By Nina Pileggi and Max Stoff
Updated July, 2020 7:02 pm ET

LOS ANGELES — Stemming from COVID-19 related economic volatility, the California Public Employees’ Retirement System (CalPERS) did not meet its annual investment return goal. CalPERS reported a 4.7% return for the fiscal year ending on June 30th, which is below the system’s 7% target. This is the second year in a row that CalPERS missed its investment return target – CalPERS returned 6.7% last year.

Local governments must pay more when the CalPERS’ investment returns do not meet the system’s targets. Ultimately, these payments are funded by taxpayers. Given CalPERS’ two-year lag in updating employer contribution rates, local governments will not see increased pension contribution costs until 2022. Also, CalPERS amortizes these costs over a twenty-year period, in two phases. The first phase is a five-year ramp-up, meaning that the additional annual contributions increase roughly twenty percent each year for the first five years of the amortization schedule. The second phase is a level dollar amount over the remaining fifteen years of the amortization schedule.

For public finance officials, the long-term ripple effects of increased pension costs stemming from consecutive years of missed investment returns, compounded by potentially shrinking revenue bases due to COVID-19, present two unique challenges. The first is communicating pension-related costs to internal and external stakeholders in an effective manner. The second is developing a flexible, proactive, and data-driven approach to addressing pension costs. Below are three key best practices, generated from working with public finance officials across the country, that can improve the communication and policy-planning processes surrounding pension costs.

Dedicate time and resources into educating stakeholders. Council members, board members, and citizens are not expected to be actuarial subject matter experts. However, they are tasked with opining on the policies and budgets that address pension costs. Establishing a permanent program to provide a baseline level of education and historical context around pension costs for relevant stakeholders will lead to more efficient, targeted, and fruitful discussions when developing and evaluating policies.

Scenario analysis is essential when developing, proposing, and assessing pension funding policies. Understanding how, based on your agency’s data, your pension costs and liabilities could be impacted by a range of different outcomes will allow for a more holistic and data-driven policy making process. Stakeholders may feel more comfortable that you have done your due diligence when pension policy proposals incorporate multiple scenarios. Regularly considering new/relevant potential scenarios will lead to a more robust policy assessment process.

Propose pension funding policies with built-in triggers for proactive re-examination. We have found there are many leading indicators that would warrant a re-examination of a pension funding policy. For instance, if revenue projections drop below a certain threshold then an additional contribution policy may not be feasible. Understanding the relevant indicators for your agency and incorporating them into policy proposals will yield more agile policies that can be more easily adjusted to meet change.

Want to learn more about how the CalPERS investment return impacts California local governments? Join speakers Charlie Francis and Ira Summer as they discuss what the investment experience means, how CalPERS has performed over the years, how the experience impacts current and future contribution requirements, and assessing the impact considering COVID-19.

By Nina Pileggi and Max Stoff
Updated July, 2020 7:02 pm ET

LOS ANGELES — Stemming from COVID-19 related economic volatility, the California Public Employees’ Retirement System (CalPERS) did not meet its annual investment return goal. CalPERS reported a 4.7% return for the fiscal year ending on June 30th, which is below the system’s 7% target. This is the second year in a row that CalPERS missed its investment return target – CalPERS returned 6.7% last year.

Local governments must pay more when the CalPERS’ investment returns do not meet the system’s targets. Ultimately, these payments are funded by taxpayers. Given CalPERS’ two-year lag in updating employer contribution rates, local governments will not see increased pension contribution costs until 2022. Also, CalPERS amortizes these costs over a twenty-year period, in two phases. The first phase is a five-year ramp-up, meaning that the additional annual contributions increase roughly twenty percent each year for the first five years of the amortization schedule. The second phase is a level dollar amount over the remaining fifteen years of the amortization schedule.

For public finance officials, the long-term ripple effects of increased pension costs stemming from consecutive years of missed investment returns, compounded by potentially shrinking revenue bases due to COVID-19, present two unique challenges. The first is communicating pension-related costs to internal and external stakeholders in an effective manner. The second is developing a flexible, proactive, and data-driven approach to addressing pension costs. Below are three key best practices, generated from working with public finance officials across the country, that can improve the communication and policy-planning processes surrounding pension costs.

Dedicate time and resources into educating stakeholders. Council members, board members, and citizens are not expected to be actuarial subject matter experts. However, they are tasked with opining on the policies and budgets that address pension costs. Establishing a permanent program to provide a baseline level of education and historical context around pension costs for relevant stakeholders will lead to more efficient, targeted, and fruitful discussions when developing and evaluating policies.

Scenario analysis is essential when developing, proposing, and assessing pension funding policies. Understanding how, based on your agency’s data, your pension costs and liabilities could be impacted by a range of different outcomes will allow for a more holistic and data-driven policy making process. Stakeholders may feel more comfortable that you have done your due diligence when pension policy proposals incorporate multiple scenarios. Regularly considering new/relevant potential scenarios will lead to a more robust policy assessment process.

Propose pension funding policies with built-in triggers for proactive re-examination. We have found there are many leading indicators that would warrant a re-examination of a pension funding policy. For instance, if revenue projections drop below a certain threshold then an additional contribution policy may not be feasible. Understanding the relevant indicators for your agency and incorporating them into policy proposals will yield more agile policies that can be more easily adjusted to meet change.

Want to learn more about how the CalPERS investment return impacts California local governments? Join speakers Charlie Francis and Ira Summer as they discuss what the investment experience means, how CalPERS has performed over the years, how the experience impacts current and future contribution requirements, and assessing the impact considering COVID-19.