December 08, 2004

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Classifieds

Publication Date: Wednesday, December 08, 2004

Hundreds of California counties, cities and special districts, as well as the state itself, contract with CalPERS to administer their retirement funds.

The agency pays out about $7 billion a year in pensions, according to CalPERS spokesperson Darin Hall.
Assured benefit

Public employee pensions are known as "defined benefit." Such a plan ensures that that employees, upon retirement, receive a predetermined amount in benefits based on a formula that includes age, number of years on the job, and salary at retirement.

That formula is negotiated by the public agency and employee unions, with ceilings set by the state Legislature.

Both employee and employer pay into the employee's pension account. The retiree receives benefits until death.
Change to 401(k)s?

A California assemblyman, Keith Richman, R-Granada Hills, is proposing a radical change in public pensions to make them into "defined contribution" plans, such as the 401(k)s in the private sector.

The "defined contribution" plan offers no guaranteed level of benefits upon retirement. Employers may contribute a certain amount to employees' retirement accounts, sometimes matching a percentage of an employee's pretax contribution.
Contributions vary

The amount of money CalPERS requires participating cities, counties and special districts to contribute to their employees' pension fund typically varies from year to year.

Each public agency's contribution depends on its "liability" -- for example, its contracted benefits and number of people expected to retire that year, according to Mr. Hall, the CalPERS spokesperson.

It also depends on factors those public agencies have no control over. During stock market booms, the value of CalPERS' investments rise and the participating towns and special districts don't have to pay as much. During the dot-com boom of the 1990s, for example, many agencies were not required to contribute at all, although employees continued to contribute the amount set in their contracts.
Raising benefits

It was during this boom that the state Legislature, seeing the CalPERS pot brimming over, raised the ceiling on allowable CalPERS retirement benefits.

In 1999, the state lifted the cap for public safety workers -- firefighters, police officers and other emergency workers -- allowing them to retire at the age of 50 at up to 90 percent of their base pay for life. This was a 50 percent increase over the old formula, which restricted benefits to 60 percent of salary.

In both cases, the terms had to be agreed to by the employer and employees through contract negotiations.

In 2002, the cap on benefits was raised for non-safety workers, allowing an employee to retire at age 60 at up to 90 percent of his or her salary for life, if the employer and employees agreed.
Market slide

When the market boom busted in 2000, CalPERS' investment returns slid into negative territory.

Participating public agencies then were required to contribute significantly larger amounts.

Mr. Hall said that CalPERS sets a benchmark of 7.75 percent for investment returns -- "what we need to break even." After three straight years of negative returns, the agency has seen a turnaround: CalPERS reported a 12.5 percent return on investments in 2003, he said.

But relief won't be immediate for public agencies. There's a two-year lag-time for CalPERS to adjust rates to its participating agencies, and officials are crossing their fingers that investment returns will hold steady or increase, Mr. Hall said.

-- Renee Batti

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