California's government will increase the amount it contributes to state employees' pensions starting this summer, and cities and other government agencies will follow suit in two years, to help cover the cost of benefits for retirees who are living longer.
The board of the California Public Employees' Retirement System approved new assumptions for the pension system Tuesday that effectively increase contribution rates.
Projections show workers are expected to live an average of as much as two years longer, driving up the cost of paying benefits to people until they die. Women retiring at age 55 in 2028 are expected to live to 87.
Contributing more to CalPERS' $282.5 billion pension fund means local governments will have less money to pay for services such as police, roads and parks. But delaying payments to the pension system would cost more in the long run.
The rates cities, counties and school districts pay for their employees won't change until 2016 and the increase will be phased in over five years, with the added contributions over a 20-year period covering the extra cost of workers' longer lives. But the board voted 7-4 to approve a request from Gov. Jerry Brown to accelerate the state's payments starting this summer, with the increase phased in over three years. Brown said waiting would have cost the state $3.7 billion on top of its $45 billion in long-term unfunded pension liabilities.
Starting July 1, the state estimates its annual pension payment will rise by $440 million, including $260 million from the general fund. Once the increase is completely phased in, the state's annual payment is expected to be $5 billion, an increase of $1.2 billion.
"The board today took important and responsible action to strengthen California's pension system," Brown said in a written statement.
But some CalPERS board members and union representatives said the move to treat the state differently was unnecessary, given that it could voluntarily pay more for pensions, as it has in recent years.
"I don't see a reason to mandate an acceleration, and quite frankly, if the state really has extra money, the fund across the river is actually in far worse shape," said J.J. Jelencic, one of four board members who voted against the governor's request, referring to the state's $80 billion unfunded liability for teachers' pensions.
Most county and city governments surveyed by associations agreed with CalPERS' approach to phase in the increase over five years and spread the total cost over 20. But the new rate increases are on top of additional rate increases coming next year.
"Together, they are going to cause serious service reductions," said Chris McKenzie, executive director of the League of California Cities.
Sacramento Finance Director Leyne Milstein told the CalPERS board her city expected to have to pay $12 million more for pensions at the peak of new rates, the equivalent of cutting 34 police officers, 30 firefighters and 38 other employees.
In an 8-3 vote, the board rejected an option for public agencies like Sacramento to absorb costs more slowly by phasing in the increased contributions over seven years instead of five. Mounting CalPERS pension costs played a significant role in Stockton, San Bernardino and Vallejo filing for bankruptcy protection, McKenzie said. But the difference in overall costs for a seven-year phase in period was small.
"It can't be the thing that breaks the agency," said board member George Diehr.
Almost no public agencies are eligible for a change in payment terms because of financial hardship under existing CalPERS policies, said the fund's chief actuary, Alan Milligan.
Some public safety employees will have to pay more toward their pensions under the board's action -- an increase of as much as 0.75 percent of their salaries. CalPERS expects other government employers to impose, or bargain, for higher member contributions.
CalPERS' assumptions are based on earning a 7.5 percent return on the pension fund's investments, a projected rate of return that the board left unchanged Tuesday.