Marin Public Pension Series – Brief #2: Understanding the Financial Status, Cost, and Sustainability of Public Pensions in Marin County
The Marin Public Pension Series is a three-part issue brief series intended to provide policymakers and the public with an informed perspective on the value, cost, and broader social implications of defined-benefit (DB) pensions for public employees in Marin County, California. Brief #1 examines the economic value of defined-benefit pensions for public employees, employers, and residents in Marin County. Brief #2 addresses the cost and sustainability of public employee pensions. Brief #3 highlights the role of public defined-benefit pensions in reducing retirement wealth inequality by race, gender, and education compared to 401(k)-style plans.
This brief analyzes the California Public Employee Retirement System (CalPERS), the California State Teachers’ Retirement System (CalSTRS), and the Marin County Employee Retirement Association (MCERA), which provide defined-benefit pensions to public employees in Marin County. This brief is intended to help policymakers and the public better understand the financial standing of these public pension systems, the role of legacy liabilities vs. ongoing benefit accrual in employer pension costs, and the current trajectory of these costs. This brief also considers the impact of pension fund investment performance, accounting and funding policy changes, and pension benefit reforms on the long-term sustainability of public pensions. Key findings are as follows:
- CalPERS, CalSTRS, and MCERA have all made significant strides in reducing their unfunded liabilities thanks to strong long-term investment returns and reformed contribution rate policies.
- CalPERS, CalSTRS, and MCERA have met or exceeded their current investment return targets (6.8%, 7%, and 6.75%, respectively) over short- and long-time horizons.
- In FY2021, CalPERS, CalSTRS, and MCERA earned exceptionally high investment returns—21.3%, 27.2%, and 32.0%, respectively. For employer contribution rates, this represents a significant buffer against potential subpar returns over the next two to three years.
- Funding ratios increased for the three systems as of the end of FY2021. MCERA was fully funded on a market value basis. CalPERS was 80% funded, also on a market value basis. Many CalPERS Public Agency plans in Marin County were 100% funded based on the market value of assets. CalSTRS, which smooths returns over three years, was approximately 75% funded and is on track to achieving 80% funding and 100% funding ahead of schedule under the state’s funding plan.
- A large majority of current taxpayer costs for pensions are tied to legacy unfunded liabilities, while the cost of benefit accrual by active employees is relatively modest due to PEPRA limits on pensions for those hired after 2012.
- About half to two-thirds of employer costs for public pensions in Marin County are tied to legacy unfunded liabilities that are declining.
- The cost of benefit accrual by current employees (aka normal cost) accounts for only one-third of current pension costs for the typical public employer in Marin County. This cost is gradually declining due to the Public Employee Pension Reform Act (PEPRA) of 2012, which reduced pension benefits, raised the retirement age, and required at least 50% cost sharing for employees hired after 2012.
- Employer normal cost for PEPRA employees—compared to the cost for older hires—is 26% lower for teachers, 35% lower for firefighters and police, and 27% lower for other workers.
- The employer normal cost for PEPRA benefits is low in absolute terms for non-safety workers: about 7.5% of payroll.
- For teachers hired after 2012, school districts spend less than 8% of payroll for pension normal cost, while teachers themselves pay 10.2%. California teachers are not covered by Social Security. Thus, schools pay a net 1.8% above the employer tax for Social Security.
- Employer costs for public pensions in Marin County are stabilizing or decreasing due to pension benefit reductions under PEPRA and progress in paying down unfunded liabilities.
- CalPERS Public Agency contribution rates will peak for most in Marin County employers in FY2023 or FY2024, then decline as the majority of excess investment returns from FY2021 begin to be recognized in rate calculations.
- MCERA reduced average employer contribution rates for FY2023 by more than 3 percentage points compared to FY2022 based on the first 20% of its excess investment returns from FY2021.
- FY2021 investment returns will reduce the state’s obligations to CalSTRS over the next few years. The pension system predicts that the official school contribution rate will remain stable at 19.1%, where it has been since FY2020. However, under the Governor’s budget proposal for FY2023, schools will no longer receive state subsidies for this rate, which reduced their obligations to CalSTRS by about 2% of payroll in FY2022. At the same time, both the Governor’s and Legislature’s budget proposals include historic increases in total school funding that dwarf this change.
- CalPERS, CalSTRS, and MCERA have adopted more conservative actuarial assumptions, accounting methods, and funding policies the last decade, putting these pension systems on a sounder financial footing for the long haul.
- All three systems have lowered their long-term investment return assumptions and discount rates several times since 2001.
- All three systems have adjusted their retiree life expectancy assumptions—a key driver of pension cost—to anticipate continuous improvements in life expectancy over time.
- CalPERS and MCERA accelerated the amortization of unfunded liabilities, requiring employers to pay off their pension debt faster.
- CalSTRS, which relies on state legislation to set contribution rates, has benefited from the 2014 CalSTRS Funding Plan to raise the pension system’s funded status to 100% by 2046. To make up for more than a decade of systematic underfunding, the policy incrementally increased employer, employee, and state contribution rates starting in FY2015. CalSTRS has been receiving adequate contributions since FY2018 and now has limited authority to adjust rates to meet its funding goals.
Read the full report.