts for their members. For example, many of
the recent state employee agreements that increased
employee contributions to their pensions included
future pay increases roughly equivalent to the
increase in the employee pension contributions.
Th is is understandable, given the history of the
state’s benefi t commitments and the obligations
of unions to represent their members, but it limits
governments to an extent from achieving lasting
cost savings for current and past employees
through the negotiation process.
For Future Employees, Government Can
Alter Pension and Retiree Health Benefi ts. While
governments have very little fl exibility with regard
to current and past employees’ retirement benefi ts,
it is clear that they may change benefi t promises
prospectively for future hires without limit.
Disparity Between Public and
Private Retirement Benefi ts
Underlying the real policy and fi scal problems of
current public retirement systems is a sharp divide
between public-sector and private-sector workers.
Public-sector workers have guaranteed, defi ned-
benefi t pension plans, and many, but not all, of them
have retiree health plans too. Private-sector workers
by and large have none of these things anymore. Th e
Governor’s proposal, in essence, aims to reduce this
substantial disparity.
The Governor released his 12-point pension
plan on October 27, 2011. In addition to making
remarks at a press conference, the Governor
released a short description of the goals of
his plan. While some of the elements of the
plan have been included in prior legislative
vehicles (and the Governor released language
for similar proposals on March 31), our review
below is based primarily on the Governor’s
pension handout from October 27 and his press
conference, as well as subsequent contacts with
administration staff concerning the plan. Draft
legislative language to implement the Governor’s
proposals would need to fill in many details
absent from his October 27 presentation.
Below, we will review each of the 12 points in
turn, providing, in some cases, some background
information, a description of the Governor’s
proposal, and our initial comments.
EQUAL SHARING OF PENSION COSTS
Background
Normal Cost and Unfunded Liability
Contributions. Contributions to pension plans
from employers and employees consist of two
main components: (1) “normal cost” contributions,
which generally are equal to the amount actuaries
estimate is necessary—combined with assumed
future investment returns—to pay the cost of future
pension benefi ts that current employees earn in
that year and (2) contributions to retire unfunded
liabilities. For example, CalPERS estimates that
the normal cost for state Miscellaneous Tier 1
workers (such as state offi ce workers and most CSU
employees) is now 14.4 percent of their payroll. In
addition, the annual cost to retire unfunded liabil-
ities for Miscellaneous Tier 1 workers—plus some
related benefi t costs—equals 10.4 percent of payroll,
for a total required contribution of 24.8 percent
of payroll. For CalPERS’ state Peace Offi cer and
Firefi ghter workers (principally state correctional
GOVERNOR’S 12-POINT PLAN
AN LAO REPORT
14 Legislative Analyst’s Offi ce www.lao.ca.gov 6-113
offi cers), the normal cost is now 25.4 percent of their
payroll, and the annual cost to retire unfunded
liabilities is 11.3 percent of payroll, for a total
required contribution of 36.7 percent of payroll.
Most State Workers Pay One-Half of Normal
Costs and One-Th ird of Total Costs. Following
the recent agreements of state employee unions to
increase their employees’ contributions to CalPERS,
over 70 percent of Miscellaneous Tier 1 workers
contribute approximately 8 percent or more of
monthly pay to cover pension costs. Th is 8 percent
exceeds 50 percent of the normal cost contributions
for these employees, but, for most, represents only
about one-third of the total required contribution,
including both normal costs and unfunded liability
contributions. In the state Peace Offi cer and
Firefi ghter group, about 80 percent of workers now
contribute about 11 percent of their monthly pay
to cover pension costs. Th is represents just under
one-half of the normal cost contributions for these
employees, but less than one-third of the total
required contribution.
With Fixed Employee Contributions,
Employers Cover Any Cost Changes. In current law
and most employee contracts, employee contributions
to their pensions generally are fi xed. Th is means that
the portion of the total required contribution not paid
by workers generally is paid by the public employer—
in this example, the state. While normal costs tend to
remain fairly stable over time, assuming no changes
in the pension benefi t structure, unfunded liabilities
can change markedly from year to year due mainly to
upturns and downturns in the investment markets.
Since employee contributions generally are fi xed in
labor agreements or state or local law, this means
that the public employer can experience signifi cant
increases in total required contributions as unfunded
liabilities increase and signifi cant decreases in total
required contributions when those liabilities drop.
Public Employee Contributions Vary. Like the
state, some local public employers recently have
negotiated with their unions to increase employee
contributions to local pension plans. As the
Governor points out, however, there remains a wide
disparity among public employers in what portion
of normal costs and total required contributions
is borne by public employees themselves. In some
cases, public employees make no such contribu-
tions. Various laws, agreements, and precedents
allow some employers to pay a portion of their
employees’ contributions to pension plans. In many
cases, such a payment merely substitutes for pay
the employers otherwise might choose to give to
employees, but it means that some employees may
see no real costs for their pension benefi ts when
reviewing their pay stubs. Th ere is concern among
some that many of these public employees view
their substantial pension as a sort of “free good.”
Proposal
Equal Sharing of Normal Costs, but Unclear
If Sharing Would Apply to Other Costs. Th e
Governor’s plan proposes that all current and
future public employees be required to pay at least
50 percent of the normal costs of their defi ned
pension benefi ts. Th is seemingly would mean that
there would be no more employer payments of
required employee pension contributions. Th is
requirement would be phased in “at a pace that
takes into account current contribution levels,
current contracts and the collective bargaining
process”—apparently, over several years.
Th e Governor’s proposal explicitly addresses
only the employee share of normal costs and is
unclear as to whether the 50 percent requirement
also would apply to unfunded liability contri-
butions. It is also unclear if the 50 percent
requirement would apply to defi ned contribution
fund deposits (which also can be split 50/50
between employers and employees, in theory).
Governor Says Th is Provides “Real Near-Term
Savings.” By applying the increased employee
AN LAO REPORT
www.lao.ca.gov Legislative Analyst’s Offi ce 156-114
payment requirement to both current and future
public employees, the Governor states that this
change would provide near-term cost relief for
some public employers, since increased employee
contributions would reduce contributions that
public employers otherwise would have to make.
LAO Comments
Governor’s Proposal a Good Start in Th is
Area. We agree with the Governor that future
public employees should be required to pay for
a portion of pension contributions. We believe
it would enhance public confi dence in state and
local retirement systems for there to be a clear,
unambiguous statewide policy in this area. Th ere
is no single correct percentage of total required
contributions that employees should be required
to pay, but 50 percent is a reasonable starting
point for the discussion.
Important for Employees to Share in
Unfunded Liability Costs Too. We urge the
Legislature to require that future public
employees bear a portion of not only pension
normal costs, but also unfunded liability
contributions. When public employers see
their pension contributions go up due to a
downturn in the stock market or similar reasons,
employees should see their contributions rise
as well. Similarly, when public employers see
their pension contributions drop due to stock
market upticks, employees should benefit from a
reduction in their contributions.
Like many others, we are concerned that
public retirement boards make excessively
optimistic assumptions concerning future
investment returns. We believe that requiring
public employees to bear a portion of the cost
(or benefit from a portion of the savings) when
these assumptions prove inaccurate will incen-
tivize retirement boards to make more prudent
investment assumptions. Moreover, requiring
employees to bear a portion of unfunded liability
costs would reduce the year-to-year volatility
of government contributions to pensions. In
effect, this change would transfer a portion of
this volatility risk from employers (who now
generally pay all increases due to unfunded
liabilities) to employees.
Case Law: Possible for Some Current
Employees, but Probably Not for Many Others.
At his press conference announcing the proposal,
the Governor said his proposal addressed
“existing employees by increasing their contri-
bution rate.” He added, “One thing we know for
sure: under constitutional law, the employer can
require higher contributions.”
We do not share the Governor’s belief that
existing constitutional law clearly allows the
state to require current public employees to
contribute more to pensions. To the contrary,
such a proposal seems to run counter to existing
constitutional protections in case law that may
protect many current and past public employees.
In the nearby box (see page 18), we summarize
the case and statutory law in this area, which
suggests that it might be possible to increase
contributions for some current employees, but
not for others. For many current employees, such
contribution increases probably could be imple-
mented only through negotiations, and in any
event, would result in many employers increasing
pay or other compensation to offset the financial
effect of the higher pension contributions. Since
increasing current employees’ contributions is
one of the only ways to substantially decrease
employer pension costs in the short run, the legal
and practical challenges that we describe mean
that the Governor’s plan may fail in its goal to
deliver noticeable short-term cost savings for
many public employers.
AN LAO REPORT
16 Legislative Analyst’s Offi ce www.lao.ca.gov 6-115
HYBRID PENSION PLAN FOR FUTURE EMPLOYEES
Background
“Hybrid” pension plans generally combine
a defi ned benefi t pension with a defi ned contri-
bution retirement savings plan. Accordingly, it
is important to understand the characteristics of
both such plans. Th e key diff erence between such
plans is the handling of investment risk. In most
defi ned benefi t plans, such as California’s state
and local pension systems, employers bear almost
all investment risk. Th is means that if investment
returns of the systems over time are less than
projected, public employer costs rise, but public
employee costs do not change. By contrast, in
defi ned contribution plans, an employer is obligated
to make only a specifi c amount of contributions
in the years that employees work. If investment
returns are less than desired, the employer is not
obligated to contribute anything more to a defi ned
contribution plan. In defi ned contribution plans,
therefore, employees and retirees generally bear all
investment risk.
Proposal
Hybrid Plan for Future Public Employees.
Th e Governor proposes that future public
employees be enrolled in hybrid retirement plans.
Details of the Governor’s idea are somewhat
unclear, but he appears to envision employer
and employee contributions to both defi ned
benefi t and defi ned contribution plans, as well as
employees’ participation in Social Security (except,
presumably, for future teachers and most public
safety workers). Th e Governor seems to propose
that the state Department of Finance be empowered
to design such hybrid plans based on the following
general goals:
• Non-Public Safety Employees. Th e
hybrid plans would be based on employer
and employee contribution schedules
that would aim to produce a 75 percent
replacement ratio for non-public safety
employees assuming a 35-year public-
sector career. Th e defi ned benefi t pension
plan would be responsible for about
one-third of the 75 percent replacement
income, the defi ned contribution plan
another one-third, and Social Security the
fi nal one-third. For teachers and others
not in Social Security, the defi ned benefi t
would be responsible for two-thirds of
the 75 percent replacement income, with
defi ned contribution plans responsible for
the remaining one-third.
• Public Safety Employees. Th e hybrid
plans would be based on employer and
employee contribution schedules that
would aim to produce a 75 percent
replacement ratio for public safety
employees assuming a 30-year public-
sector career. For those employees not
in Social Security, as with teachers, the
defi ned benefi t would be responsible for
two-thirds of the 75 percent replacement
income, with defi ned contribution plans
responsible for the remaining one-third.
Benefi t “Cap” for High-Income Public
Employees. Th e Governor’s plan also references a
cap on the defi ned benefi t portion of the proposed
hybrid plan requirement so that public employers
do not face high costs for pension benefi ts of
future high-income public workers. Such a cap
might aff ect future public workers like the small,
but growing, portion of current public pensioners
who receive pension benefi t payments exceeding
$100,000 per year. Th e Governor’s plan provides no
detail on how such a cap might work.
AN LAO REPORT
www.lao.ca.gov Legislative Analyst’s Offi ce 176-116
Strict Legal Protections Limit Government’s Flexibility
Our understanding of California’s detailed case law on public pensions over the last century is as
follows: in order to have the fl exibility to unilaterally implement cost-saving reductions to the pensions of
current and past employees, public employers need to have explicitly preserved their rights to make such
changes either at the time of an employee’s hiring or in subsequent, mutually-agreed amendments to the
pension arrangement. Otherwise, reductions for these employees and retirees require that comparable,
off setting advantages be granted—advantages that tend to negate the pension savings.
“Comparable New Advantages” Generally Required When Disadvantaging Employees. Th e 1955
California Supreme Court case, Allen v. Long Beach, is an important landmark in California pension law.
Th e court ruled that “changes in a pension plan which result in disadvantage to employees should be accom-
panied by comparable new advantages.” One of the pension amendments invalidated in Allen increased
each employee’s pension contribution from 2 percent to 10 percent of salary. Th e Supreme Court, in fact,
declared that this increased contribution requirement “obviously constitutes a substantial increase in the
cost of pension protection to the employee without any corresponding increase in the amount of the benefi t
payments he will be entitled to receive upon his retirement.”
In Pasadena Police Offi cers Association v. City of Pasadena (1983), a state appellate court said the
precedent in Allen meant that “where the employee’s contribution rate is a fi xed element of the pension
system, the rate may not be increased unless the employee receives comparable new advantages for the
increased contribution.” Th e appellate court added that while “an increase in an employee’s contribution rate
operates prospectively only and in eff ect reduces future salary…in Allen the Supreme Court struck down
such a change on the grounds that it modifi ed the system detrimentally to the employee without providing
any comparable new advantages.”
What About Changing Future Benefi t Accruals? Th e logic in the Allen and Pasadena Police Offi cers
Association cases, among others, makes it very diffi cult to assume that state or local governments could
unilaterally change the rate at which current employees accrue pension benefi ts for their future service, as
has been suggested by various recent proposals. (Th e Governor does not make such a proposal.)
In a 1982 case, Carman v. Alvord, the California Supreme Court noted that upon “entering public
service an employee obtains a vested contractual right to earn a pension on terms substantially equivalent
to those then off ered by the employer.” In the 1991 case concerning Proposition 140, the court considered
that measure’s termination of then-incumbent legislators’ rights to earn future pension benefi ts through
continued service. In that case, the court said the termination of the benefi t accrual rights for these legis-
lators was a contract impairment and was unconstitutional under the U.S. Constitution’s contract clause
because it infringed on their vested pension rights. (Proposition 140, it should be noted, did end pension
benefi ts for legislators elected aft er its passage.) Furthermore, in the Pasadena Police Offi cers Association
case, the appellate court noted that an employee “has a vested right not merely to preservation of benefi ts
already earned…but also, by continuing to work until retirement eligibility, to earn the benefi ts, or their
substantial equivalent, promised during his prior service.”
Signifi cant Challenges to Mandating Th at Current Workers Contribute More. While the case
law described above is protective of current and past public employees’ pension rights, it indicates that
AN LAO REPORT
18 Legislative Analyst’s Offi ce www.lao.ca.gov 6-117
governments may be able to unilaterally (that is, outside of negotiations) change elements of the pension
arrangement if they have explicitly preserved the right to do so. For example, in International Association
of Firefi ghters, Local 145 v. City of San Diego (1983), the California Supreme Court ruled that a city could
increase employee contribution rates pursuant to city charter and ordinance provisions that allowed it
to do so. Accordingly, some public employers that have carefully preserved such rights could unilaterally
implement increases in current workers’ pension contributions.
We suspect that many local governments may not be in a good position to defend their ability to
implement such increases. While several sections of the state’s CalPERS and 1937 Act laws purport to
preserve the Legislature’s ability to increase certain CalPERS contribution rates or make clear that state law
itself does not limit local governments’ ability to periodically increase, reduce, or eliminate their payments
to off set required employee contributions, local governments—promising, as they do, a wide variety of
retirement packages through dozens of retirement systems—may obligate themselves contractually.
Even in a 2009 decision upholding San Diego’s ability to impose higher employee pension costs at a
bargaining impasse, the Ninth Circuit federal appeals court distinguished between legislatively enacted
reductions in employers’ payment of a share of employees’ required pension contributions (allowable, the
court ruled) and legislatively imposed increases in the total amount of required employee pension contribu-
tions themselves (implying the latter may be unallowable under contract law). Th e Ninth Circuit stressed
that looking into a state or local legislative body’s intent was key to determining whether a retirement
benefi t provision was contractually protected. Accordingly, some local governments may have intended to
include low employee contributions as a part of their pension contract, while others may not. Th is muddled,
uncertain legal framework seems to us inconsistent with the Governor’s claim that governments have broad
legal ability to mandate current employee contribution increases. Furthermore, even if unilateral increases
are permissible under contract law, they will directly or indirectly result in many governments having to pay
more to employees in salaries or other forms of compensation in order to remain competitive in the labor
market. For example, recent increases in most state employees’ contributions negotiated with rank-and-fi le
employees were accompanied by future salary increases of similar amounts.
Since increasing current employees’ contributions is one of the only ways to substantially decrease
employer pension costs in the short run, these substantial legal and practical hurdles mean that the
Governor’s plan may fail in its goal to deliver noticeable short-term cost savings to many public employers.
Key Lesson From Case Law: Governments Should Be Clear About Th eir Pension Rights. Th e case
law makes clear to us that governments oft en have not been clear about what aspects of pension and retiree
health benefi ts and contributions—if any—they can change unilaterally in the future and which they
cannot. For this reason, we have recommended that the Legislature require local governments to explicitly
disclose to employees—preferably, on the day that they are hired—which aspects of pension and retiree
health benefi ts and contributions the public entity can change unilaterally (that is, without negotiation) and
which it cannot. If it chose to do so, the Legislature could require that such disclosures refl ect the results of
collective bargaining and apply only to future employees . (Approval of such a requirement by voters may be
necessary to avoid the state having to reimburse local governments for this disclosure mandate.)
AN LAO REPORT
www.lao.ca.gov Legislative Analyst’s Offi ce 196-118
LAO Comments
Excellent Starting Point for Discussion. We
previously have recommended that the Legislature
take steps to ensure that future public workers are
enrolled in hybrid plans. Th is can reduce substan-
tially the risk of future unfunded pension liabilities
by shift ing a signifi cant portion of the risk that
public employers now bear for defi ned benefi t plans
to defi ned contribution plans instead. In defi ned
contribution plans, employers bear no risk for
future investment returns, and unfunded liabilities
for these plans are not possible.
Major Policy Shift Would Make Public
Employees More Like Private-Sector Workers.
We believe that moving future public employees to
hybrid plans would address a key policy concern
relating to the current public employee pension
system—the growing disparity between public-
sector and private-sector employee retirement
benefi ts and security. Moving to a hybrid plan would
bring public employees’ retirement packages closer
in line with those of their private-sector counterparts
and serve to discourage future public employees
from retiring as early as their predecessors do today.
Finally, we believe that the Governor’s goal to have
career public workers have a retirement income
equal to about 75 percent of their career income
makes sense and is in line with studies indicating
the replacement ratio to preserve an employee’s
lifestyle in retirement. (Th is is particularly true if
the employee has supplemental employer-subsidized
health coverage during retirement.)
We discuss our concerns related to the
proposed cap for high-income public workers later
in this report. Also, as discussed immediately
below, there appear to be discrepancies between
this part of the Governor’s proposal and his
proposal to increase future public employees’
retirement ages.
INCREASED RETIREMENT AGES
FOR FUTURE EMPLOYEES
Background
In California, public employee pension
formulas oft en are referenced in a type of
shorthand—such as 2 percent at 55—that implies
there is a single “retirement age” (in this case, 55).
Actually, current California public employees in
this group are eligible to begin receiving service
retirement benefi ts at age 50—although with a
lower benefi t factor. In most cases, however, these
employees work longer so that they can increase
their retirement benefi ts through a higher factor.
For example, in the 2 percent at 55 group for
non-public safety state employees, employees can
“max” out their factor at 2.5 percent at age 63. Even
this, however, is not the “maximum retirement
age,” as workers generally can continue to increase
their benefi ts by working more years beyond age 63.
As shown in Figure 3, in the state’s three largest
public employee retirement systems, the average
state or local employee retired at about age 60 as
of 2009-10. Public safety employees tend to retire a
few years earlier. Moreover, due to recent changes
in benefi ts for newly hired state employees and
some local employees, average retirement ages in
many of the groups shown in the fi gure will tend
to increase somewhat in the coming decades under
current policies, even if the Governor’s proposal is
not adopted.
It is also worth noting that many retirees
receiving benefi ts from public retirement systems
also work in other jobs during their lifetime,
including private-sector positions. Th ese partial
career employees can receive relatively small
pension benefi ts. Calculations of the average
monthly or annual pension benefi ts paid by public
pension systems oft en include these partial-career
workers. If such workers were excluded from these
AN LAO REPORT
20 Legislative Analyst’s Offi ce www.lao.ca.gov 6-119
calculations, average monthly benefi ts paid would
be higher than shown by public pension systems in
many cases, and average retirement ages shown in
Figure 3 also could be aff ected.
Proposal
Work to a Later Age Would Be Required for
Full Benefi ts. Th e Governor’s plan seemingly
requires that all future public employees work to a
later age to qualify for full retirement benefi ts. Th e
Governor proposes that non-public safety pensions
for future employees target a retirement age at
67 (the current Social Security retirement age for
those workers). Future public safety workers would
target a lower retirement age “commensurate with
the ability of those employees to perform their jobs
in a way that protects public safety.” (As discussed
below, it is not clear exactly what the Governor
means in this part of his proposal. Presumably,
this would be addressed when the administration
provides additional details about its plan.)
Th e Governor points out that these changes
would reduce signifi cantly both pension and
retiree health costs for governments. In particular,
employees would have
fewer, if any, years
between retirement
and reaching the age
of Medicare eligibility.
Aft er the age of Medicare
eligibility, a substantial
portion of public-sector
retiree health care costs
shift to the federal govern-
ment’s Medicare program.
LAO Comments
Increasing Average
Retirement Ages
Is Essential. Given
increased longevity, we
believe it is appropriate to increase retirement
ages for future public employees. Failing to do so
would risk a growing long-term fi scal burden for
governments supporting pension programs, since
future increases in longevity would then produce
proportionate or greater increases in pension and
retiree health benefi t costs. Th ere is no single right
age to target, especially for public safety workers. It
will be important, however, for the Legislature to
set a specifi c policy for public safety workers rather
than the nebulous one that the Governor’s proposal
seems to suggest.
Th e Legislature also may wish to consider
whether the current age of minimum service
retirement eligibility for most public employees—
age 50—should be increased.
Possible Confl ict With Other Parts of the
Proposal. We are uncertain how the Governor’s
retirement age proposal squares with other aspects
of his proposal. Specifi cally, if future non-public
safety workers are to work until age 67 to receive
full retirement benefi ts, this suggests that a public
employee entering government service right out
of college or high school might have to work for
Figure 3
Average Retirement Ages for Selected Public
Employee Groups in 2009-10
Age
California Public Employees’ Retirement Systema
California Highway Patrol Offi cers 53
Local public safety offi cers 55
State correctional offi cers and fi refi ghters 60
Other state and local employeesb 60-61
California State Teachers’ Retirement Systema
School district and community college teachers 62
University of California Retirement Plan
Professional and support staff members 59
Academic faculty 63
a Includes service retirements only. Disability retirements, on average, occur 8 to 11 years earlier for
CalPERS members and about 6 years earlier for CalSTRS members.
b Includes state and local “miscellaneous” employees, such as government offi ce workers.
CalPERS = California Public Employees’ Retirement System; CalSTRS = California State Teachers’
Retirement System.
AN LAO REPORT
www.lao.ca.gov Legislative Analyst’s Offi ce 216-120
over 40 years to receive such benefi ts. Yet, the
Governor’s hybrid proposal envisions a 75 percent
replacement ratio for such workers aft er only 35 years
of government service. Accordingly, it is not clear
how the Governor’s plan intends to mesh the key
variables of the expected length of a working career,
replacement ratios, and retirement age.
LIMIT SPIKING FOR FUTURE EMPLOYEES
Background
Benefi ts for Many Still Based on Single
Highest Year of Salary. Many current public
employees are entitled to receive pension benefi ts
based on their single highest year of government
salary. As we discussed in our 2005 P&I report on
public pensions, this single-year formula for deter-
mining pension benefi ts is very rare among state
and local employees in the United States; in fact,
it is a feature of public pensions in California and
almost nowhere else.
In recent years, the state and some local
governments have moved to change the single-year
formula for newly hired employees by instead
calculating their pension benefi ts based on their
highest average annual compensation over a three-
year period. Th is discourages pension “spiking,”
which includes eff orts of employees to change jobs
or receive increased pay during their fi nal one
or two years of employment that increases their
eventual pension benefi t by a large amount.
Proposal
Require “Th ree-Year Final Compensation” for
Future Employees. Th e Governor proposes that all
future public employees have their defi ned benefi t
pensions calculated based on their highest average
annual compensation over a three-year period.
LAO Comments
Broad Consensus for Th is Change. We previ-
ously have recommended the Governor’s proposal.
Th ere seems to be broad public consensus for this
change, and it would be a small step to increase
public confi dence in public employee pension
systems. We caution, however, that, despite
frequent headlines concerning pension spiking,
this change probably would result in substantial
pension cost savings for a relatively small group
of future employees. It is not likely to result in
signifi cant cost savings for governments.
BASE BENEFITS ON REGULAR, RECURRING PAY
Background
Current Rules Can Result in Some Abuses.
Th ere are some instances when public pensions
reportedly are increased as a result of employees
receiving additional pay from bonuses, unused
vacation time, overtime, and other “perks.” Many
pension systems, however, already prohibit such
compensation items from being used to calculate
fi nal compensation for purposes of pension benefi ts.
Proposal
Establish Uniform Rule to Prevent Abuses. Th e
Governor proposes that all public defi ned benefi t
pension systems prohibit these types of compen-
sation items from being included in fi nal compen-
sation used to determine annual pension benefi ts for
future employees.
LAO Comment
Broad Consensus for Th is Change. We
recommend passage of this proposal. Such a change,
if rigorously enforced by all pension systems and
employers, should help increase public confi dence
in California’s state and local pension systems.
AN LAO REPORT
22 Legislative Analyst’s Offi ce www.lao.ca.gov 6-121
Th is change, however, might lower costs for only a
small percentage of future employees. Th is part of
the proposal seems unlikely, therefore, to produce
substantial pension cost savings for governments.
LIMIT POST-RETIREMENT EMPLOYMENT
FOR ALL EMPLOYEES
Background
Currently, Individuals Can Return to Public
Sector Aft er Retirement. California governments
oft en rely on “retired annuitants” and retired
workers from other public employers to work
part-time or full-time. Such retired workers can
bring considerable expertise to public agencies.
Some pension systems, such as CalPERS, limit
retired members to working for only 960 hours
per year for certain state and local agencies, and
these retired annuitants’ services do not result in
their accruing any additional retirement benefi ts.
In other cases, an individual may be able to retire
from one retirement system and work for an
employer in a diff erent public retirement system,
while accruing additional retirement credit in
that second system. (Th is latter scenario probably
occurs very infrequently.)
Proposal
Extending CalPERS Limits to All Public
Employers. Th e Governor proposes to limit all
current and future employees in their post-retirement
work for California governments. Specifi cally, the
Governor wants to limit all current and future
employees from retiring from public service and
working more than 960 hours per year for a public
employer—essentially extending the CalPERS
post-retirement employment rules to all public
employees. Th e Governor also would prohibit all
retired employees from earning retirement benefi ts for
service on public boards and commissions.
LAO Comments
Important to Strike the Right Balance With
Th ese Changes. While the Governor’s proposal
in this area lacks some detail, it seems reasonable
to us, in that it seems to strike the right balance
on limitations on postretirement employment. In
many cases, public employers can benefi t from the
expertise of retired workers while saving money—
paying them little or nothing in the way of benefi ts.
(A full-time worker, by contrast, typically would
receive substantial benefi ts that would add to his
or her personnel costs.) We observe, however, that
it will be very diffi cult for pension systems across
the state to enforce this provision if it is indeed
applied to limit a public retiree’s work for any state
or local employer in the state. For example, it might
be diffi cult for the Los Angeles County Employees
Retirement Association to identify a newly hired,
middle-aged employee who happened to be a
retiree of, say, the UCRP.
LIMIT FELONS’ RECEIPT OF PENSION BENEFITS
Proposal
Forfeit of Pension and Related Benefi ts.
Th e Governor proposes that public offi cials and
employees convicted of a felony in carrying out
offi cial duties, in seeking elected or appointed offi ce,
or in connection with obtaining salary or pension
benefi ts forfeit their pension and related benefi ts.
LAO Comments
Proposal Raises Various Issues. Th e Legislature
may want to explore certain issues regarding this
proposal. For instance, it is unclear to us whether
this type of change would be constitutional in
all cases as applied to current and past public
employees. For future public employees, however,
the state clearly may impose such a forfeiture
requirement. In addition, would such forfeiture
be prospective only, or would repayments of some
AN LAO REPORT
www.lao.ca.gov Legislative Analyst’s Offi ce 236-122
or all previously paid pensions to retired felons be
required? What if the felon cannot repay such costs?
PROHIBIT RETROACTIVE PENSION INCREASES
Background
Contributor to Recent Unfunded Liability
Increases. In recent years, many California govern-
ments have retroactively applied pension benefi t
increases to some or all employees’ prior years of
service. Th is can mean, for instance, that an employee
who worked nearly all of his career earning benefi ts
based on one pension benefi t formula (for example,
2.5 percent at 55) was able to complete that career on
a higher pension benefi t formula (such as 3 percent
at 50). When the change is applied retroactively, that
worker may earn a pension benefi t equal to 3 percent
of his fi nal compensation multiplied by his years of
service, even though both he and his employer made
contributions throughout his working life based
on a 2.5 percent benefi t factor. Accordingly, when
that worker retires, the government is left with an
unfunded liability to address in the coming decades.
Proposal
Ban Retroactive Benefi t Increases. Th e
Governor proposes to ban future retroactive
pension increases for all public employees. Prior
retroactive increases are constitutionally protected
and generally cannot be changed.
LAO Comment
An Important Change to Make. History
suggests that, particularly at times when pension
systems temporarily appear overfunded, retroactive
benefi t increases can be very tempting for public
employers and employees—essentially a kind of
“free money” to provide to career public servants.
Yet, as the Governor correctly points out, such free
money generally will end up costing taxpayers,
since pension systems rarely remain overfunded for
long and unfunded liabilities almost always result
from such retroactive benefi t grants. Moreover,
retroactive grants oft en will play no role—or even a
counterproductive role—in encouraging employee
recruitment and retention. New recruits certainly
do not benefi t from a higher pension benefi t applied
to prior years of service. Valued career employees
oft en will be incentivized to retire earlier than they
otherwise would due to their ability to receive a
higher retirement benefi t.
Given the history of public employers in this
area and the limited instances in which such retro-
active benefi t grants would be of real value to public
employers, we recommend that the Legislature
approve this element of the Governor’s proposal.
PROHIBIT PENSION HOLIDAYS
Background
A Relic of Past Boom Years in the Financial
Markets. During the late 1990s and early 2000s,
the “tech bubble” years in the stock market when
public pension systems temporarily reported that
they were overfunded, many public employers
substantially reduced or entirely eliminated their
annual pension contributions and, in some cases,
public employee contributions were reduced as well.
Th is is the key reason why state pension contribu-
tions to CalPERS were so low in some years of
the late 1990s, as shown in Figures 1 and 2. State
contributions to CalSTRS’ defi ned benefi t program
also were reduced during this period, contributing
to CalSTRS’ recent funding problems.
Proposal
Limit Ability of Employers to Suspend
Contributions. Th e Governor’s proposal would
“prohibit all employers from suspending employer
and/or employee contributions (related to both
current and future public employees) necessary to
fund annual pension costs.”
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24 Legislative Analyst’s Offi ce www.lao.ca.gov 6-123
LAO Comments
Getting Details Right Is the Key. We agree
that employers should be sharply limited in their
ability to suspend regular employer or employee
contributions. History tells us that such periods of
overfunding oft en are fl eeting and may be based on
temporary stock market bubbles.
In 2008, the Public Employee Post-Employment
Benefi ts Commission (PEBC) appointed by the
prior Governor and legislative leaders agreed to
a recommendation to restrict pension funding
holidays. Th e PEBC recommended that employers
be permitted to implement contribution holidays
only based on the amortization of their surplus
over a 30-year period. In other words, contribu-
tions could fall to zero only in instances when
the surplus is so great it can fund 30 full years of
normal costs. We suggest that the Legislature use
PEBC’s recommendation as a starting point in the
discussion in this area.
PROHIBIT AIRTIME PURCHASES
Background
Widely Available, but Very Diffi cult to Price.
Pursuant to state legislation or other law, CalPERS
and many other public pension systems have
allowed certain eligible public employees to buy
“airtime,” which is additional retirement service
credit for years not actually worked. For example,
a state employee can add fi ve years of service
credit—and, accordingly, increased retirement
benefi ts later—by paying a signifi cant sum of
money to CalPERS. In theory, the public employee
pays for the entire cost of this additional defi ned
benefi t pension credit. In practice, however, airtime
is nearly impossible to price accurately and, in
the past, oft en has been priced far too low, which
has resulted in the creation of a small portion of
existing unfunded pension liabilities.
Proposal
Ban Airtime Purchases. Th e Governor
proposes banning airtime purchases for current
and future employees. Prior airtime purchases
presumably would remain valid.
LAO Comments
Agree With Governor. In light of the diffi culty of
pricing airtime accurately and its tendency to result
in the creation of unfunded liabilities and higher
taxpayer costs, we recommend that the Legislature
approve this part of the Governor’s plan.
CHANGE COMPOSITION OF PENSION BOARDS
Background
Proposition 162 Limits Ability to Change
Pension Boards. California’s public retirement
systems are governed by boards that generally
consist of appointees of public offi cials and
public employees and retirees elected by system
members (or, in some cases, appointed by public
offi cials). In 1992, Proposition 162—sponsored
by public employee groups in response to eff orts
of Governor Wilson and the Legislature to alter
fi nancial arrangements relating to CalPERS—
placed in the Constitution a limitation on the
Legislature’s ability to change the composition
of state and local public retirement systems.
Accordingly, the Legislature generally may not
alter the number, terms, method of selection,
or method of removal of state or local pension
board members. To do so, a vote of the electors of
the jurisdiction aff ected by the pension board is
required. For CalPERS, for example, a statewide
vote is required to change board membership.
Proposal
Change CalPERS Board. Th e Governor
proposes to add two public members with fi nancial
expertise to the CalPERS board. Th ese board
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www.lao.ca.gov Legislative Analyst’s Offi ce 256-124
members would be “independent,” in the sense that
neither they, nor anyone in their family, may be a
CalPERS member or have any material fi nancial
interest in an entity that contracts with CalPERS.
Th e Governor also would replace the current
representative of the State Personnel Board (a quasi-
independent state entity) that sits on the CalPERS
board with the Director of Finance, a gubernatorial
appointee. Th e Governor also apparently wants
similar changes on other pension boards.
LAO Comments
No Issues With the Governor’s Proposal.
We concur with the Governor that, ideally, more
members of CalPERS and other pension boards
would have signifi cant fi nancial expertise. We are
unsure, however, whether this requirement would
lead to that, since “fi nancial expertise” is a fairly
subjective term that could be met in a variety
of ways, some of which may not be particularly
relevant to pension board membership.
We also agree that, given the state’s role
as CalPERS’ largest fi nancial contributor, it is
appropriate for the Director of Finance to sit on
the system’s board. Other state offi cials currently
on the CalPERS board—the State Controller, the
State Treasurer, and the Director of the DPA—each
have only a limited role in the state budget process.
Being the principal executive branch offi cial
involved with the state budget process, the Director
of Finance would be a valuable addition.
REDUCE RETIREE HEALTH BENEFITS
FOR FUTURE STATE EMPLOYEES
Proposal
Continues Eff ort to Increase Years of Service
Required for Benefi ts. Th e Governor proposes
that all future state employees be required to work
for 15 years before they become eligible for any
state subsidy for retiree health premiums. Th ese
employees would be required to work for a full
25 years for the maximum state contribution to
retiree health premiums. Many current employees
must work only 20 years for this maximum
contribution. Moreover, the Governor proposes
to reduce the current maximum retiree health
subsidy for state retirees. Th e “100/90 formula,”
whereby the state contributes up to 100 percent of
average employee health premium costs to retiree
health benefi ts, seemingly would be reduced
to something more akin to around 80 percent
of average premium costs (more typical of the
subsidy current state workers receive during their
careers). Th e 100/90 formula, which therefore
provides a greater health subsidy in retirement
than many state workers received during their
careers, was fi rst approved in 1978.
LAO Comments
Paired With Other Proposals, Potentially Huge
Long-Term Cost Decrease. Combined with other
proposals in the Governor’s package, which would
encourage employees to retire later, this change could
dramatically reduce long-term state retiree health costs
below what they otherwise would be under current
law. Moreover, by reducing retiree health subsidies
to future workers in retirement, this change may
encourage some workers to retire a bit later, thereby
reinforcing other proposals in the Governor’s package.
Th ere are many details of this proposal to work out,
but, in general, we believe that changes of this type are
reasonable. Th e Legislature also could consider basing
future employees’ retiree health subsidies on Medicare
supplement plan costs (rather than active employees’
average premium costs—the basis in current law) and
changing all or a part of retiree health subsidies for future
workers to defi ned contribution retiree health plans. In
defi ned contribution retiree health plans, employees,
rather than the employer, bear the risk of future
investment returns and health care cost increases.
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26 Legislative Analyst’s Offi ce www.lao.ca.gov 6-125
What About Funding Retiree Health Liabilities?
Governor Does Not Seem to Prioritize Addressing
Retiree Health Funding Problems. Th e Governor’s
plan does not seem to prioritize addressing the lack
of prefunding of retiree health liabilities at either
the state or local level. As we have noted in several
prior publications—including Retiree Health Care: A
Growing Cost for Government (2006) and California’s
First Retiree Health Valuation: Questions and
Answers (2007)—it is important for governments and
employees to fund retiree health benefi ts as they accrue
(that is, during the working lives of employees, when
they earn the right to receive these benefi ts). Because
the state and local governments, along with employees,
have long set aside funding for defi ned benefi t
pensions, these pensions are funded largely from
investment returns generated by these contributions.
Yet, retiree health liabilities generally are not funded
at all by governments during the working lives of their
employees. Th is means that no investment returns are
available to off set costs of governments and retirees
and adds substantially to the costs of providing these
benefi ts.
Addressing Th is Problem Is Very Diffi cult When
Budgets Are Tight. Assuming continuation of the
current system of defi ned retiree health benefi ts
(where governments promise a specifi c type of
subsidy to health benefi t costs for public employees
in retirement), both the state and local governments
should transition gradually over time to requiring
employer and/or employee contributions to cover
the costs of these future benefi ts. By authorizing
CalPERS to establish the California Employers’ Retiree
Benefi t Trust (CERBT) Fund and working with
some employee groups to begin funding state retiree
health liabilities, the Legislature already has taken
the fi rst steps to making retiree health prefunding a
viable possibility for the state and other governmental
entities. Moreover, a number of governments—in
addition to some state government employee groups—
already have begun to prefund their retiree health
benefi t liabilities through CERBT and other funding
arrangements. In considering changes to pensions
and retiree health benefi ts, the Legislature may wish
to consider additional steps to require governments
to properly fund their defi ned retiree health benefi t
systems. Such steps surely would need to be gradual,
given the increased near-term budgetary costs they
would impose on governments currently coping with
signifi cant fi scal challenges.
LAO PERSPECTIVES ON THE GOVERNOR’S PROPOSAL
A BOLD PROPOSAL WORTHY OF
LEGISLATIVE CONSIDERATION
Reasonable Set of Pension Benefi ts and
Reduced Long-Term Costs. Our overall perspective
is that the Governor’s proposal is a bold one. It
would result in substantial changes to the current
public employee retirement benefi t system,
particularly for future employees. In our view,
it would increase public confi dence in state and
local pension systems over the long term and
bring public employees’ retirement benefi ts more
in line with those of private-sector employees.
It undoubtedly would make public retirement
systems more sustainable over the long run by
reducing public entities’ vulnerability to increased
costs resulting from unfunded liabilities. Because
defi ned benefi t pension and retiree health benefi ts
would be reduced from current levels, unfunded
liabilities simply would be unlikely to grow so big
as to threaten the fundamental fi scal health of
public entities.
Th e Governor’s proposed changes probably
would not produce much short-term budgetary
AN LAO REPORT
www.lao.ca.gov Legislative Analyst’s Offi ce 276-126
savings for state government and many local
governments, but they would produce substantial
long-term savings, potentially in the billions of
dollars per year (in current dollars). Finally, we
believe the Governor’s proposals generally would
leave future public employees with a reasonable,
though reduced, set of pension benefi ts in exchange
for working longer during their public-service
careers. We believe the package is worthy of serious
legislative consideration in the coming months.
GETTING THE DETAILS RIGHT
Legislature Should Take a Few Months to Get
the Details Right. Like the Governor, we believe
there is much merit in fashioning broad-based
pension policy changes that aff ect all public pension
plans in the state. Yet, with several thousand public
employers and many diff erent pension and retiree
health packages off ered to public employees, it is
very diffi cult to fashion a workable, fair, sustainable
set of legislative provisions that accomplishes
the type of changes envisioned by the Governor.
We strongly urge the Legislature to take several
months to fashion a pension plan in response to
the Governor’s proposals. Th ere are many details
to sort out in such a plan, yet there is plenty of time
to fashion a package that would be ready for voter
approval in November 2012.
What Should Be in the Constitution? A
basic choice facing the Legislature is which
pension changes should be enshrined in the State
Constitution and which in statute. Constitutional
changes are harder to undo over time.
We agree with the Governor and others that
some pension changes may be so important that
they warrant a place in the Constitution. Perhaps
the clearest cases for placement in the Constitution
are the prohibitions on retroactive benefi t increases
and pension funding holidays. Structured properly,
these are workable, practical reforms where there
should very rarely, if ever, be a need for future
exceptions. Furthermore, extending certain
pension and retiree health limitations to charter
cities, charter counties, and UC probably would
require constitutional amendments.
We are concerned, however, about placing fi ne
details of a hybrid pension plan or other pension
and retiree health structural provisions in the
Constitution. Aft er all, all pension plans will require
modifi cation and adjustment—including “clean up
bills” to modify certain provisions—from time to
time. Th e clearest example is for tax law changes;
periodic changes in tax law or regulations oft en will
require minor changes for pension plans. Th e package
should include a path to making such necessary
changes for pension and retiree health plans, even if
elements of the plan are placed in the Constitution.
We suggest that the Legislature fashion a
constitutional package for submission to voters,
along with a companion piece of statutory legis-
lation containing various provisions, such as hybrid
plan design elements. In the proposed constitu-
tional amendment, the Legislature could preserve
for itself—and, in some cases, perhaps, for local
governments—the ability to adjust such detailed
design elements with supermajority votes.
Review Savings Estimates Carefully. Pensions
and retiree health cost estimates are very diffi cult
to understand. Th ey are constructed by actuaries
according to highly technical, detailed rules and
assumptions. Th e assumptions, if changed, can
materially alter cost or savings estimates related
to benefi t changes by large margins. Legislative
committees considering the Governor’s proposal—
and alternatives—probably will want actuarial
estimates of the costs and savings of such changes.
In the fi nal analysis, actuaries will inform the
Legislature that proposals of the magnitude of the
Governor’s can save billions of dollars of state and
local funds (in current dollars) annually in the long
AN LAO REPORT
28 Legislative Analyst’s Offi ce www.lao.ca.gov 6-127
term and, perhaps, in some cases there might be
limited short-term savings based on increases in
current employee pension contributions.
Cost estimates may be particularly useful in
comparing diff erent pension savings proposals—for
example, to determine which competing proposal
is likely to save more money over the long run—but
even then, such analyses are highly dependent
on assumptions that are open to broad debate.
Moreover, it will be diffi cult—perhaps impossible—
to secure estimates of how pension and retiree
health changes will aff ect all plans in the state.
Th ere are simply too many such plans to make such
estimates viable in the foreseeable future.
ALIGNING PUBLIC AND PRIVATE
SECTOR COMPENSATION
Setting Public Employee Compensation
Levels is Diffi cult. About 6 percent of Californians
currently work for the state or a local government.
Determining the appropriate compensation and
benefi t levels for these public employees is a diffi cult
balancing act. If government sets employee compen-
sation and benefi ts at rates that are too low, it can
be diffi cult for government to recruit and retain a
skilled workforce. Conversely, if government sets
compensation and benefi ts at rates that are too high,
it can undermine public confi dence in government’s
ability to manage funds, as well as impose unnec-
essary costs for public services.
Current Compensation Structure Diffi cult
for Public to Evaluate and Accept. Given these
tensions, we think the best strategy is for state and
local governments to broadly align the structure
and amount of public employee compensation with
compensation packages provided to comparable
employees in the private-sector. While we recognize
that making comparisons between the work respon-
sibilities of public- and private-sector employees is
diffi cult, making the structure of public employee
compensation packages similar to those off ered
to private-sector employees would promote trans-
parency to the public and allow the public to more
easily compare the generosity of public employee
compensation packages with compensation packages
with which they are familiar. Conversely, the current
structure—wherein state and local governments
provide compensation (defi ned benefi t pension plans
and, in some cases, retiree health benefi ts) in forms
that are very diff erent from that off ered in the private
sector—impairs the public’s ability to assess whether
government is carefully managing its funds and can
aff ect the public’s trust in government.
SOME INCREASED COSTS…NOT JUST SAVINGS
“Total Compensation” and the Public
Workforce. A governmental entity competes with
employers in the public and private sectors to attract
and retain a talented workforce. One measure of
a government’s competitiveness as an employer is
to compare total compensation levels off ered by
the state with those off ered by other employers.
An employee’s total compensation includes
salary, retirement, and other employment benefi ts
such as health benefi ts. Unlike salary and health
benefi ts, retirement benefi ts are a form of deferred
compensation. An employee forgoes some level of
compensation today (higher salary) with the expec-
tation that she or he will receive an off setting level of
compensation in the future. Studies have illustrated
that retirement benefi ts help make the public sector’s
current total compensation levels competitive
with those off ered in the private sector. Th is seems
especially true in the case of employees with higher
levels of education and skills.
Need for Higher Salaries, Especially for
High-Skill Public Workers. Under the Governor’s
proposal, the pension benefits offered to future
public employees would be less than the current
benefits. This change would reduce the value
of the total compensation offered to public
employees. In the case of some highly educated
AN LAO REPORT
www.lao.ca.gov Legislative Analyst’s Offi ce 296-128
and highly skilled public employees (for example,
some groups of scientists, medical professionals,
engineers, academics, and lawyers), public
employers’ current total compensation levels
likely would no longer be competitive if pensions
are reduced and no other pay or benefits are
increased. It is conceivable that in the current,
weak economy, the state and local governments
could attract these types of employees even at the
reduced levels of total compensation implied in
the Governor’s plan. In the long term, however,
the public sector in California may have diffi-
culty attracting highly skilled, highly educated
employees of the caliber and quantity needed
to provide public services under this proposal.
Accordingly, to the extent that the Governor’s
proposal reduces total employee compensation—
particularly for highly skilled, highly educated
state and local employee classifications—higher
salaries or other benefits probably will need to
be offered to these groups over the long term. A
cap on defined benefit pensions for high-income
public employees, as the Governor proposes,
could exacerbate these problems. Such higher
costs will offset an unknown portion of the
savings generated from pension and retiree
health benefit reductions.
Why Change Pensions if Net Savings Are So
Hard to Achieve? Reductions in one element of
compensation—such as pensions—oft en result
in salary or other compensation increases, as
described above. Nevertheless, we urge the
Legislature to pursue changes to pension and
other retirement benefi ts for a number of reasons,
including the likely long-term net budgetary
benefi t that these changes would produce for
governmental budgets.
First, by moving more employee compensation
from infl exible pension benefi ts to somewhat
more fl exible salaries and other compensation,
governments would gain some budgetary fl exibility.
Second, salary, employee health benefi ts, and
most other forms of compensation do not create
the risk of unfunded liabilities associated with
pensions and retiree health benefi ts. Other forms
of compensation are paid as they accrue, with little
or no risk of their costs being transferred in large
amounts to later generations. Pensions and retiree
health benefi ts are a very diff erent story. Reduced
unfunded liability risk due to lower defi ned benefi t
pension and retiree health commitments could
mean less budgetary volatility for governments in
the long run.
Finally, while we expect that some salaries
will rise because of retirement benefi t reductions,
governments will not have to raise all salaries
or otherwise off set all retirement cost savings
elsewhere in their compensation structure. Over
the long run, substantial net savings—perhaps
in the billions of dollars annually—could result
from pension and retiree health changes of the
magnitude proposed by the Governor.
CONSIDERING THE STATE /LOCAL
RELATIONSHIP IN THIS AREA
Currently, Signifi cant Autonomy for Cities,
Counties, and Special Districts. California cities,
counties, and special districts and their rank-and-
fi le employees currently have signifi cant authority
to collectively bargain retirement benefi ts. For
example, local governments and employees can,
in many instances, negotiate: (1) the selection
of a retirement plan from among the many
plans off ered by CalPERS, a 1937 Act county
retirement system, or certain other retirement
systems; (2) the share of the plan’s cost to be
paid by the employee and employer; and (3) the
provision of plan enhancements (such as basing
pension benefi ts upon a single year of fi nal
compensation). Th e Governor’s proposal imposes
AN LAO REPORT
30 Legislative Analyst’s Offi ce www.lao.ca.gov 6-129
signifi cant limits on local retirement plan compo-
nents and the division of pension costs between
employees and employers.
Do Local Governments Need to Be “Saved
From Th emselves?” In general, we think that
local elected offi cials should have the authority
to determine compensation levels, including
retirement benefi ts, which meet the needs of
their workforce. We note, however, that it is
oft en diffi cult for local governments to weigh the
major, lasting costs of public pensions against
the near-term benefi t of maintaining a skilled
workforce. As a result, aft er the state authorized
local governments to off er enhanced retirement
benefi ts in the late 1990s, many local agencies—
seeing competitor agencies off er higher benefi ts—
also agreed to provide enhanced benefi ts. Since that
time, the cost of these benefi ts (combined with the
signifi cant retirement system investment losses), has
imposed major fi scal pressures on many California
local governments—fi scal pressures that will last
for decades. Due to all of these factors, some local
offi cials believe that state policy is needed to impose
lower pension benefi ts—such as those proposed by
the Governor—or limit maximum employer pension
costs in order to prevent them and their successors
from adding to pension and retiree health cost
concerns in the future.
How Should the Legislature Approach Th is
Issue? It seems to us, therefore, that a key policy
question that the Governor’s plan poses to the
Legislature is whether some diminution in local
control over retirement benefi ts is merited given the
long-term nature of pension costs and the potential
for competition among local and state employers.
WHAT ABOUT CALSTRS?
On March 31, 2011, the Governor produced an
early version of a 12-point pension plan through
a press release and committed to introduce the
12 pension reforms. Th e October 27 proposal
by the Governor fi lls in some important details
concerning 11 of the items covered in the
March 31 press release, plus additional guber-
natorial proposals concerning retirement ages
and retiree health care. Th e one policy mentioned
in the Governor’s March 31 release that seems
to be left largely unaddressed in the October 27
gubernatorial plan is CalSTRS’ massive unfunded
liability, which totaled over $56 billion as of June
2010, according to CalSTRS actuaries. While the
Governor’s proposals may perhaps reduce costs
for future teachers enrolled in CalSTRS, it does
not appear to include anything to address these
liabilities already accrued, but not funded, for
current and past employees.
At Least $4 Billion Per Year Needed to Pay
Liabilities Over Th ree Decades. Most problemati-
cally, because CalSTRS contributions by employers,
employees, and the state are fi xed in the Education
Code, there are not any plans in place for any entity
ever to fund those promised benefi ts. If additional
contributions were provided immediately to CalSTRS,
they would need to total about $3.9 billion per year
(in current dollars) for at least the next three decades.
(Th ose fi gures assume that CalSTRS hits its annual
investment targets, which many observers believe will
be unlikely in the coming decades.) Given the state’s
budget problems, as well as the funding issues facing
school and community college districts, it is very
unlikely such funding can be identifi ed immediately.
Th e longer that a funding solution waits, however,
the more that this $4 billion annual tab will tend to
increase. Addressing the CalSTRS unfunded liability,
therefore, is one of the most diffi cult long-term
fi nancial challenges facing California.
Funding Solution Should Be Identifi ed as Part
of Th is Legislative Process. Given the commitment
of the Legislature and the Governor to discuss signif-
icant structural changes to state pension systems
now, we believe that a part of this discussion should
be CalSTRS’ long-term funding plan. Discussing
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changes in CalSTRS and other pension benefi ts
without discussing how to fund benefi ts already in
place does not make sense to us. Accordingly, we
urge the Legislature to tackle the CalSTRS funding
problem as part of a pension package.
We believe that the state—which has had the
sole responsibility for setting CalSTRS’ benefi t and
funding levels in the past—will have to play a key
role in addressing the existing unfunded liability.
Moreover, given that the only other theoretical
sources for addressing the liability are school and
community college districts and their employees,
the state ultimately would be pressured to increase
funding for those public entities in any event,
even if there were a way to require districts and
employees to pay more to address the funding
problem. Accordingly, the state probably will need
to gradually increase contributions to CalSTRS in
the coming years and maintain those contribu-
tions for several decades until existing unfunded
liabilities are retired.
Take Steps to End State Funding of CalSTRS
Over the Long Term. School and community
college districts, unlike almost all other public
employers in the state, have practically no fl exibility
in setting retirement benefi ts for their employees,
and they are shielded in current law—due to
fi xed contribution rates for both districts and
employees—from higher (or lower) costs that
may result from future increases (or decreases)
in CalSTRS’ unfunded liabilities. Th e Governor’s
plan envisions major changes in benefi ts for future
teachers and administrators enrolled in CalSTRS
and a reinforcement of the current require-
ments that districts and teachers share pension
costs. Given the altered levels of defi ned benefi ts
envisioned in the Governor’s plan, maintenance
of the existing contribution requirements for the
state, districts, and teachers probably would make
no sense for future teachers; these contribution
requirements will have to be changed.
Under these proposals, we do not see why there
would continue to be a direct state role in funding
future teachers’ benefi ts. (Payments related to
current teachers and the existing unfunded liability,
however, will likely have to continue for decades.)
We urge the Legislature to take this opportunity
to (1) commit the state to increasing payments
over time to retire existing unfunded liabilities
and continue to make payments related to current
CalSTRS members over the next few decades and
(2) require that districts and CalSTRS members be
the sole contributors to the Teachers’ Retirement
Fund for future teachers enrolled in the plan that
emerges from this legislative discussion. Over
the next few decades, under this approach, state
contributions in CalSTRS would dwindle, and over
time, districts and employees and retirees of the
system could gradually take over the state’s existing
seats on the Teachers’ Retirement Board. CalSTRS
should become a system of districts and teachers—
completely fi nancially separate from the state. If the
Legislature adopts this change, it should be careful to
require pension benefi t levels of school districts that
can be sustained within the existing contribution
levels that school districts and teachers already pay.
In this new structure, we believe that school
districts, their employee and retiree groups, and
CalSTRS itself would have a much greater incentive
to establish prudent, rather than optimistic,
investment return assumptions, given that they and
they alone will be responsible for keeping the system
well-funded for future teachers.
Consider Infl ation Benefi ts. Pension systems
in California typically include provisions to
protect retirees from having their benefi ts eroded
excessively over time by the eff ects of infl ation.
Th ese are sometimes called “purchasing power”
benefi ts. In CalPERS, for instance, infl ation
protection generally is “built into” the benefi t, and
governmental entities like the state—along with
employees—pay for it in their regular contributions
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32 Legislative Analyst’s Offi ce www.lao.ca.gov 6-131
to the system. In CalSTRS and perhaps some
other systems, purchasing power protection is
less straightforward. In CalSTRS, for instance,
the Supplemental Benefi t Maintenance Account is
guaranteed a fi xed amount of state funding now
to provide purchasing power benefi ts. If, in the
future, infl ation were to outpace the growth of
those contributions, CalSTRS retirees could see
signifi cant erosion in their benefi ts.
For CalSTRS and perhaps some other systems,
therefore, the Legislature will need to consider
future pension benefi t design in the area of
infl ation protection as well. With newly reduced
defi ned benefi ts, are changes in existing purchasing
power benefi ts warranted? While the state and
nation have been in a long period now of relatively
low infl ation, there is no guarantee this trend
will persist forever. Accordingly, any substantial
changes in purchasing power benefi ts could prove
to be expensive under certain actuarial scenarios.
WHAT ABOUT UC?
UCRP Also Has a Major Funding Problem.
From 1990 to 2010, UC and its employees enjoyed
a remarkable two-decade pension funding holiday
due principally to (1) substantial overfunding
of UCRP during the 1980s by the state and the
university and (2) very strong investment returns
for UCRP during the 1980s and 1990s. Th e state
also benefi ted from the funding holiday, since it
had contributed to UCRP regularly in prior decades
and used the elimination of contributions as a
budget solution during the fi scal crisis of the early
1990s. Given that UCRP continued to enroll new
employees and provide additional service credit to
existing employees, it would have been impossible
for such a funding holiday to continue forever. Th e
investment market downturn of 2008 caused the
already dwindling surplus in UCRP to fade away,
and now the system has an unfunded liability.
Unlike other systems, however, UC and its
employees are struggling to fi nd a way to cover
normal costs, as well as unfunded liabilities, given
that neither of them had contributed to the system
for two decades. Th e university and its employees
have already moved to change certain benefi t
commitments for current and future employees,
and they continue to engage in hard talks on how
to increase contributions to cover the costs of
both past and future benefi t commitments. Th e
university, however, believes that it may have to
raise tuition more or cut student services or other
employee costs in order to fund its entire share of
pension costs in the future. As a result, UC seeks
several hundred million dollars of additional
annual state funding beginning within a few
years so that it can cover normal costs and retire
unfunded liabilities over the next several decades.
Th e state has no apparent legal commitment to
provide such additional funding, and the state does
not directly set benefi t levels for UC employees.
To date, the Legislature has chosen not to provide
additional funding to UC for this purpose, despite
the university’s requests.
UC May Well Need Additional State Funding
for Retirement Costs. Th e magnitude of UC’s
unfunded liability costs not covered from other
funding sources (such as enterprise units and
the federal government) is so large—hundreds of
millions of dollars per year—that the university
will face very diffi cult decisions in the coming years
about how to cut costs or raise tuition further if the
Legislature does not provide additional funding
related to UCRP. Extending the Governor’s proposed
pension changes for other public employees to UC
employees as well may reduce UC’s future personnel
costs and help the university address the UCRP
funding problem over the long term. In the short
run, however, costs to address existing benefi t
commitments will remain very diffi cult to address
within existing resources of the university.
AN LAO REPORT
www.lao.ca.gov Legislative Analyst’s Offi ce 336-132
We urge the Legislature to consider the
long-term funding strategy for UCRP during these
legislative discussions on overall pension policy.
Specifi cally, the Legislature could resubmit a request
to UC that it provide a comprehensive, detailed
proposal for a long-term funding strategy. (Th at
same request was included in the 2010-11 Budget
Bill, but was vetoed by Governor Schwarzenegger.)
It will be very diffi cult for the state to consider a
long-term UCRP funding policy without such a
detailed proposal being submitted and without fi rm
agreement on the plan from all UC employee groups.
WHAT ABOUT DISABILITY BENEFITS?
Governor’s Proposals Focus on Service
Retirement, Not Disability Retirement. California’s
public pension systems oft en provide certain benefi ts
to disabled public employees, including employees
disabled as a result of their work assignment. Death
benefi ts also are sometimes provided to employees’
survivors.
In recent years, some public pension systems have
tightened their scrutiny of disability retirement appli-
cants considerably, but given the magnitude by which
the Governor proposes to reduce future employees’
pension benefi ts, there may nevertheless be a spike in
the future in disability retirement applications if the
Governor’s proposals succeed. Accordingly, in consid-
ering the Governor’s proposals, the Legislature may
wish to engage pension systems on ways to further
reduce incentives for improper disability retirement
requests in the future.
FOCUS ON THE LONG TERM
Achieving Major Near-Term Savings Will Be
Very Diffi cult—Perhaps Impossible. California
has decades of case law in this area based in part
on U.S. Supreme Court precedent in the area of
contract law. During the past year, there has been
a substantial increase in public discussion of the
possibility of reducing sharply the pension benefi ts
accrued by current public employees and even
current public-sector retirees. Th e motivation for
these suggestions seems to be the disparity between
public- and private-sector workers’ retirement
benefi ts, as well as a desire to reduce public costs
and transfers of obligations to future generations.
We understand these concerns, but the fact is
these types of changes oft en have been attempted by
other California governments in recent decades, and
in most cases, struck down. Other than increasing
current employees’ pension contributions (which
may be possible for some governments that have
rigorously protected their right to do so), there is
almost no viable way to decrease pension costs for
current and past employees outside of the negoti-
ating process. Case law in California is exceptionally
clear. In fact, California’s protections for public
employee pension contracts may be more protective
than those embodied in the U.S. Constitution.
Reductions in current and past employees’ pension
benefi ts almost always will require that governments
provide a comparable and off setting new advantage
in return. Only in cases of extreme emergency does
the case law suggest that more drastic changes may
be possible and, even then, the changes typically
would have to be temporary, with interest costs
accruing to the aff ected employees or retirees
during the time of the temporary pension cost
reduction. Moreover, even when governments can
increase employee pension contributions, collective
bargaining and the need to remain competitive
in the labor market will lead to salary or other
compensation increases that may off set much of the
retirement cost savings.
For all of these reasons, it may not be worth-
while for the Legislature to devote signifi cant time
during this process attempting to reduce current
and past employees’ retirement benefi t costs. Th e
debate, in our view, is best spent considering where
California’s public retirement systems will go in the
future.
AN LAO REPORT
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In the Short Run, Retirement Contributions
Will Have to Increase. In the short run, the
hard truth is that state and local pension and
retiree health contributions generally will have to
increase—in some cases, substantially—to fund
liabilities already accrued and earned by current
and past employees. Th e clearest example of this is
the need to increase funding to CalSTRS to pay for
its unfunded liabilities. Transitioning employees to
hybrid or defi ned contribution plans, furthermore,
may result in a decrease in some systems’
investment returns, thereby increasing employer
costs in the near term. By enacting reductions in
the retirement costs for future public employees,
however, the Legislature can realize major long-run
savings and also help “soft en the blow” of such
near-term cost increases.
AN LAO REPORT
www.lao.ca.gov Legislative Analyst’s Offi ce 356-134
LAO Publications
This report was prepared by Jason Sisney, Deputy Legislative Analyst. The Legislative Analyst’s Offi ce (LAO) is a
nonpartisan offi ce which provides fi scal and policy information and advice to the Legislature.
To request publications call (916) 445-4656. This re port and others, as well as an E-mail subscription service,
are available on the LAO’s website at www.lao.ca.gov. The LAO is located at 925 L Street, Suite 1000,
Sacramento, CA 95814.
AN LAO REPORT
36 Legislative Analyst’s Offi ce www.lao.ca.gov 6-135
California Public Employees’ Retirement System
P.O. Box 942715
Sacramento, CA 94229-2715 Reference No.:
(888) CalPERS (or 888-225-7377) Circular Letter No.: 200-010-12
TTY: (877) 249-7442 Distribution: VI
www.calpers.ca.gov Special:
Circular Letter
March 16, 2012
TO: ALL PUBLIC AGENCY EMPLOYERS
SUBJECT: EMPLOYER RATE IMPACTS DUE TO DISCOUNT RATE CHANGE
The purpose of this Circular Letter is to inform you of recent changes to the CalPERS
discount rate assumption and the impact this will have on employer contribution rates.
At the March 14, 2012 meeting, the CalPERS Board of Administration (Board) approved
a recommendation to lower the CalPERS discount rate assumption, or the rate of
investment return the pension fund assumes, from 7.75 to 7.50 percent. This will
increase public agency employer rates for fiscal year 2013-14.
CalPERS actuaries offered the Board two options to protect the soundness of the
pension plan: a 7.25 percent discount rate that includes an adjustment to add an
element of conservatism to further protect against lower returns, or a 7.50 percent
discount rate without such an adjustment. The Board voted to lower the discount rate
to 7.50 percent but directed staff to develop a plan to phase in the employer contribution
rate increases over a period of two years.
Background
In March 2011, the Board voted to keep the current discount rate of 7.75 percent. That
decision was partially made to help employers during these difficult economic times, but
was also contingent upon a reassessment this year. CalPERS discount rate was last
changed 10 years ago, when it was lowered to 7.75 percent from 8.25 percent.
Over the past year, the CalPERS Actuarial Office conducted its own study and hired an
independent evaluator to assess economic assumptions. The discount rate assumption
is calculated based on expected price inflation and real rate of return. Based upon
information from both studies, CalPERS Actuaries recommended that the assumption
for price inflation be reduced from 3.00 to 2.75 percent. When added to the current real
return assumption of 4.75 percent, produces a discount rate assumption of 7.50
percent.
Attachment F
11\
CalPERS
6-136
Circular Letter No.: 200-010-12
March 16, 2012
Page 2
Results
The Board’s decision to lower the discount rate assumption will have the following
estimated impacts on public agency employers and employees:
Public agency employer contribution rates are estimated to increase by
approximately 1.0 to 2.0 percent of payroll for Miscellaneous plans and 2.0 to
3.0 percent of payroll for Safety plans. These increases are to be phased in over
a period of two years beginning in fiscal year 2013-14. Details of the phase have
yet to be developed. CalPERS will communicate via Circular Letter to employers
when details are available.
Service credit purchase requests postmarked, delivered, or faxed on or after
March 15, 2012 will increase between 5.0 to 13.0 percent depending on the
individual circumstances of members.
Retirement applications with retirement dates on or after March 15, 2012 will
be calculated from the new discount rate. Members who choose optional
benefits – leaving some part of their benefit to a spouse or beneficiary after their
death – will experience approximately a 2.0 percent increase in cost.
The measured impact of the change in the discount rate assumption will be known
when the Actuarial Office completes the June 30, 2011 actuarial valuations in fall
2012. The June 30, 2011 valuations will set the employer rates that take effect on
July 1, 2013.
If you have any questions, please call our CalPERS Customer Contact Center at
888 CalPERS (or 888-225-7377).
ALAN MILLIGAN
Chief Actuary
6-137
CalPERS
Actual Investment Returns - A 20 Year History
12 Months Ended
Year June 30th Dec 31st
1992 13.9%6.5%
1993 14.6%13.4%
1994 2.0%-1.0%
1995 16.4%25.3%
1996 15.4%12.8%
1997 20.2%19.0%
1998 19.6%18.5%
1999 12.6%16.0%
2000 10.8%-1.4%
2001 -7.1%-6.2%
2002 -6.0%-9.5%
2003 3.9%23.3%
2004 16.7%13.4%
2005 12.6%11.1%
2006 12.3%15.7%
2007 19.1%10.2%
2008 -4.9%-27.8%
2009 -23.4%12.1%
2010 11.6%12.6%
2011 21.7%1.1%
20-year average 9.1%8.3%
10-year average 6.4%6.2%
Attachment G
6-138