ANALYSIS-Can Calpers keep its promises?

Published: 23 Oct 2009 03:35:28 PST

(This story is part of a special report on risk at Calpers, to see other stories and graphics double click on: [ID:nN2254816])

SAN FRANCISCO, Oct 23 - A letter earlier this year from the chief executive of Calpers, the biggest U.S. public pension fund, to local officials in California sent shock waves across the state.

Anne Stausboll opened by telling them contribution rates paid by local governments to Calpers, the California Public Employees' Retirement System, would largely be unchanged for the 2009-10 fiscal year, providing a bit of relief for local budgets thinned by the recession.

But due to the fund's steep losses -- eventually tallied at more than $56 billion in its most recent fiscal year -- Stausboll warned: "Rates for 2011-12 are less certain."

That means they will rise, according local officials, who expect to be in a financial bind as a result in coming months -- and well beyond.

"We're going to see our contributions increase significantly at a time when our revenues won't be bouncing back," said Rod Gould, city manager of Poway, California.

Calpers actuarial staff say the fund's losses leave only difficult choices into the distant future for local officials unless financial markets stage an epic comeback, said Dwight Stenbakken, deputy executive director of the League of California Cities.

"All I've heard is decades -- decades, plural," Stenbakken said. "We'll be paying for this downturn for years and years to come."

HARD CHOICES ALL AROUND

Unless markets charge ahead, local officials face:

* increasing contributions by public workers to their retirement plans, potentially by up to 50 percent for some employees, according to Stenbakken;

* raising taxes to cover higher contribution rates absorbed by government agencies, which may also jump by 50 percent, Stenbakken said;

* cutting public services and payrolls to shift money to retirement plans; or

* a combination of all of the above because existing pension benefits through Calpers are "vested rights" guaranteed no matter their cost, Stenbakken said.

None of the options will be politically popular.

Public employee unions are sure to oppose higher member contributions and job cuts. Taxpayers are sure to oppose calls for tax increases and proposals for service cuts.

"There is a day of reckoning for local governments," said Steve Levy of the Center for the Continuing Study of the California Economy.

"It's going to be very hard unless the stock market just goes nuts," Levy said.

Making matters worse is a wave of baby-boomers in government jobs who are on track to retire. "It's five to 15 years out but it's building," Levy said.

BENEFITS BILL COMES DUE

Calpers board member and State Treasurer Bill Lockyer told Reuters that local governments are likely to see higher contribution rates to cover their benefit hikes of years past.

"Local entities have to accept some of the responsibility for benefit increases they voted for," Lockyer said. "We have an obligation to keep the promises made to those employees."

Veteran local officials expected as much because the value of Calpers' assets has plummeted so hard, leaving it with a net return for the 10-year period ended in July of 3.25 percent.

While positive, it is of little comfort to local officials who over the past decade doled out generous pension benefits.

They had been comforted by Calpers' long-term performance and its ability to meet its goal of an average annual rate of return of 7.75 percent, which allowed the fund to provide the lion's share of revenues to keep its finances on track and liabilities under control.

"They said 'Don't worry, be happy,'" said David Crane, an economic advisor to Governor Arnold Schwarzenegger.

In retrospect, "Those pension boosts were given under unreasonable assumptions," Crane said, noting local officials took Calpers' decade of positive returns in the 1990s as an assurance of future success.

Inflating pension benefits was effectively a bet on the market taking care of swelling retirement liabilities, which taxpayers will have to cover in some way, shape or form in years ahead, said Steven Frates, a senior fellow at the Rose Institute of State and Local Government.

"Local government agencies awarded their workers with pretty lavish benefits through Calpers when things were rockin' and rollin'," Frates said. "They assumed the market was fat and could afford all this, and now they've saddled their taxpayers with significant costs going forward."