CalPERS Chief Explains Rate Change

 WHY THE DISCOUNT RATE WAS DROPPED
Yesterday Marcie Frost, since July the Chief Executive Officer of CalPERS, the biggest public employee retirement system in the country, issued a commentary explaining the rationale behind the decision by the CalPERS Board last month to reduce the "discount rate" by a half percentage point over the next three years.

FACTS ARE FACTS
Regardless how you feel about public pensions - we know how Jim Righeimer feels, since he told us in no uncertain terms EXACTLY how he feels at the most recent City Council meeting when he said, "I will say this uncategorically, nobody, nobody who works in government should have a $200,000 pension check - period!" - and whether we should somehow go back on the contractual agreement we have with our employees covered by this plan, we cannot duck the reality of this issue.

THE OBLIGATION WILL GROW
Yes, a reduction of the discount rate means that member agencies, like the City of Costa Mesa, will have to make up the difference, which will increase the amount of the Unfunded Pension Liability - estimated by some to be right at $229 million today.  Although neighboring cities have begun to chip away at their pension liability, so far the City of Costa Mesa - under the dictatorial leadership of Jim Righeimer - has done virtually nothing to reduce it.

WHAT CAN BE DONE?  NOT MUCH...
Quite honestly, due to the circumstances beyond the control of the city, there seems to be not much that CAN be done short of Municipal Bankruptcy.  The Pension Oversight Committee, early in their tenure, heard all about that option from a workshop conducted by one of their members.  Righeimer, whose hatred for public employees and his envy for their pensions oozes from his pores as he speaks about it,  implied that he wants the employees to give back their benefits - to agree to take a lesser amount to soften the impact of the pension hit on the city coffers.

HERE'S THE STATEMENT
Here's the text of Frost's commentary, found in it's original format at this link.

CalPERS' Action on Discount Rate was a Prudent, Smart Decision

January 6, 2017

By Marcie Frost
CalPERS, Chief Executive Officer

Last month, the CalPERS Board of Administration took a decisive step to strengthen our fund by cutting what is known as the "discount rate" by a half percentage point over the next three years.

The move generated a lot of attention. Some praised it. Some complained that we didn't make a deeper cut. Others were considerably harsher. They charged that we had hid our 4-year-old policy, one that was very publicly debated in 2013 (PDF), of implementing any reduction over five years.

Of course, that's just straight-out wrong.

I took over as the Chief Executive Officer of the California Public Employees' Retirement System last October. I believe deeply that all of us, private and public sector workers alike, deserve financial security in our retirement. Let me explain why cutting the discount rate is so important - and let me tell you about our goals and our future and why we won't shy away from tackling the pension challenges ahead.

First, some background: The discount rate is what we assume our $304 billion in investments will return in a typical fiscal year, July 1 to June 30. It's a critical component of pension financial planning, because it’s used in calculating the amount of money those who are part of the CalPERS system contribute.

We lowered the rate because experts inside and outside CalPERS advised us that, the recent stock market surge notwithstanding, the long-term financial outlook had darkened. Achieving a 7.5 percent return – the rate in place since 2012 – was now far less likely than it was just two years ago when we last revisited it. Solid investment returns are the cornerstone of the CalPERS system: They pay for nearly two-thirds of every dollar we pay out in pension benefits.

But cutting the discount rate has real financial impacts for California taxpayers. We're acutely aware of that. The state, local public agencies, and school districts that make up CalPERS will have to contribute more money. So will many public employees, especially those hired after the Public Employees' Pension Reform Act took effect in January 2013. Liabilities too will grow before they level off and begin a downward trend.

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Those hard realities helped inform the CalPERS Board when it decided to reduce the rate over three years - to 7.375 percent immediately, to 7.25 in July 2018, and, finally, to 7 a year later. To sustain the CalPERS Fund for decades to come and pay the benefits they've promised their employees, our 3,000 employer partners knew the discount rate had to be reduced. But it was abundantly clear from our many conversations with them that they wanted to see the changes phased in. For their own budgeting purposes, they didn't want the rate to be cut dramatically in one fell swoop.

The reduction is a key step to ensuring the long-term sustainability of the fund and keeping in place reasonable retirement benefits that public employers need as they compete in the marketplace for talented workers. Others recognize the benefits of the decision as well. The credit-rating agency Moody's has called it a "credit positive" (PDF) for the State of California and many local governments.

We are a maturing pension fund like many across our nation. More money is going out in pensions than coming in, we have a low funded status, a decline in the number of active workers supporting retirees, and a low-return investing environment. These issues are real, but we are on the right path to full funding - and the Board's action on the discount rate has strengthened our efforts.

We've just started a comprehensive review of our assets and liabilities to make sure we're invested in the right places as we continue to pay the benefits our members have earned. We're working overtime to provide the public agencies and school districts with the clear financial roadmap they need to properly plan their budgets over several years. It will take time, but we have the discipline, confidence and the financial expertise to solve these issues for the next generation of public servants.

The real difficulty about this debate is not simply the data before us. It's the clear understanding that what we do impacts real lives - the lives of our 1.8 million members, the bottom line of the cities, counties, schools, and special districts that are the backbone of California, and, ultimately, the taxpayers of our state.

CalPERS is celebrating its 85^th anniversary this year of serving those who serve California. We intend to directly confront what's ahead so that we can provide retirement security for the next 85.