On Wednesday, the Board of Administration of the California Public Employees' Retirement System (CalPERS) approved new actuarial policies that will have a significant impact on participating employers. The policies are designed to return CalPERS to fully funded status over the next 30 years, but will increase costs for participating employers. Some estimates indicate that employer contributions will rise by almost 50% over a five-year period beginning with the 2015/2016 fiscal year. Employee contributions, however, will not be impacted by this change.
Currently, the majority of CalPERS plans are underfunded by 20% to 35% on average, and the prospects only look worse with liabilities increasing faster than assets accrue. As a result, changes to the 15-year rolling asset smoothing period (adopted in 2004 to address volatile employer contribution rates) and the rolling 30-year amortization period were recommended in order to accelerate progress towards the goal of attaining fully funded status. The new policies adopt a five-year asset smoothing period and a fixed 30-year amortization period.
CalPERS indicates that the new policies will prevent dramatic increases in employer contribution rates during years of extreme fluctuations in investment returns, such as the 2008/2009 fiscal year, and will keep changes in rates to a reasonable level during other years. The new 30-year fixed amortization period will begin with a five-year ramp up of employer rates, which will then stabilize for 20 years and then ramp down for five years. Implementation of the new policies has been delayed until the 2015/2016 fiscal year.
If you have any questions about how these new policies will impact your agency, or to explore potential strategies to mitigate the financial impact on your agency, please contact John Wahlin, Isabel Safie or Allison De Tal in the firm’s Employee Benefits practice group, or your BB&K attorney.