1. * and how does that compare with private sector rules?
How Are Required Employer Contributions Determined for California Public Sector Pension Plans?*
Jay Peters
September 18, 2017
* and how does that compare with private sector rules?

2. Federal Law: ERISA (1974) Standards for U.S. retirement plans:
participation, vesting, benefit accrual
grievance, appeals procedures
minimum funding
compensation and benefit limits
lots more
Governments exempt from minimum
funding standards, et. al.

3. Leads to Key Difference
Public Sector
Private Sector
Governing body sets funding policies used to determine contributions
ERISA, regulations determine required contribution
Very little discretion
Lots of discretion

4. Funding Policies Measure liability, assets
Assumptions to project amount, timing of future payments
Annual rate to discount those future payments to current dollars
How much of this liability counts as “accrued” and as “normal cost”?
How should asset value reflect recent “unexpected” investment results?
Translate into employer contributions
Period over which to fund gap between assets and accrued liability
Contribution pattern during period

5. Rate Used for Discounting
Public Sector
Private Sector
annual long-term investment return rate that governing body expects fund to earn
regardless of plan’s investments, average historical yield on high- quality corporate bonds
now 7.0% - 7.6% in CA
now ̴ 6%, headed to ̴ 5% by 2021
recent downward trend
no role for expectations

6. Impact Per 1% Drop in Discount Rate
employer normal cost: roughly 40% - 50% increase for a “classic” non- safety group
somewhat less for PEPRA, safety
unfunded accrued liability
increases accrued liability ̴13%
pre-change: accrued liability = $100, assets = $75; unfunded = $25
52% increase: from $25 to $38 [= $113 ̶ $75]
discount rate
7.x%
6.x%
total normal cost rate
20%
25%
+25%
̶ member rate
10% ̶
= employer rate
15%
+50%

7. Typical CA Public Sector
Funding the Gap
Typical CA Public Sector
Private Sector
period
20 or 30 years, depending on source
7 years
payment pattern
increase 3% - 4% / year
level $
phase-in / phase-out
reduced payments, first & last 4 years
none
lag until payments begin
one or two years
Illustration:
City X’s CalPERS plan incurs a $32.4 million experience loss in Additional City X contributions are to amortize this loss over 30 years, starting 7/1/18.

8. Amortization Payments and Unamortized Balance

9. Poorly Funded Plans Private Sector
By law, if < 60% funded per mandated discount
rate, no further pensions may be earned
Overrides CBAs
Public Sector
Pensions earned regardless of funded position
Many CA plans have-been / will-be < 60% if
measured using private sector discount rates

10. Upshot If ERISA funding rules suddenly applied to public sector:
in the near-term, required pension contributions
by CA governments would be several times larger
but eventually they would be smaller
than if current policies continue.

11. Comparing Pension Value Typical Private Sector (circa 2000) vs
Comparing Pension Value Typical Private Sector (circa 2000) vs. CalPERS Non-Safety
employee retires at age 55 after 25 years of service, $75,000 pay in final year