|
6.1.C. - Page 28
<br />CaIPERS' reduction of Discount Rate from 7.5 to 7 percent.
<br />In late 2016, CAPERS decided to lower its Discount Rate from 7.5 to 7.0 percent .5' This will
<br />have the effect of significantly increasing the size of CalPERS' Unfunded Liabilities and,
<br />accordingly, the contribution amounts Agencies must pay. One expert has estimated that, for
<br />every one quarter percentage point decrease in the Discount Rate, Agency contribution rates (that
<br />is, the size of their contribution payments as a percentage of total payroll) go up by
<br />approximately 2.5 percentage points. 60 A 5 percentage point increase in the contribution rate
<br />would represent a large increase in payments by the Cities as their average contribution rate in
<br />FY 2017-2018 was 27.3 percent.61 In order to give Agencies time to prepare for these increased
<br />costs, CaIPERS intends to phase in the change in its Discount Rate from 7.5 to 7 percent over a
<br />three-year period as follows62:
<br />• FY 2018-2019:
<br />7.35%
<br />• FY 2019-2020:
<br />7.25%
<br />• FY 2020-2021:
<br />7.00%
<br />To further ease the impact on Agencies of these Discount Rate reductions, CalPERS plans to
<br />phase in the resulting contribution payment increases over an additional 5 years. 63 As a result,
<br />the full cost of the Discount Rate decreases to 7 percent will not be felt by Agencies until
<br />approximately FY 2024-2025.64 This phasing -in process comes at a cost, however, as it allows
<br />interest to continue to accrue on Unfunded Liabilities for a longer time, thereby increasing total
<br />costs that the Cities will eventually have to pay.
<br />In late 2017, CaIPERS considered lowering its Discount Rate even further, down to 6.75 or even
<br />6.5 percent. 65 Agencies objected because of the increased contribution costs this would impose
<br />on them and CaIPERS decided not to lower the Discount Rate below 7 percent. 66 However, one
<br />expert has projected that it is "likely" CalPERS' Discount Rate will be lowered, in a series of
<br />steps, down to 6 percent over the course of the next 20 years or so. 67
<br />11 CaIPERS, CaIPERS to Lower Discount Rate to Seven Percent Over the Next Three Years, December 21, 2016,<
<br />htt)s://www.calDers.ca.2ov/Daize/newsroom/calDers-news/.../calDers-lower-discount-rate>.
<br />10 Nation, Pension Math 2011, pp. 25-26.
<br />61 Appendix A.
<br />62 CaIPERS, CalPERS to Lower Discount Rate to Seven Percent. Terando, Strategies for Managing the New Reality,
<br />slide 6.
<br />63 Mendel, Old cause of pension debt, p. 3.
<br />' League of California Cities, CaIPERS Stays the Course.
<br />65 Diamond, CaIPERS considers 4 asset allocation options, p. 1.
<br />11 Ibid. League of California Cities, CaIPERS Stays the Course.
<br />61 Lin, Bianca and Childs, Matthew, City of Pacifica Miscellaneous and Safety Plans, CaIPERS Actuarial Issues —
<br />6/30/15 Valuation Preliminary Results, Bartel Associates LLC, September 18, 2017, slide 3,
<br /><htto://www.citvofbacifica.ore/civicax/filebankiblobdload.asDx?BlobID=13378>. Lin, Bianca and Yam, Wai Man,
<br />City of Menlo Park Miscellaneous and Safety Plans, CalPERS Actuarial Issues — 6/30/15 Valuation Preliminary
<br />Results, Bartel Associates LLC, May 2, 2017, slide 10,
<br /><httns://www.menloDark.orgJDocumentCenter/View/14392/D2-MenloPark-17-05-02-CalPERS-Misc-Safety>. Lin,
<br />2017-2018 San Mateo County Civil Grand Jury 14
<br />
|