CalPERS Board of Administration Special Session – February18, 2014


PRESIDENT FECKNER: The first order of business
will be to call the roll.
BOARD SECRETARY LUCAS: Rob Feckner? PRESIDENT FECKNER: Good afternoon.
BOARD SECRETARY LUCAS: Priya Mathur? VICE PRESIDENT MATHUR: Hello.
BOARD SECRETARY LUCAS: Michael Bilbrey? BOARD MEMBER BILBREY: Here.
BOARD SECRETARY LUCAS: Howard Schwartz for Julie
Chapman? ACTING BOARD MEMBER SCHWARTZ: Here.
BOARD SECRETARY LUCAS: Terry McGuire for John Chiang?
ACTING BOARD MEMBER McGUIRE: Here. BOARD SECRETARY LUCAS: Richard Costigan?
BOARD MEMBER COSTIGAN: Here. BOARD SECRETARY LUCAS: George Diehr?
BOARD MEMBER DIEHR: Here. BOARD SECRETARY LUCAS: J.J. Jelincic?
BOARD MEMBER JELINCIC: Here. BOARD SECRETARY LUCAS: Henry Jones?
BOARD MEMBER JONES: Here. BOARD SECRETARY LUCAS: Ron Lind?
BOARD MEMBER LIND: Here. BOARD SECRETARY LUCAS: Steve Coony for Bill
Lockyer? ACTING BOARD MEMBER COONY: Here.
BOARD SECRETARY LUCAS: And Bill Slaton? BOARD MEMBER SLATON: Here.
PRESIDENT FECKNER: Thank you. You notice that you heard Ron Lind, but you
didn’t see his face. Ron is at the Capitol Hilton in
Washington D.C. It has been noticed, so he is there
listening telephonically and on a speaker phone.
Ron, is there anyone there with you? BOARD MEMBER LIND: Nobody at this time.
PRESIDENT FECKNER: All right. So if anyone comes to your meeting area and wants to ask
a question, please let us know.
BOARD MEMBER LIND: Okay. PRESIDENT FECKNER: Good afternoon, ladies
and gentlemen. We are here today to have a presentation
for the Board. I want to make a few remarks before
we do so.
The recommendations that are being brought to us
representative the culmination of months and months of
work by our staff, our stakeholders, as well as members of
this Board. This work has not been an easy task. It’s
been very complex, complicated, and it has very
far-reaching impacts. I want to first say thank you to our staff
for their tremendous work that’s gotten us to
here today. It has not gone unnoticed. So thank you all for
the various levels of very hard work. I also want to thank
our stakeholders who have taken the time to understand
the issue and provide us with input and feedback
every step of the way. And finally, to the members of this
Board. I want to thank you for your thoughtful and
frank conversations — as we take five dollars from
George. (Thereupon a cell phone went off.)
PRESIDENT FECKNER: — and for your continued duty as fiduciaries of this CalPERS system.
We recognize that the ultimate decision made today may
not satisfy every concern or fulfill every wish, but we
do know that this work will go far in protecting the retirement
security for those that we serve. So, at this time, I’d like to turn the floor
over to our CEO, Anne Stausboll.
CHIEF EXECUTIVE OFFICER STAUSBOLL: Thank you, Mr. President. Just before we delve into the
details, I thought it would be good to just take a moment
to step back and reflect on where we are strategically,
because regardless of the outcome or decisions made
today, I think it’s important to acknowledge the evolution
our organization has gone through to get to this
item. So as we all know in August 2012, the Board
established a strategic plan with — and the first and
primary goal was to improve the long-term pension
sustainability. And two important parts of that were to
take an integrated view of our assets and liabilities, and
to educate our stakeholders so that they could make more
informed decisions. So today’s work, as the President said, reflects
over 18 months of work by the Board and the staff to
implement towards those goals. So for the first time
ever, we have a truly integrated and cross functional
effort between our Investment and Actuarial Offices, and
that was led by Joe Dear — I hope he’s watching — and
Alan Milligan in a terrific effort of joint leadership.
And then during the process, we hired our first
ever CFO, who’s also played a key role in tying the pieces
together in bringing a finance perspective to the table.
So I feel like today is really milestone in our
strategic plan, and I think we should all recognize it as
such. So I want to thank the Board and the staff for
staying true to the vision along the way, because change
is hard, even when you know it’s the right thing. And I
want to thank the stakeholders who have been extremely
generous with their time and the many meetings we’ve had.
So thank you for your input. So I’m hopeful that the framework that we
are using today will be our model going forward,
and sets a new bar for making these kind of decisions.
And with that, I turn it over to Cheryl Eason. She’s
going to lay out the framework for what we’re going to
go through the next hour or so.
CHIEF FINANCIAL OFFICER EASON: Great. Thank you. Good afternoon. Cheryl Eason, CalPERS
Chief Financial Officer. I am joined today by Eric
Baggesen, the Senior Investment Officer for Asset Allocation
and Risk Management, and Alan Milligan, Chief
Actuary. We also Harvey Leiderman of Reed Smith, Board’s
fiduciary counsel present in the audience as well.
(Thereupon an overhead presentation was presented as follows.)
CHIEF FINANCIAL OFFICER EASON: So as mentioned, this agenda item represents the culmination
of nearly two years of work to ensure greater sustainability
and soundness of the fund. This has been a joint
effort of the Investment, Actuarial, and Financial Offices
and leads us to today’s recommendations covering asset
allocation and actuarial assumptions.
CHIEF FINANCIAL OFFICER EASON: Today’s review by
the Board of the actuarial parameters and asset allocation
supports the CalPERS strategic objective to fund the
System through an integrated view of asset — pension
assets and liabilities. Taking this integrated approach
of our assets and liabilities supports the objectives
outcome to make more informed decisions on the funding of
pensions. CHIEF FINANCIAL OFFICER EASON: The regular
review of our actuarial assumptions every four years in
accordance with current Board policy ensure the underlying
assumptions used in actuarial valuations accurately reflect expected future experience and the
funding of the system.
The economic assumption review was advanced this
year to coincide with the demographic assumption review.
The risk and capital market assumptions associated with
asset allocation is currently reviewed every three years
per the Board’s policy. Reviewing both sets of
assumptions today allows for a greater period of
contribution predictability, and therefore staff will
continue to work collectively to keep these views in synch
in the future. CHIEF FINANCIAL OFFICER EASON: The development
of the ALM process leading up to today’s session has been
a comprehensive body of work involving extensive stakeholder feedback.
Here are the highlights: As noted, 2012 marked the launch of ALM, and
introduced, from a conceptual perspective, the need for an
integrated view of our assets and liabilities to inform
decisions designed to achieve a sound and sustainable
fund. The ALM framework was developed early in the
development phase, formally introducing risk tolerances
and appetites and user interfaces for decision making at
the July 2012 Board off-site. CHIEF FINANCIAL OFFICER EASON: The ALM
integration phase in early 2013 brought forward three
significant areas of discussion, the adoption of new
actuarial policies aimed at returning the pension fund to
full funded status in 30 years, which included the rate
smoothing method with a 30-year fixed amortization period
for gains and losses; the introduction of the risks and
returns of various asset classes, including advantages and
disadvantages in alternative asset classes; and, the
adoption of capital market assumptions in June 2013.
CHIEF FINANCIAL OFFICER EASON: And finally, leading up to today’s Board session, there
have been numerous discussions and presentations for
feedback and direction on a number of parameters, including
discussions on funding risk and flexible de-risking strategy,
the adoption of Investment Beliefs in September
2013, and the construction of possible strategic asset allocation
candidate portfolios with expected return and risk
profiles. CHIEF FINANCIAL OFFICER EASON: This afternoon
is Item 3a of the agenda there are a number of
recommendations regarding strategic asset allocation and
actuarial assumptions being brought forward. One such
recommendation, asset allocation, was presented earlier to
the Investment Committee. The Investment Committee approved the recommendation to adopt Portfolio
A, and recommends the Board include Portfolio A as
part of this agenda item.
The second set of recommendations includes what
actuarial assumptions to use. These assumptions are used
by actuaries to set the contribution schedule. Actuarial
assumptions include both economic and demographic assumptions. Economic assumptions include
the discount rate and wage and price inflation projections,
and demographic assumptions include retirement,
employment, and mortality rate projections. These mortality
improvement projections include current valuation cycle
improvements, as well as future improvements in mortality.
And the third set of recommendations is to determine how to adjust the funding to reflect
these changes. These recommendations include both
the amortization and smoothing periods and implementation
options. So before I hand off this presentation to
our Chief Actuary, Alan Milligan, to walk us through
the specifics of the recommendations, I am pleased
to take any questions.
Thank you. CHIEF ACTUARY MILLIGAN: Thank you, Cheryl.
I want to first reiterate what Anne said that
this has been a collaborative effort. I want to thank my
own staff for their work on this item, as well as the staff
in the Investment Office and the staff in the Finance
Office. They’ve been great partners with us. I’d also
like to call out the Stakeholder Relations Branch.
They’ve had quite a significant amount of work just recently,
and I really want to thank them for all of their
efforts. CHIEF ACTUARY MILLIGAN: So at this point,
I want to talk about the asset allocation and the
discount rate. This is really kind of the first decisions
that we need out of you today. This is a chart that you’ve
already seen earlier today identical to what was done
before. And this is really the three options that we brought
before you. I would like to reiterate that we supported
the Investment Committee decision, and, of course,
it’s the same recommendation this afternoon.
CHIEF ACTUARY MILLIGAN: This is a linked recommendation. The asset allocation and the
investment — and the discount rate are linked. We do
have to make sure that they are in synch. And I do want
to say that all three of those asset allocations that were
proposed would support a 7.50 percent discount rate. And
the use of a 7.50 percent discount rate was very
consistent with the input that we received with respect to
the risk characteristics that the Board felt we should be
working with at the November asset liability management
workshop. So all of this I think is very much in synch,
and we are recommending that the Board continue
with a 7.50 percent discount rate and adopt Portfolio
A. CHIEF ACTUARY MILLIGAN: So with respect to
the other actuarial assumptions, we did a full
review of our actuarial assumptions this time, both the
economic and the demographic assumptions. We are recommending
no changes to our current assumptions. That is, we are
recommending that we continue with a 2.75 percent inflation
assumption, a 3 percent wage inflation assumption, a 3
percent payroll growth assumption and a 7.50 percent discount
rate. So no changes on any of the assumptions. And that’s
really reflective of the fact that not much time
has passed since we last reviewed our economic assumptions.
And so with so little time to pass, there’s really no reason
to adopt a different assumption.
CHIEF ACTUARY MILLIGAN: With respect to the demographic assumptions, we are looking at
recommending a number of different — a number of different
changes. As we outlined in the Finance and Admin Committee
meeting in December, we did prepare an experience study
that looked at our demographic assumptions, and the results
of that study caused us to recommend a number of changes.
The assumption causing the biggest impact on
employer contribution rates is the assumption for
post-retirement mortality improvement. This is due to the
inclusion of mortality improvement factors. We are
projecting increased longevity in the future, and we’re
building that increased longevity into our actuarial
assumptions. I do want to note that in the past, we have
always updated our mortality assumption on a regular
basis. The last time we updated our mortality assumption
was only four years ago. So it’s not that we are falling
behind on the mortality assumption. What we’re doing this
time is we’re going forward in time and we’re projecting
future improvements. So we’re actually recommending that
we include — that we prepare our actuarial valuations,
not based on the mortality rates in place today, but
rather based on what we think the mortality rates will be
in the year 2028. So we are looking — this is a forward
looking recommendation. Safety groups are also being impacted by proposed
changes to the salary scale assumptions. We are seeing
increased rates of increased pay later on in people’s
careers than we had seen in the past, and that is actually
causing an increase, although mostly for safety groups.
We’re seeing a mixed set of results with respect to retirement assumptions. Some groups, notably
some of the public agency miscellaneous formulas,
are actually seeing slightly lower rates of retirement
than we had been seeing in the past. And so we are recommending
changes there.
But the biggest change on the retirement rates —
service retirement rates has to do with the CHP and POFF
groups. Those are coming in significantly higher than
we’ve seen in the past, and so we are recommending some
changes there. CHIEF ACTUARY MILLIGAN: So choosing a method
to project mortality improvement is really kind
of the second main decision point of the day. The most significant
finding in our review is that we needed to strengthen our
mortality assumption. Mortality rates continue to
decline, which means that life expectancy continues to
increase. That’s a good thing for all of us as
individuals. However, it does mean that we need to take a
little bit more care about our future retirement, and
we’re going to need to fund for a longer retirement, both
personally as well as a System. So we are recommending that we use a 20-year
static projection using an industry standard table Scale
BB. We have — that 20-year projection can be broken down
as seven years just to bring the mortality projection
up-to-date, up to the middle of the period when we expect
to be using this new table for our valuations, and then a
13-years projection on into the future. That’s what gets
us to 2028. We have also included in the agenda item an
alternative mortality assumption, which is a 15-year
static projection using Scale BB. CHIEF ACTUARY MILLIGAN: One thing I did want
to bring to the Committee’s attention, I know
you’ve seen this before — seen it a couple times already.
This is a comparison of our actual mortality improvement
experience relative to Scale BB. So the green line, the
nice straight one, is — with a couple of slopes
at either end, is Scale BB. The orange wiggly line is the
rates of mortality improvement inherent in our own
data. So in the past, we have seen mortality
improvements greater than is indicated by Scale BB.
However, we have to be careful about putting too much
weight on our own experience in this case. Normally, we
have enough data to develop our own tables. Most
retirement systems would not develop their own mortality
table. We can do so because we have enough data, but you
do need even more data to do a mortality projection scale.
And we felt that it was best to go with the industry
standard table, rather than recommending that we create
our own mortality projection scale. We think that is the
more responsible course to go, and is, we think, going to
be more predictive of the future than relying on our own
data in this case. CHIEF ACTUARY MILLIGAN: So I did want to bring
up that one thing that has happened since we last brought
this to you in December, is that we have had an external
review of our experience study by an external actuarial
firm. Cheiron, Inc. did a review and the principal author
of their report Bill Hallmark is available in the audience
today should you have any questions of Bill. CHIEF ACTUARY MILLIGAN: So I want to go on.
In addition to the actuarial assumption changes,
we also need to make decisions about how we’re going to
adjust our funding. As a result of the actuarial assumption
changes, we are now acknowledging that we need to make
some changes to the liability numbers. So we’re not actually
taking on more liability, we’re just acknowledging that
the liabilities were a little bit larger than
we had previously thought, as a result of this new
information about our actuarial assumptions.
CHIEF ACTUARY MILLIGAN: So current Board policy would be to amortize the increase in liability
due to the assumption changes over a 20-year period,
and to smooth that impact over a five-year period, both
a five-year ramp up at the beginning of the 20 years, and a
five-year ramp down at the end of the 20 years. Please note
that it is a 20-year amortization. It will be fully funded
at the end of the 20 years. The ramps are part of the
20-year period. They’re not in addition to the 20-year
period. CHIEF ACTUARY MILLIGAN: With respect to the
timing of the implementation, we made — our recommendation is that it should be first
effective for the 2016-17 contribution year. So that would
be based on the June 30th, 2014 actuarial valuations for
public agencies, and the June 30th, 2015 actuarial
valuations for the State and schools pool.
We could adopt an earlier effective date for both
the State and the schools. We could even adopt an earlier
effective date for public agencies. What we can’t do is
change the public agency rates beginning 2014-15. Those
rates were already set by the actuarial valuation reports
that we sent out late last year. And so the earliest we
could have the new assumptions impacting public agency
rates would be 2015-16. However, we do feel it’s appropriate to give
our employers adequate warning, and the ability
to build these new rates into their budgets. And so what
I would like to do is to build that into the next set of actuarial
valuation reports for public agencies in their projected
rates and then the next — the second time we do the
actuarial valuations would be the fall of 2015, build it
into their actual rates, which is why the effective date
of 2016-17 was chosen. Consistent with the Board’s direction when
we adopted the changes to the smoothing methodology
last year, we’ve — we’re recommending that the
— that these changes impact all employers on the same contribution
year. CHIEF ACTUARY MILLIGAN: So just to give you
an idea of what this is — how this plays out
in practice. What we’ve got here is a graph of a sample
public agency. This is a miscellaneous plan. The yellow line
with the round dots is the contribution schedule that
we currently have this particular employer on. It includes
the impact of the smoothing changes and the impact of
going to a 7.50 percent discount rate a couple years ago.
All that’s built into the yellow line.
The blue line with the square boxes is, in fact,
what this employer’s contribution rate would be should the
Board adopt our staff’s recommendation. The green line is what the contribution rate
would be for this employer, if the Board were to adopt
staff’s recommendation, but only — but with only a
15-year mortality projection, instead of a 20-year
projection. CHIEF ACTUARY MILLIGAN: In the agenda item,
we discussed two possible alternative amortizations,
a 20-year amortization with a seven year smoothing,
and a 30-year amortization with a five year smoothing.
The impact on those — on employer contribution
rates of these alternative amortizations is shown in one
of the attachments to the agenda item.
CHIEF ACTUARY MILLIGAN: This is how it would workout for that same sample employer. The
dark blue line with the square boxes is, in fact, the same
line as you saw on the previous graph. It is staff’s recommendation.
The light blue line with little circles is what would
happen if the Board were to adopt a 30-year amortization
with five year smoothing. And the medium blue line —
actually, I guess the light blue line does not have
little — doesn’t have circles on it. The medium blue
line has the circles on it, and that’s — that would be
with a 30-year amortization. I think I got that wrong, but I’m not sure
what I said wrong, so I’ll keep moving.
(Laughter.) CHIEF ACTUARY MILLIGAN: And this is the same
sample employer, but with 15 year mortality projection and
the same three financing options. This graph you’ve also seen before. This shows
you what the — how — what the pay — how the unfunded
liability gets paid down over time is, and also off to the
right of that, just how much is being paid in total
contributions and total interest. This is for a $1
million unfunded liability amount. So any particular
employer could simply multiply their increase in actuarial
liability by — sorry, divide their increase in actuarial
liability by $1 million and get numbers suitable for them.
What’s interesting to note is that if you amortize over 20 years, either the five year
smoothing or the seven year smoothing, you essentially
pay $2.2 million total contributions on that $1 million unfunded
liability. So employers would be paying $1.2 million
of interest on a $1 million increase in unfunded liability.
But if you go to a 30-year amortization, either with a three-year — five-year or a seven-year
smoothing period, you pay almost double in interest.
You would actually pay $2.2 million in interest on top
of the $1 million unfunded liability.
So this gives you an idea of the impact on employers of the various different amortization
schedules. CHIEF ACTUARY MILLIGAN: So in terms of impact
to members, we are — the recommended assumptions
will increase the member normal costs — the total
normal costs. And Public Employees Pension Reform
Act that was passed does require members to pay 50 percent
of the normal cost for PEPRA members.
Now, there’s a limitation on that contribution. The normal cost has to increase by at least
one percent before the member contribution rate is triggered.
Note that that is a cumulative one percent increase,
not a one time one percent increase. But given that
this is really the first thing that’s causing those normal
costs to change, at this point in time, the single-year
impact and the cumulative impact are the same. So I can
actually tell you a little bit more precisely the impact
on members than I will be able to in the future.
CHIEF ACTUARY MILLIGAN: This chart shows the impact on PEPRA normal costs for various different
groups. What you can see very easily is that only
four groups are expected to see increases in excess of one
percent of pay, and above — which means above the trigger
level. And that is the peace officer — the two peace
officer fire fighter groups, that’s the State POFF Plan,
as well as CHP and public agency safety.
It’s actually very likely that most public agency
safety plans will, in fact, see an increase in the normal
cost in excess of one percent of pay, and hence trigger
the change to the member contribution rate. CHIEF ACTUARY MILLIGAN: So I should also mention
that the proposed assumption changes will result in
changes to some member calculations, two calculations in
particular. The first one would be that the service
purchase is under the present value method. Now, PEPRA
also eliminated the ability of members to purchase
additional retirement service credit, but military service
purchases are still available to members, and these are
done on the present value method. So they’re the biggest
of the remaining service purchases. There are a few
others that are less frequently used. In general, and I think almost universally,
costs under these new methods — service purchase
costs under these new methods — new assumptions will
increase. The other place that actuarial equivalency
is used in the benefit calculations. The main
other place is optional forms of benefit at retirement, when
a member elects not to take the unmodified form, but
elects to take an Option 2, for example, or some other option
that provides survivor benefits. And in this case,
the effect is different. This change will generally result
in smaller reductions to member’s pensions to
elect an optional form of benefit.
And the reason for that is that effectively by
taking these optional forms of benefits, you’re purchasing
survivor benefits for your spouse. And we all know that
the cost of insurance goes down if life expectancy goes
up, so you don’t have to pay as much in the form of a
reduced benefit to get this additional survivor protection. So that’s why that’s going in
the opposite direction. It is, however, not as big an effect
as the increase in the service purchase costs.
CHIEF ACTUARY MILLIGAN: So let’s talk a little bit about the impact to employers.
CHIEF ACTUARY MILLIGAN: First, we have had an
awful lot of stakeholder engagement over the last couple
of months working with various different stakeholder groups. I would like to reiterate the thank
you to all of our stakeholders for all of the time that
they’ve put in to understand and respond and comment on our
proposals. We have received comment letters from the
Governor, from member organizations, from employer organizations,
and from individual employers. Included in the
agenda item materials themselves were the letter from
the Governor and the letter from the League of Cities. After
we posted the agenda item, we got some additional comment
letters. I believe all of those are in your packets.
And I would like to thank every organization that responded
to this agenda item with their perspectives.
CHIEF ACTUARY MILLIGAN: One thing that the —
one of the things that we have gotten in the way of
feedback is that member organizations would like some to
receive — like some flexibility. This came through very
clearly in the League of Cities letter. They are asking
for flexibility in two ways. First, that they be given
additional flexibility to make additional payments to
payoff the unfunded liability sooner. That is a
capability that is already built into current Board
policies. I and my staff have all of the authority that
we need to permit employers to do — to make additional
contributions. And my staff routinely work with employers
to work out some additional funding options for the
employer. Beyond that, last fall at the employer forum,
we got very clear feedback from employers that
they want this additional flexibility, the ability to really
take control of the unfunded liability and pay it down
at a schedule that may be faster, you know, than the minimum
that we build into their contribution rates.
We are working on that, and I expect to be able
to build something into public agency actuarial valuation
reports this fall, so that there is a standard schedule
for additional — for making pre-payments. Although, my
staff will continue to work with individual employers to
customize any schedule should an employer need something a
little bit different from the standard ones that we build
into the valuation report. I can’t anticipate everything,
but I will try to have something there that they can
choose very quickly and easily, as well as a more custom
option at their — at their request. They also asked for — the League of Cities
also requested that we include as an option a seven-year
phase-in for employers, so that this would be with a
governing body resolution requesting the seven-year phase-in. That’s not included in staff’s recommendation,
but staff have looked at this and we can accommodate the
seven-year phase-in on an optional basis. We can also
accommodate a three-year phase-in as requested by the
Governor in his letter. I should also note that for the State, we
can implement the assumption change in the 2014-15
contribution year as he requested. So that is possible
for us to do. I could not do that for the public
agencies. I could do that for the schools. CHIEF ACTUARY MILLIGAN: One of the things
I wanted to bring to you, which we had not done
before, was in relation to the new assumptions, we’ve
taken a look at how these impact our risk characteristics,
and — I found it. For the State Miscellaneous Plan, by making
these changes to the assumptions, we’re recognizing
that the probability of falling below 50 percent funded,
at any point over the next 30 years, is about 44
percent. Whereas, previously, we had believed it to
be about 41 percent.
Obviously, when we recalculate our liabilities, the liabilities will be higher as a result
of these new assumptions, which means that our assumption
about how likely it was to fall below 50 percent funded
was a little bit optimistic. So just letting you know that
— how much this has changed.
In addition, contribution rate levels, the probability of employer rates going above
35 percent of payroll at any point in the next 30 years
is about 60 percent significantly greater than previously
calculated. And that is as a result of the increased contributions
that would be required. So one thing I want to point out is that,
in fact, this is an apparent change, not a real
change. Our model is only as good as the assumptions that
we put into it. And what we’re suggesting today is that
the assumptions that we built into our model were
not as good as they could have been and we need to make
better assumptions. So this is not a real increase
in risk, this is just recognizing that we may be had a bit
more risk than we had previously thought.
CHIEF ACTUARY MILLIGAN: So in closing, we’re going to — we’re asking for a number of decisions.
We are asking that you select an asset allocation
portfolio and discount rate. We are asking you to indicate
what assumptions we should use, including the level
of mortality improvement to project. We’re asking
you to — how to amortize the funding impact, including
options for employers, what is the default for the State
plans, for the schools pool, and for public agencies?
Is it the same for all three categories? What options, if
any, should we provide to employers? And in what fiscal year
should the contribution rate change be effective.
And with that, I would — I’m prepared to take
any questions the Board may have. PRESIDENT FECKNER: Thank you. I’ll start with
Ms. Mathur. VICE PRESIDENT MATHUR: Thank you, Mr. President.
I had a question on page 28, where you talk about
the impact on member calculations, specifically about the
cost increase to service purchases. Just to be clear,
that is — that would only be on new requests after the
decision, correct? That would not be — that would not be
applied to current pending purchase requests? CHIEF ACTUARY MILLIGAN: Yeah, that’s actually
part of Recommendation number 4, that for service credit
purchases under the present value method, this — the new
assumptions would apply to all requests received by
CalPERS on or after February 19th. So on or after
today — sorry, on or after — VICE PRESIDENT MATHUR: Tomorrow
CHIEF ACTUARY MILLIGAN: — tomorrow. But any requests already in-house would be honored.
VICE PRESIDENT MATHUR: Okay. Terrific. Thank you.
PRESIDENT FECKNER: Mr. Jelincic. BOARD MEMBER JELINCIC: While I believe that
Portfolio B would be a better choice, I don’t think that
that’s changed in the last hour and a half, so I will move
staff’s recommendation. VICE PRESIDENT MATHUR: Second.
PRESIDENT FECKNER: It’s been moved by Jelincic, seconded by Mathur.
Any discussion on the motion? Ms. Mathur.
VICE PRESIDENT MATHUR: I just — I’m asking a
qualifying — a clarifying question. You prefaced your
statement with that you prefer Option B, but staff’s
recommendation is Option A. BOARD MEMBER JELINCIC: Yes. I recognize —
yeah, my personal preference is B, but that was rejected
an hour and a half ago, and I haven’t seen anything that
tells me the land has changed, so I’m going completely
with staff’s recommendation, which includes A.
VICE PRESIDENT MATHUR: Okay. Thank you for the
clarification. PRESIDENT FECKNER: Mr. Coony.
ACTING BOARD MEMBER COONY: It’s for further clarification. Are we voting on — is this
motion only with regard to Recommendation number 1 or
with the entire —
BOARD MEMBER JELINCIC: It’s the entire motion. ACTING BOARD MEMBER COONY: In that case, I’d
offer a substitute motion. PRESIDENT FECKNER: All right. Let’s hear it.
ACTING BOARD MEMBER COONY: With respect to the
State plan — well, first of all — yes, with respect to
the State plans only, I would move staff’s recommendations
with regard to 1, 2, 3 and 4, but with three-year smoothing or phase-in and ramp down, rather
than five year smoothing as the staff currently proposes,
and with the assumption changes implemented for the State
plans in the July 30th 2013 valuation report, which would
then set the resulting rate for 2014-15, the effective
date would be July 1st of this year.
BOARD MEMBER COSTIGAN: I’ll second. PRESIDENT FECKNER: It’s been moved by Coony,
seconded by Costigan. Any discussion on the motion? It’s on the
substitute motion. I have Mr. Jelincic.
BOARD MEMBER JELINCIC: Just to clarify, for everybody other than the State, staff’s original
motion would stay in place?
ACTING BOARD MEMBER COONY: As to our position on
that matter, we would have a further modification on the
phase-in period for schools and locals, but as far as this
is concerned, this is a motion with — only with regard to
the State plans. BOARD MEMBER JELINCIC: Okay. I would support
— I would reject the substitute and support
staff’s recommendation. Clearly, if the State wishes
to pay more, it certainly is entitled to pay more. It has
managed to do so the last couple of years. I do not think
that we have an obligation to help the Governor jam
the legislature.
The proposal staff put forward is fiduciarily sound, and I don’t see any reason to mandate
an acceleration. And quite frankly, if the State
really has extra money, I think the fund across the river
is actually in far worse shape, and they’re actually have
— approaching a liquidity problem. So I would
encourage the staff to reject the staff — the substitute
motion. PRESIDENT FECKNER: Thank you.
Mr. Slaton. BOARD MEMBER SLATON: Thank you, Mr. Chair.
As I’ve been thinking about this, particularly since my seat represents local government,
the issue for the State, while I have heard through the
letters and through other communication the challenging
— the challenges that local government faces, I
don’t find that same challenge in the State.
And when I look at our fiduciary responsibility, which my belief does not include CalSTRS,
my fiduciary responsibility is here, that earlier is better,
and it produces a stronger fund, and a stronger funding
status. So I plan on supporting this particular motion
in regard to the State plans only.
PRESIDENT FECKNER: Thank you. Mr. McGuire.
ACTING BOARD MEMBER McGUIRE: Thank you, Mr. President. The Controller would fully support
the substitute motion made by the Treasurer’s
representative with — I’d like to make just one comment
regarding it. Basically, we support the largesse or willingness
of the State to make contributions early, and that’s
the reason why we support, it but the Controller would
also support the State participating in another program
offered by CalPERS, which is the OPEB liabilities, which
is another significant obligation of the State. And we
hope that the State will initiate contributions to that
OPEB obligation at the same time this year.
Thank you. PRESIDENT FECKNER: Thank you.
Seeing no other requests to speak, we have a
motion before us, but we have 12 requests from the
audience to speak. So we are going — pardon? It’s not his turn. He had his shot.
Mr. Milligan. CHIEF ACTUARY MILLIGAN: Mr. Chair, I just
want to make comment. I don’t believe we have the
ability to have a different asset allocation for the
State versus the local agencies and the schools. So that it’s
not a problem, so long as theres a subsequent motion
that applies the same asset allocation to the schools
and the public agencies.
PRESIDENT FECKNER: Thank you. All right. I’m going to call you — the audience
down to speak. I’ll call you in two’s. Please come down.
We’re starting something new. So the staff will be turing
on the microphone for you, so you don’t have to bother.
Just come down into these seats over here on your right,
my left, and speak your name for the record. Remember you
have two minutes — up to two minutes to speak, please.
The first two we have Ronald Bates and Chris McKenzie from League of California Cities.
And when they’re done and vacate, we have Leyne
Milstein and Jai Sookprasert will be the next two.
MR. McKENZIE: Go ahead? PRESIDENT FECKNER: Um-hmm.
MR. McKENZIE: Mr. President, members of the Board, good afternoon. I’m Chris McKenzie,
executive director of the League of California Cites.
We represent over 400 cities across the State, most of
which are participating employers in the CalPERS system.
We appreciate your service.
I really just wanted to touch on a few things. You have our letter. I don’t think it’s directly
relevant to the motion, but this is our chance to speak.
All of the work that we’ve done in this area in partnership
with your staff and other employer groups across
the State has really brought one message back to me, and
that is we have to strike a balance. You talk about that a
lot in your meetings. And we have to be as aggressive
as we possibly can without creating further fiscal stress,
significant fiscal stress for our most challenged participants
in the System.
So the recommendation of the League of Cities is
to endorse staff recommendation, which, by the way, is a
stretch for our members. I want you to understand that.
It’s an aggressive posture, as a default, but with two
options. One, which Alan described, and I appreciate the
work that he’s doing on the more aggressive approach. And
I realize it’s existing policy, but we think more of our
members need to know about that. And on the other side, a
very slight breathing room, and that is a seven year
phase-in instead of a five for those who feel they may
need it some day. I think we all want to make sure that cities
survive the next 10 years as we go through this fiscal
challenge. So thank you for your time and your service.
PRESIDENT FECKNER: Thank you. DR. BATES: Mr. Chairman and members of the
Board, my name is Ronald Bates. I’m the city manager of
Pico Rivera, California in southern California. And I
chair the League’s City Manager Pension Reform Committee.
I too, along with Chris, want to thank Anne and Alan and
the staff for working with us in putting the proposal
together, listening to the comments that came from cities
all across this State. I would just bring to your attention an article
here that was in Governing in February. I just want to do
a quick quote from it. “There’s a big difference between
what public leaders know about finance and what they need
to know. Government finance is anything but intuitive”.
I just made a presentation two weeks ago to the
Independent Cities Association, and we talked about where
we’re going to be by the end of this decade. And it’s
clear that on average, we’re going to see miscellaneous
employees be in the neighborhood of 35 percent for pension
costs. For safety employees probably about 70, maybe some
of them over 70. As the executive director mentioned, this
is going to put a lot of strain on cities. Additionally,
in many of these cities, the base is being reduced
of employees. So the actual impact on payrolls,
where we might be getting good actuarial numbers from
PERS at say 20 percent in the case of our, city. It’s
actually come in at 22 percent, not because staff has done
anything wrong, it’s just because the base of employees
has gone down that you can spread that money over.
So the challenge for all of us has been indicated is how to keep the system stable, so that
our employees still benefit from a lot of hard work over
a lot of years, but at the same time giving us some ability.
So again, too we speak on behalf of the many cities
who say, yes, we need to fund PERS properly. We support the
staff recommendation, but also give us some flexibility
with a seven-year phase-in period.
Thank you, Mr. Chair. PRESIDENT FECKNER: Thank you.
Next two, Leyne Milstein, Jai Sookprasert, followed by Dorthy Holzem and Faith Conley.
MS. MILSTEIN: Good afternoon. My name is Leyne Milstein, and I’m the Finance Director for
the City of Sacramento, and I’m also currently the president
of the Fiscal Officers Department of the League of
California Cities.
And let me start by saying, we understand and
recognize our obligation to pay the costs associated with
the change in mortality tables. It is undeniable. But I
think it’s also important that we understand that cities
and local governments are in very different places in
their recovery from what we’re calling the Great
Recession. And there are some that can afford to pay
more and have articulated that desire, but there
are those who are just getting by and/or still cutting in
order to regain balance with their budgets.
And our city, the City of Sacramento, has had six
years of reductions. We have 1,200 less staff in our
general fund. We’ve eliminated police officers, firefighters. You name it, we’ve cut it. And
what I’d like to advocate for is that we have options.
And echoing what Mr. McKenzie and Mr. Bates had advocated
that for those that can afford it, the five-year phase-in
and the 20 year amortization absolutely make sense.
But for those where that would place an undue burden, where
you’re forced to make choices between programs and
services that are delivered to our residents, that, at this
time, for example, the City of Sacramento in looking
at our forecast, we would look at that longer phase-in,
so that we would have some flexibility in trying to
get to that point.
We know right now in 16-17 when this cost hits
us, it will be unaffordable and we know that at our
five-year high, estimated at about an additional 12
million. What that means for us is that we’re cutting
probably proportionally 34 police officers, 40
firefighters and 38 positions in our miscellaneous. You know this is a thing that we’ll evaluate
from year to year. If we look at our forecast in
2016-17 and we can afford it, we’ll absolutely choose
the five year. So I hope that we have an opportunity to have
that phase-in approach for local government.
Thank you. PRESIDENT FECKNER: Thank you.
MR. SOOKPRASERT: Good afternoon. Jai Sookprasert with the California School Employees
Association. We too support the staff’s recommendation for a two-year delay and a five-year phase-in.
We would note that, you know, it’s a good thing
that people are living longer, and that in trying to
address this reality, we should move in a deliberate and
incremental manner. We believe that a two-year delay and
a five-year phase-in provide the appropriate and prudent
timeline for school employers and employees to prepare
themselves for the rate increases. We should note that schools have been cut
by a significant amount, 20 billion over the last
five years. We’re struggling to come back at this stage.
And your decision today will have real impacts on our
employers and employees, because any rate increase that
are sudden, will make them think twice about restoring jobs,
eliminating those furloughs, which affect 80 percent of
our members in this schools. And so we’re asking for you
to think carefully, as you will — as you know, less
than 10 years ago, these funds were fully funded. And the
current situation that we are in is not something
the employees created. It’s something that happened on Wall
Street that has a ricochet across the country. Hard working
public employees did not cause this problem. And
we’re working together with our management team to resolve
them. Pension fund, as you snow, is cyclical. And
we’ve seen a great return last year for CalPERS. And we
know that in the eighties, the funds were actually, you
know, 50 percent funded. And in the nineties, it was 100
percent. And so we think that, as you move forward,
you know, you are actually better off today than
you were in the eighties. We know we’re facing a serious
situation, but we believe that an incremental approach
is the best way to signal to the school districts that
this is something that’s been carefully planned and
believe the staff has given you a good recommendation.
Thank you. PRESIDENT FECKNER: Thank you.
The next two are Dorthy Holzem, Faith Conley, followed by Suzanne Mason and Richard Gillihan.
MS. HOLZEM: Good afternoon, Mr. President and
members. Dorthy Holzem with the California Special
Districts Association. I, too, want to express my
gratitude and appreciation for the ongoing dialogue and
conversations we had leading up to this very important
decision before you today. We, too, understand that the change in the
contribution rate for employees is inevitable. I’m hard
pressed to be up here asking for more costs for our
locals, but we understand that without change the risk is
just too great. Specifically I want to make sure my comments
address staff Recommendation 2 and 3 as we shared in our
letter dated February 10th, and our support for the
recommendations related to the 20-year amortization with
five-year smoothing. And also, most importantly, the
fiscal year 16-17 implementation date. We requested feedback from our local districts
to learn about what these changes would mean
to them. Some expressed they could handle these changes
with reserve funds. Others shared there may be maintenance
deferral or equipment purchase delays. Others shared hiring
freezes as well as salary freezes that would be ongoing
as they continue to climb out of the economic recession.
But despite these differences again, the majority of the feedback received all shared that the
20-year amortization with five-year smoothing is the
best approach to reduce overall costs. And again, with the
implementation in 16-17, it allows us at the local level
to make prudent decisions, and avoid hasty decisions that
could lead to further negative implications. And finally, in relation to flexibility, our
members really appreciate the existing authority of
CalPERS to make payments earlier on a quicker schedule,
rather than delay payments and further extend costs.
So if you have any questions, I’m available, and
thank you for your time today. PRESIDENT FECKNER: Thank you.
MS. CONLEY: Thank you, President Feckner, and
Board members. My name is Faith Conley. I’m with the
California State Association of Counties. I will also
echo my colleagues and thanks for allowing us to provide
our comments to you on this important decision today.
CSAC also surveyed our 37 CalPERS contracting agencies regarding the potential impacts of
the changes in the actuarial assumptions. As would be expected,
each of our agencies replied that there would be a
wide variance in how they would respond to these changes.
Our larger counties replied that there would possibly
be delays in infrastructure investment. Our smaller counties
replied that they could be saying upwards of three
or four or five, up to 20 employee layoffs.
So there was a wide variation response. I will
say that 93 percent of our respondents say that they
supported the five-year phase-in and 20-year amortization
process. Overall, I will say that respondents in counties
as a whole recognize and accept the need for changes to
the actuarial assumptions. We believe that it will ensure
fund solvency. It will protect retirement stability for
our employees, and it will also maintain the fiscal
prudence and it reduces our costs in the long run.
So again, thank you for allowing us to present these comments to you today. And I can be
reached with any questions.
PRESIDENT FECKNER: Thank you. Next, we have Suzanne Mason, and Richard
Gillihan, followed by Deanna Van Valer and George Linn.
MS. MASON: President Feckner, Board members, my
name is Suzanne Mason. I’m the director of human
resources for the County of Napa. I am here on behalf
speaking for the Board of Supervisors. As was communicated in a letter you received
last week from Mark Luce, Chairman of our Board
of Supervisors, the Board fully supports the actuarial changes
being recommended by staff in order to appropriately
fund future employee retirement benefits.
The county is also aware that the Board is considering alternative amortizations and
smoothing schedules for employers. While we recognize
that some employers may wish to take advantage of the
alternative approaches, the County of Napa believes the
current 20-year schedule, with a five-year phase-in
should be adopted as the standard. And if alternatives
are considered, these should be offered as options
to employers, not the standard default rate.
I thank you for your consideration of this important topic, and I also want to thank
the staff at CalPERS for the time they’ve taken in working
educating the employers and also listening to our input.
Thank you. PRESIDENT FECKNER: Thank you.
MR. GILLIHAN: Good afternoon, Mr. President AND
Board members. Richard Gillihan with the Department of
Finance here on behalf of the administration. As you
know, the Governor sent a letter on February 5th asking
for a different timing and phase-in for the proposed
actuarial changes than the staff recommendation, specifically the govern is asking for these
changes to take effect beginning in the budget year 2014-15
with a phase-in period of three years.
As the Governor stated in his letter, the cost of
delay is approximately $3.7 billion to the State over the
next 20 years. It’s a little higher than that, when you
factor in the benefits of a three-year phase-in period.
These costs — these are funds that could otherwise be
used for other policy priorities. As the Governor’s letter noted, no one likes to pay more for
pensions, but ignoring the true costs for two more years
will only burden the system and cost more in the long
run. And we’d note that the cost of delay reflects
— increases the unfunded liability by about
1.7 billion dollars just by that two-year delay.
Happy to take any questions that the Board may
have. PRESIDENT FECKNER: Thank you.
Next up is Deanna Van Valer and George Linn followed by Terry Brennand and Christy Bouma.
MS. VAN VALER: Good afternoon. My name is Deanna Van Valer. I’m an actuary with Bartel
Associates. We provide retirement plan consulting for
both pension and OPEB retirement plans to public agencies.
Almost all of our clients are California public agencies.
On behalf of Bartel Associates, I would like to address
the inclusion of future mortality improvements in the actuarial
assumptions for CalPERS valuations that the Chief Actuary
is recommending to the Board. The thinking of actuaries regarding future
mortality has definitely evolved over the past several
years. At Bartel Associates, we have used an assumption
for future mortality improvements in all of our OPEB and
pension valuations for roughly the last three years, and
very specifically this is coinciding with valuation dates
of June 30, 2011 and later. We have told our clients that
the right thing to do is to include an assumption for
future mortality improvements. In our experience, our
clients, the public agencies, do understand that mortality
is improving, that people are living longer than they used
to, and that this trend will continue in the future.
Further, they also understand that by not including a factor for this increase in future
longevity, we would be undervaluing their pension plan
OPEB plan obligations. We feel that the right thing
to do is build in the assumption of future mortality improvements
into the rates and the sooner the better.
While clearly this will have a short-term adverse
impact on employer rates, actuarially speaking it is
better to take the steps now rather than kick the can
further down the road. Specifically regarding what the Chief Actuary
house recommended, I think the recommendation of a 20-year
static projection is a good one, and we support it until
the CalPERS valuation system can be updated for
generational projections. I would like to note that these comments are
those of Bartel Associates, and we are not speaking on
behalf of any of our clients. Thank you.
PRESIDENT FECKNER: Thank you. MR. LINN: My name is George Linn, and I’m
the director of public relations for RPEA, Retired
Public Employees Association.
First of all, I’d like to thank staff for all of
the time they spent bringing this information to us so
that we knew what was going on. I understand the extreme
need for having a pension fund that is sustainable and
will make certain that all of the retirees get their
pension when they apply. However, I think that what I see is setting
one standard for all agencies is difficult. And
the reason I say this is I retired from a public agency
in San Francisco, not the city, not the county, but
a small public agency, and they are struggling financially
day-to-day. I’m also on the Economic Development Advisory
Committee in a Northern California city. They certainly
don’t have spare money laying around, and they have been
laying off police and fire and others right and left over
the last couple of years. These communities and these small public agencies
have not really recovered from this big downturn we had,
so I think the name of the game is flexibility and ask
these agencies specifically which path they’d like to
take, whether it’s five or seven years, 20 or 30 years, I
think that they need to have an option so that it fits
into their financial plan and capabilities. Thank you.
PRESIDENT FECKNER: Thank you. The next two are Terry Brennand and Christy
Bouma followed by Neal Johnson.
MR. BRENNAND: Good afternoon. Mr. President and
members, Terry Brennand on behalf of SEIU California. I
guess to address the motion before you, SEIU opposes the
substitute motion and would support the staff recommendation. I think we’ve heard the theme
here about flexibility, about giving local agencies the
best chance at meeting these challenges we’ve got going
forward. We’re still climbing out of a recession here
in California, much lower than I think people
imagined. And the two-year delay and five-year phase-in
gives us the best opportunity to meet those obligations
going forward. I would also note that if you impose a separate
more stringent payment schedule on the State agencies, you
also impose it on some agencies for which the Governor is
not the employer, namely the CSU. They would have no
opportunity to meet with their Board and deal with this
directly. It would be a singular decision. And for that
reason, we oppose the substitute motion and support the
staff. Thank you.
PRESIDENT FECKNER: Thank you. MS. BOUMA: Mr. Chairman, members of the
Committee, Christy Bouma representing the California
Professional Firefighters. I’m also here to oppose the substitute motion
respectfully and support the staff recommendation. We’ve
never sort of viewed the CalPERS Board as being an
extension of the Executive Branch, and so I think having
disparate standards for contracting agencies versus the
State is probably an inappropriate and unprecedented path
for the CalPERS Board. I would also take exception to any statement
that you’re ignoring the problem. You know, having
these future mortality projections built into your
system now, as is advisable and a new actuarial standard,
is not ignoring the problem. Rather, it’s commendable.
It’s taking a proactive and to quote my colleague
with the League of California Cities, we don’t find
ourselves on the same page very often, but I would embrace
many, if not most of his remarks, and suggest that you’re
to be commended for taking this aggressive stance.
I would also suggest that the staff recommendation has flexibility inherently
built into it. There’s a delay, if you want it, or you can
pay now. There’s a phase-in for those who need to ease
into this new standard and this new cost or not. You
can pay now. So I think that it is the best of both worlds.
And I just also wanted to go on the record and thank the
Board for releasing the staff to be so engaged with
stakeholders, so engaged with my members, conducting a
webinar, giving every firefighter in California the
opportunity to understand what they will be facing when
they’re at the bargaining table and seeing these changes
imposed through the actuarial studies that will be
released to their employers in the future. So again, I
appreciate the balance and the measured approach, and we
urge you to support the staff recommendation. PRESIDENT FECKNER: Thank you.
Neal Johnson, please. MR. JOHNSON: Neal Johnson SEIU 1000.
Consistent with Mr. Brennand’s comments a few
moments ago, we are really concerned about the alternative
proposal. We have been through a, as I think staff has
started with, a 18-month process over development of the
asset allocation. And now we have a proposal coming in at
essentially the stroke of midnight that changes what has
been a large body of work and creates into — essentially
creating a differential treatment of the State and local
agencies. We’re all in this great sea of public service
to the residents of California, and I think it doesn’t do
any of us good to sort of split and create different
paradigms for the State of California, particularly State
civil service versus local agencies, the CSU system, et
cetera. So we really wish you to support the staff
recommendation and reject the alternative proposal.
Thank you very much. PRESIDENT FECKNER: Thank you. I’m seeing no
other requests from the audience here. Mr. Lind, is there
anyone at your location that wishes to speak? BOARD MEMBER LIND: There is not.
PRESIDENT FECKNER: Thank you. I’ll next call on
Mr. Diehr. BOARD MEMBER DIEHR: Thank you, Mr. President.
I want to speak in favor of the Treasurer’s
motion. The State is in reasonably good financial
situation now. We know what that is. The public agencies
are somewhat different. Some are in good situations, I
expect, and some are in not such good situations. The
savings to the State, and that will accrue to employees of
the State, if the Treasurer’s motion is adopted, is estimated
at $3.7 billion. That’s a lot of money. And every
time we push these things back, the interest rate is 7.50
percent on it effectively.
So I think that this is the responsible thing to
do. It’s not doing the Governor’s work. It’s what I —
well, I think this Board should do with respect to the
plan for the State. PRESIDENT FECKNER: Thank you.
Mr. Jelincic. BOARD MEMBER JELINCIC: And I again will speak
against it. The State has the flexibility to make the
payments early, if it chooses. What this motion does is
take that option away from the State. One of the impacts
is that the Legislature does not get to be involved in the
discussion. It also means that there may be less money
available for schools, there may be less money available
to pass through to other agencies. Every time we raise
the rate, we get told how we are preventing them from
building schools and roads, et cetera. And now, we’ve got a proposal coming from
the State that takes that extra money and says
we’re going to use it ourselves to pay down our obligations.
So I think the flexibility is there. If the State wants
it, the State can use it. And I would oppose the substitute.
PRESIDENT FECKNER: Thank you. Mr. Coony.
ACTING BOARD MEMBER COONY: With respect, one, the proposal before us will actually — it
starts with the staff recommendation, which would have had
the State and schools on the same schedule — the same schedule,
and this proposal — the net result of this would
be to delay schools a couple of years just like the locals
would be delayed. So I just want to make that point.
The second thought I — is we routinely, as we
are supposed to, set a rate, which is imposed on the State
of California, on the Governor, and on the legislature.
We’re making — we decided on the schedule for coming to
the conclusion on when we were going to make this — these
demographic and other changes, asset allocation changes.
It has nothing to do with, and isn’t particularly deferential, to the State’s budget schedule.
If it were, we’d be making this decision sometime in May
perhaps, and imposing our rate, so that the legislature
would know when it was going to take effect at that point.
I don’t think — and I would add finally that we
have heard nothing from the legislature suggesting that
they have any concern about you’re taking this action,
anymore than they have in the past when we’ve taken the
action to set the rate. PRESIDENT FECKNER: Okay. Seeing no other
requests to speak. You have a substitute motion before
you. Mr. Lind. Somebody pushed his button.
(Laughter.) PRESIDENT FECKNER: Well, good for you, Ron.
You were long distance pushing your button here.
Mr. Jones. BOARD MEMBER JONES: I just have a question.
Why didn’t you not include recommendation 1, steve,
in your — ACTING BOARD MEMBER COONY: I did include it.
I didn’t include it in the written motion, because
I thought —
PRESIDENT FECKNER: Just a second. Speak up. Just a second. Let me find your name. There
you go. ACTING BOARD MEMBER COONY: Sorry, Mr. Jones.
I did include Item 1 in this motion. I didn’t
have it in the written motion. I thought it would have
been taken up as a separate matter. So you can include 1,
2, 3 and 4 with a three-year ramp up and ramp down, as
my — as this motion, and the immediate implementation with
the July budget, right, 14-15 year.
Thanks. BOARD MEMBER JONES: Okay. Thank you. Well,
I’m of the opinion that we’ve heard from many
speakers that people want flexibility. And, to me, this
is giving THE State some flexibility. And I recognize that
many times it’s said that flexibility already exists,
but if we’re going to consider giving counties and school
districts flexibility, then why don’t we give the State
the same flexibility from a policy point of view.
And I’m of the mindset that I don’t think we
should be pushing funding out into the future when if we
could pay bills today, I would support that. I think it’s
fiscally prudent to pay bills while you got money. That’s
why I supported the de-risking of our portfolio adoption,
because I think when you have money it’s better to de-risk
your portfolio rather than trying to de-risk it when you
don’t have money. So given that this is, to me, is just
giving the State the same flexibility that counties and
schools are asking for, then I could support that, as long
as it also includes the Item 1. If you’re willing to make
that change. PRESIDENT FECKNER: Item 1 was in his original
motion. BOARD MEMBER JONES: Oh, you stated it. It’s
just not on what I’m looking at? PRESIDENT FECKNER: Correct.
BOARD MEMBER JONES: I gotcha. Okay. PRESIDENT FECKNER: He said 1, 2, 3 and 4 in
his original motion.
BOARD MEMBER JONES: Okay. PRESIDENT FECKNER: Okay. Seeing no other
requests so speak, all votes must be by roll call, please.
So we’ll verbally call the roll for each vote. BOARD SECRETARY LUCAS: Priya Mathur?
VICE PRESIDENT MATHUR: No. BOARD SECRETARY LUCAS: That’s a no for Priya
Mathur. Michael Bilbrey?
BOARD MEMBER BILBREY: No. BOARD SECRETARY LUCAS: That’s no for Michael
Bilbrey. Howard Schwartz?
ACTING BOARD MEMBER SCHWARTZ: Yes. BOARD SECRETARY LUCAS: Yes for Howard Schwartz.
Terry McGuire? ACTING BOARD MEMBER McGUIRE: Yes.
BOARD SECRETARY LUCAS: Yes for Terry McGuire. Richard Costigan?
BOARD MEMBER COSTIGAN: Yes. BOARD SECRETARY LUCAS: Yes for Richard Costigan.
George Diehr? BOARD MEMBER DIEHR: Yes.
BOARD SECRETARY LUCAS: Yes for George Diehr. J.J. Jelincic?
BOARD MEMBER JELINCIC: No. BOARD SECRETARY LUCAS: No for J.J. Jelincic.
Henry Jones? BOARD MEMBER JONES: Yes.
BOARD SECRETARY LUCAS: Yes for Henry Jones. Ron Lind?
BOARD MEMBER LIND: No. BOARD SECRETARY LUCAS: No for Ron Lind.
Steve Coony? ACTING BOARD MEMBER COONY: Yes.
BOARD SECRETARY LUCAS: Yes for Steve Coony. Bill Slaton?
BOARD MEMBER SLATON: Yes. BOARD SECRETARY LUCAS: Yes for Bill Slaton.
PRESIDENT FECKNER: All right. On a vote of 7 to
4, the motion carries. Next motion.
Ms. Mathur. VICE PRESIDENT MATHUR: Thank you, Mr. President.
With respect to schools and public agency — agencies, I
move staff recommendations on number 1, number 2, number 3
and number 4, but with one modification, and that is to
provide public agency employers the option to elect
seven-year smoothing if their governing body passes a
resolution requesting this option. BOARD MEMBER JONES: Second.
PRESIDENT FECKNER: It’s been moved by Mathur, seconded by Jones.
Mr. Slaton. BOARD MEMBER SLATON: Yeah. My original thought
was that the five-year — the staff recommendation is
adequate. And I am torn with this issue of going to seven
years, which essentially makes it nine years before you
reach the point, because I assume the motion includes the
two-year delay, is that correct? VICE PRESIDENT MATHUR: Yes.
BOARD MEMBER SLATON: Yeah. So I actually am very torn. I’d like to hear some other comment
from other Board members and see if maybe I can reach
a final conclusion on this before we vote.
Thank you. PRESIDENT FECKNER: Mr. Jelincic.
BOARD MEMBER JELINCIC: I certainly would encourage the schools and public agencies
to pay it early, if they can. I would not support a proposal
to let them drag it out further. You know, our obligation
is to the beneficiaries. Sooner is better. I’m glad
the State wants to pay it sooner. I don’t think we should
have mandated it, but I’m glad they do. But I would
not support allowing the schools and public agencies
to drag it out even further.
PRESIDENT FECKNER: Mr. Coony. You’ve got to quit pushing your button, sir.
There you go. No. Somebody leave it alone.
ACTING BOARD MEMBER COONY: Thanks. I’ll have to
drop by more often. The Treasurer was prepared to make a motion
actually for consistency sake with three-year smoothing
rather than five-year smoothing. We were looking well
into the next decade before these rates are effective
under the staff’s proposal, seven years actually, and at a
higher cost to employers and employees at the end of that
period, but we’re persuaded that it’s very difficult —
having heard the testimony today, it is very difficult to
make that decision for thousands of State agencies that
are, in most cases, not as resilient as the State in terms
of recovering revenue or recovering from the recession.
But within five years we’re going to be — it’s likely we’re going to be at the front end
of another bad business cycle, just based on past experience.
And by then we’ll have a new study, a new demographic
study, new recommendations, for which I am sure everybody
will be in here asking for a new ramp up period before
we even finish this one.
And so we’re prepared to — we will not make the
motion for a three-year smoothing for the locals, but
seven years takes this out to nine years with the delay.
And it doesn’t make sense to us to be almost through the
decade before we get to the end of this, and actually
acknowledge changes in life expectancy, for example, that
are only going to get better in the next decade. So we have a problem — we would probably
oppose when it gets — we’ll hear the rest of the
debate. PRESIDENT FECKNER: Mr. Bilbrey.
BOARD MEMBER BILBREY: Thank you, Mr. President. First, I have a clarifying question. Did you
say for the seven years to be only for public
agencies, if I heard you correctly, or was it for both schools
and public agencies?
VICE PRESIDENT MATHUR: Both. BOARD MEMBER BILBREY: Okay.
VICE PRESIDENT MATHUR: As an option. BOARD MEMBER BILBREY: As an option, correct.
CHIEF ACTUARY MILLIGAN: Sorry. I had missed that. We cannot do a —
VICE PRESIDENT MATHUR: For the public agencies. CHIEF ACTUARY MILLIGAN: We cannot give it
as an option to the schools. We do one valuation
for the schools, so that might have been where you
were going, Mr. Bilbrey.
BOARD MEMBER BILBREY: I just — I wanted — yeah, I wanted to clarify that that’s what
was actually said, because I thought I heard her say schools
and then for public agencies the additional seven.
BOARD MEMBER BILBREY: And I can support that motion, because I think I heard from the testimony
today that there is a small amount — a small percentage
of public agencies, and cities in particular,
that would like that option. I don’t think it’s as large as
we think the number. And again, we still have the option,
which we would encourage any agency to — if they have
the means to do it, go ahead and pay sooner than later,
but we still have that option for others who are still
struggling. Probably some of the smaller, I would assume,
cities and some of the ones in the more rural areas that
are having a harder time. So I would support the motion.
PRESIDENT FECKNER: Mr. Costigan. BOARD MEMBER COSTIGAN: Thank you, Mr. President.
I struggle over this issue of three, five or seven. I
agree with Mr. Slaton. I’ve been speaking with him over
the past few days as it relates to this issue the concerns
I have. And I understand Ms. Mathur’s flexibility in
pushing out. To me, seven years is a lifetime. To give
it in a little perspective of where I came from, I was
talking last week with some friends of ours on AB 32.
When we did AB 32 in 2006, 2020 seemed so far away. We
just pushed it out. And yet, it’s right around the
corner. Pushing it out seven years is not addressing the
issues or the concerns. I mean, I somewhere in between, and I’d like
to hear from Mr. Slaton as to the five years.
More from we have to put the marker out there. I think
seven years continues to push it out. Three years is entirely
too short. And I’m not sure in talking — and
appreciate Mr. McKenzie and others taking time to talk about
this issue, and I do concern — am concerned where local
governments are going to be, but there has to be a marker
out there. Seven years, many of us on this Board may
not be here in seven years. And it’s part of the institutional
knowledge. I know, Mr. Coony, we’re all looking — I’m
looking at my gray hair as well. But from that
standpoint, if a — I know Mr. Coony can’t make the
motion, but I’m looking forward to hearing Mr. Slaton, but
I would make a substitute motion that the period be five
years not seven. I’m sorry, remove the option — remove
the option of seven years, and make it five, if I have it
correct, but I will be happy to defer to Mr. Slaton if he
makes the motion. BOARD MEMBER SLATON: I’ll second the motion.
PRESIDENT FECKNER: So is that a substitute motion?
BOARD MEMBER COSTIGAN: Yes, please. PRESIDENT FECKNER: All right. So we have a
substitute motion before us. Ms. Mathur.
VICE PRESIDENT MATHUR: Yeah. I don’t think I
can speak more eloquently than the public agencies and
public agency representatives that spoke before us today,
that while most public agencies really want to pay this
down as quickly as possible, there are some who are in
exceptionally dire situations. And that is why I was
prompted to add the option to elect seven year smoothing
for those who really find themselves in a particularly
troubling situation. I think the vast majority will go with the
five-year. Some will even pre-pay and pay earlier, if
they can, if they have the funds to do so. So that was
the rationale for adding the seven-year as an option.
I would just add, too, that these are projections of future mortality, so I don’t actually expect
that we will have significant changes in mortality
projections in the future. I think those are accommodated
with these projections. And, in fact, some of what our
actuary — our Chief Actuary has said is that we might
actually see, because of our — you know, California’s stance
on cigarettes and the low rate of cigarette smoking,
et cetera in this State, we might not see the
same kind mortality improvements as elsewhere in the
nation, where cigarette smoking is on the decline. So I
think that — am I — I hope I’m paraphrasing you correctly.
And so I don’t think we can assume that in the
future we’re going to have, you know, worse mortality from
the point of view — from the actuary point of view, not
from the actual life point of view, than we are seeing
today, and that staff is projecting today. Thank you.
PRESIDENT FECKNER: Mr. Jelincic. BOARD MEMBER JELINCIC: And I’m simply confused.
I don’t understand where we are and what is the motion
that is currently on the table. PRESIDENT FECKNER: I believe the current motion
is staff’s recommendation, if I’m not mistaken, is that
correct, Mr. Costigan? BOARD MEMBER COSTIGAN: Yes, sir.
BOARD MEMBER JELINCIC: So the staff recommendation, okay.
CHIEF ACTUARY MILLIGAN: Staff’s recommendation for schools and public agencies, I believe,
is — but not —
BOARD MEMBER JELINCIC: Thank you. PRESIDENT FECKNER: Mr. Slaton.
BOARD MEMBER SLATON: One clarification for staff. And I understand that we do have, and
we’ve had communication, so we have local agencies that
are in very different financial status than others, and
I understand that, but we also have, I believe, a hardship
ability to deal with those who are under significant
stress. Would you comment on that?
CHIEF ACTUARY MILLIGAN: So the Board’s actuarial policies do include a hardship amortization
extension possibility. However, the criteria that we
are currently administering that hardship extension under
are such that almost no public agencies will be eligible
— will meet the requirements.
I believe that there was one that we granted the
extension to recently, but very few are going to be able
to meet the criteria. So if you do want to give
flexibility to employers, I don’t think that that hardship
extension can substitute for providing an option, such as
the seven-year phase-in. BOARD MEMBER SLATON: So that’s — it’s not
modifiable, that policy? CHIEF ACTUARY MILLIGAN: The policy could be
modified. I believe actually the policy itself provides a
fair amount of flexibility. The prior Chief Actuary
brought to this Board the criteria underwhich the Board
would — the Chief Actuary would exercise that authority.
I brought a modification of that to the Board, but those
criteria, which are kind of self-imposed by the Chief
Actuary, are what restricts the authority. I could work
on that and potentially bring back something that has a
little bit more flexibility, but I think that that would
actually be quite difficult to try to craft a set of
criteria that would be easily applied, and with few gray
areas. But I would certainly be willing to do that should
that be the Board’s direction. BOARD MEMBER SLATON: But the only reason for
someone to pick a seven year for a city or a special
district or a county for that matter to pick a seven-year
amortization would be that they’re under stress? I can’t
think of any other reason they would choose that.
CHIEF ACTUARY MILLIGAN: I could think of other reasons, but I think that is, in fact, the
reason, yes. BOARD MEMBER SLATON: The primary reason. Okay.
So the real question at hand is whether they’re going to
make that decision or whether they’re going to apply and
we’re going to make the decision. PRESIDENT FECKNER: Mr. Diehr.
BOARD MEMBER DIEHR: I’m trying to, as I want to
do, quantify this. And there’s very little difference in
the rates between five and seven years. I think for —
this sounds to me the option to add a complexity that
really has very little value. As Mr. Coony points out,
there’s likely to be yet another — other actuarial
changes in the meantime, that may make changes that the
difference in five and seven years would just pale beside
that. We have just one — I think, one impact of
alternative assumptions that doesn’t have a page on it,
sample public agency miscellaneous. And it looks like
with the seven-year it might be three — two to
four-tenths of a percent of payroll lower for a couple
years, and then a couple tenths of a percent higher for
the next 10 it looks like. This is on top of contribution
rates for State miscellaneous that are 20 to 22 percent.
So, in some ways, it doesn’t make much difference, but I think it can’t be the thing
that breaks the agency. If they’re in trouble, they will
be in trouble with the five-year, with a seven-year,
with a ten-year.
CHIEF ACTUARY MILLIGAN: You are correct. The differences between the five-year phase-in
and the seven-year phase-in are really quite modest.
PRESIDENT FECKNER: All right. Seeing no other requests to speak. You have a substitute motion
before you. Again, we need to please call the roll.
BOARD MEMBER JELINCIC: The substitute motion is
the staff recommendation? PRESIDENT FECKNER: Correct.
BOARD SECRETARY LUCAS: Priya Mathur? VICE PRESIDENT MATHUR: No.
BOARD SECRETARY LUCAS: That’s a no for Priya Mathur.
Michael Bilbrey? BOARD MEMBER BILBREY: No.
BOARD SECRETARY LUCAS: No for Michael Bilbrey. Howard Schwartz?
ACTING BOARD MEMBER SCHWARTZ: Yes. BOARD SECRETARY LUCAS: Yes for Howard Schwartz.
Terry McGuire? ACTING BOARD MEMBER McGUIRE: Yes.
BOARD SECRETARY LUCAS: Yes for Terry McGuire. Richard Costigan?
BOARD MEMBER COSTIGAN: Yes. BOARD SECRETARY LUCAS: Yes for Richard Costigan.
George Diehr? BOARD MEMBER DIEHR: Yes.
BOARD SECRETARY LUCAS: Yes for George Diehr. J.J. Jelincic?
BOARD MEMBER JELINCIC: Yes. BOARD SECRETARY LUCAS: Yes for J.J. Jelincic.
Henry Jones? BOARD MEMBER JONES: Yes.
BOARD SECRETARY LUCAS: Yes for Henry Jones. Ron Lind?
BOARD MEMBER LIND: No. BOARD SECRETARY LUCAS: No for Ron Lind.
Steve Coony? ACTING BOARD MEMBER COONY: Yes.
BOARD SECRETARY LUCAS: Yes for Steve Coony. Bill Slaton?
BOARD MEMBER SLATON: Yes. BOARD SECRETARY LUCAS: Yes for Bill Slaton.
PRESIDENT FECKNER: Thank you. On a vote eight to three, the staff’s recommendation passes.
Anything further? CHIEF ACTUARY MILLIGAN: No.
PRESIDENT FECKNER: No. All right. Then this meeting is adjourned.

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