Impact of Economic Downturn on Employer Contributions and Changes to the CalPERS Smoothing Methods

1. Impact of Economic Downturn on Employer Contributions and Changes to the CalPERS Smoothing Methods Presented by Alan Milligan, Deputy Chief Actuary CalPERS

2. Today�s Topics Recession means challenges for public sector employers Short-term pension contribution increases What CalPERS is doing to help

3. Economic Recession Affects Many Financial markets nearly collapsed Stock values took big hit Real estate values suffered losses Government tax revenues sharply lower Pension fund investments lost value

4. Public Sector Hit with �Perfect Storm� Recession decimated tax revenues More employees and payroll growth Employee health-care costs keep going up Employee retirement costs going up Government budgets under stress Solution: labor and employer negotiations This slide lays out the pressures on employers and sets us up to discuss both the payroll increases and contribution increases. Talk about who the audience is and why this is important to themThis slide lays out the pressures on employers and sets us up to discuss both the payroll increases and contribution increases. Talk about who the audience is and why this is important to them

5. Pension Rates Change Every Year Rates adjusted every based on demographic changes and investment performance Rates go down after good investment years Rates go up after poor investment years Rates tend of balance out over long term

6. Why Are Pension Rates Increasing Now? Investment market volatility Nearly all investors lost money during recession � including CalPERS Past benefit improvements not a factor � already built into current employer rates Use this to set up the graph on the rates of returnUse this to set up the graph on the rates of return

7. Myth: Cost Increases Caused Mostly by Benefit Improvements Some incorrectly blame benefit improvements over past 10 years for cost increases � only partly true Growth in government is big factor in higher CalPERS contribution amounts

8. Growth in State Payroll over the Past 10 Years

9. Growth in School Payroll over the Past 10 Years

10. Growth in Local Misc. Payroll over the Past 10 Years

11. Growth in Local Safety Payroll over the Past 10 Years

12. Breakdown of the Change in State Contributions Between 1997-1998 & 2009-2010

13. CalPERS Investment Returns Past 20 Years Demonstrate the issue visuallyDemonstrate the issue visually

14. CalPERS Earnings Assumption CalPERS assumes 7.75% average annual return Assumption based on asset mix and historical performance Long term assumption � not short term

15. CalPERS Investment Returns � June 30, 2009 1 year: -24% 5 year: 1.5% 10 year: 2.3% 15 year: 6.9% 20 year: 7.4% May need a transition slide Responds to the question about future rates of return and is it reasonable to expect that we can make 7.75% in the future. These rates of return are as of the end of a bear market; we would expect that the short term and even mid-term returns would be below the long term expected returns and they are.May need a transition slide Responds to the question about future rates of return and is it reasonable to expect that we can make 7.75% in the future. These rates of return are as of the end of a bear market; we would expect that the short term and even mid-term returns would be below the long term expected returns and they are.

16. Impact of Recent Market Returns FY 2003-04 through 2006-07 returns very positive � funded status improved to about 100% Return for FY 2007-08 was negative 5.1% -- funded status dropped to 87% Return for FY 2008-09 was negative 24% -- funded status expected to be about 60% This help establish where we were before the market tanked Move after the graph on the rates of returnThis help establish where we were before the market tanked Move after the graph on the rates of return

17. History of CalPERS Funded Status Delete?Delete?

18. What About 2009-10 Year? 12% return as of December 31, 2009 Encouraging and helpful but not yet full recovery When economy recovers funded status will improve Full recovery not expected in near future

19. PA Employer Rates Beginning July 1, 2010Based on 2007-08 returns (-5.1%)

20. Future Employer Rates FY 2008-09 investment loss (-24%) would require 3% to 8% rate increase for most PA plans beginning July 1, 2011 Rate increase for State and school plans begin July 1, 2010 Increases unnecessarily harsh? Refocus the slide to answer the question �What happened to cause us concern?�Refocus the slide to answer the question �What happened to cause us concern?�

23. New Temporary Rate Smoothing Method CalPERS Board adopted rate smoothing change to provide short-term employer rate relief Impact of the 2008-2009 investment loss (-24%) to be phased in over three years The change was adopted for the State, schools and local agencies

24. Comment on the scale Assuming a -24% Return in FY 2008-2009 and 7.75% Thereafter Plan with Asset to Payroll Ratio of 7 on June 30, 2007Comment on the scale Assuming a -24% Return in FY 2008-2009 and 7.75% Thereafter Plan with Asset to Payroll Ratio of 7 on June 30, 2007

25. Volatility Index Affects Rate Adjustments Volatility index is market value of assets to covered payroll A higher index results in more volatile contributions What causes higher indices: More generous benefits More retirees Older workforce Shorter careers

26. Impact of Temporary Method on Employer Rates Estimated impact of -24% investment return in 2008-2009 on employer rates commencing July 1, 2010, for State and school plans; July 1, 2011, for public agency plans

27. Projected Public Agency Contribution RateTypical 2% at Age 60 Plan with an Asset to Payroll Ratio of 4Based on a -24% return in 2008 � 2009 and 7.75% thereafter and 2% at Age 55and 2% at Age 55

28. Projected Public Agency Contribution RateTypical 2% at Age 55 Plan with an Asset to Payroll Ratio of 6Based on a -24% return in 2008 � 2009 and 7.75% thereafter

29. Projected Public Agency Contribution RateTypical 3% at Age 50 Safety Plan with an Asset to Payroll Ratio of 8Based on a -24% return in 2008 � 2009 and 7.75% thereafter

30. Is CalPERS Sustainable? � Yes CalPERS has adequate funds to pay benefits for many years into the future. Despite lower funded status, CalPERS� ability to pay benefits remains intact. However, many employers may consider their future costs to be unsustainable. Current employer rates are similar to the rates in the early 1980s. Rates will have to go up in short term Not the right spot for this. Consider moving to the endNot the right spot for this. Consider moving to the end

31. Closing Thoughts Employers are facing challenging times Benefit improvements not primary cause of higher costs Recession and market losses a major factor CalPERS is working with employers to mitigate future costs

32. Questions?

33. Thank You for Participating in this Webinar For information about future California Retirement Dialogue events, please visit the CalPERS On-Line Web site at www.calpers.ca.gov.