An article published in Thursday’s edition of The Bond Buyer (subscription required) highlights a rising concern of counties, cities and special districts that provide retirement benefits to their employees through the CalPERS pension plan: That, in the face of rising annual costs to fund those benefits, exiting CalPERS is far costlier because the termination fee, referred to as the “withdrawal liability” by CalPERS, which is based on an assumed rate of return that is much lower than the fixed 7.5 percent rate used to calculate ongoing liabilities.

However, the assumed rate of return used to calculate the withdrawal liability is not fixed at 4.25 percent,  as noted in the article. Rather it is a variable rate that has been as low as the high 2 percent range. This variable rate is based on the weighted average of the 10- and 30-year U.S. Treasury yields in effect on the valuation date.

Further, while the article suggests that a loophole exits during a brief window between the assessment of the liability and the completion of the withdrawal during which accrued benefits could be reduced, that is not the entire story.  Although CalPERS does have the authority to reduce accrued benefits proportionately to the amount of the withdrawal liability that remains unpaid, it also has broad powers to go after defaulted employers to ensure complete payment of the withdrawal liability until it has determined that further efforts will fail to yield additional funds.  In addition, under state law, CalPERS is merely the administrator of an employer’s defined benefit plan.  Thus, to the extent that CalPERS reduces the accrued benefits of current and former employees of a withdrawing employer, those same employees can look to the employer to make up the difference on the basis of a claim brought under the vested rights doctrine.  Therefore, employers are better served by finding ways to reduce their pension liabilities, such as refinancing its liability on more favorable terms, finding new revenue sources,  encouraging employees to take on a greater responsibility for funding pension benefits or pushing for legislation to provide employers with greater flexibility to leave the CalPERS pension plan with respect to future employees.