CalPERS’ Estimate of Contribution Increases Due to Longer Lifetimes

March 18, 2014 by Teague Paterson

As has been reported in the news, the CalPERS (California Public Employees’ Retirement System) Board has adjusted its actuarial assumptions related to mortality.  The good news is that men and women are living longer than expected, and longevity is expected to continue to increase.  The bad news is that, as a result of these changes to estimated lifespans, CalPERS employee contribution rates will increase.  This week CalPERS issued estimates of the contribution rate increases for public agency employers, in Circular Letter No. 200-013-014.  The increased contribution rates will begin to go into effect in Fiscal Year (FY) 2016, and ramp up to their expected level in FY 2020.  Beeson, Tayer and Bodine (BT&B) provide implications for this announcement related to their public and private employment law practice representing employees and unions for over 75 years.

Unions representing employees enrolled in CalPERS, especially those that expect to negotiate new contracts in the near future, should be familiar with these estimated contribution rates.  The changes in member lifespan assumptions will only slightly affect the annual (or “normal cost”) of contributions on a going forward basis for employees.  Under PEPRA (Public Employees’ Pension Reform Act) 2012, employers may only impose one-half of normal cost contributions on members absent union agreement.  Unions need not, but may, agree to member contributions that exceed half of normal cost.

By increasing lifespan estimates, an additional unfunded liability is created for prior years of service, because contributions for those years were based on mortality assumptions that have proved to be incorrect.  Consider this a “debt” owed by employers to CalPERS, a debt that CalPERS will require employers to pay off over twenty years beginning in FY 2016.  In order to soften the impact, CalPERS will gradually “ramp-up” the contribution increases for this unfunded liability between FY 2016 and 2020 (followed by a ramp-down in years 2030-35, assuming mortality assumptions are not revised again in the interim).  CalPERS will also provide employers the option to accelerate their payments of this “debt,” meaning they may start paying higher contributions earlier (in the same way a homeowner might pay more than their monthly mortgage payment).

What does this mean for employer and employee contribution rates?  For miscellaneous plans, employee contributions will increase by only 0.1-0.35% of pay, and up to 1.0% for safety (assuming members’ contributions are half of the normal cost).  However the employer rates, which include payoff of the “debt” described above, will gradually increase by up to 6.7% of payroll for miscellaneous members, or more than 9% for safety by FY 2020.  CalPERS has provided the following chart summarizing its estimates, expressed as a percentage of payroll:

If you are interested in additional information about California cases and Board rulings, BT&B provides a law blog and newsletter about similar topics.  You will also find information on education law, collective bargaining and collaborative union relationships and benefits and trusts on our website.

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