The state will pay about $31 million more annually for California Highway Patrol pensions now that CalPERS recognizes it has for a decade significantly underestimated how many employees would take advantage of lucrative benefits.
The California Public Employees' Retirement System, the nation's largest pension program, inaccurately predicted the effect of changes that allow members of the CHP to retire at nearly full salary after 30 years on the job.
The agency assumed that most healthy, longtime employees would continue working, even though they could collect nearly the same money while playing golf. CalPERS also administers local government pensions, but did not use the same flawed projections for municipal police officers eligible for the same benefits.
The pension system actuary's proposal to fix the CHP forecast reveals the magnitude of the past error. More than twice as many CHP officers as CalPERS had predicted retired since the benefit increase took effect in 2000. The average retirement age dropped from 56 the year before the changes to 53 in 2011-12.
The earlier retirements mean former officers will receive pensions for longer than anticipated, requiring more money than CalPERS had collected. As a result, the pension system must raise contribution rates to make up for the past shortfall and properly pay for current employees' future pension accruals.
The unavoidable increases are bundled with other necessary rate hikes, discussed in this column two weeks ago, that correct for longer life expectancies.
The CalPERS board will consider the package of actuarial changes on Feb. 18. Of all state and local government agencies for which CalPERS administers pensions, the CHP rates will increase most because of the adjustment to the retirement age forecast.
For CHP pensions, the state currently pays about 35 cents for every dollar of payroll. That would increase to about 55 cents by fiscal year 2020-21 because of phased-in accounting changes approved last year and the upcoming proposed actuarial adjustments.
Of that about 4 cents results from the retirement age correction.
Here's a rough approximation of the effect on the California budget: The state's current contribution to CHP pensions is $267 million annually. Applying the changes to the same payroll would increase the state contribution to about $422 million by 2020-21, of which about $31 million is because of the retirement age correction.
The age fix stems from pension increases approved in 1999 by state legislators and then-Gov. Gray Davis. CHP officers were promised 3 percent of top salary for every year on the job, with a 90 percent maximum, if they worked to at least age 50.
Thus, someone with 30 years' experience can retire with 90 percent of salary -- and no longer have to make pension system contributions. That nets about the same income in retirement as on the job. After retirement, the pensions increase by up to about 2 percent annually.
As the Legislature in 1999 considered the increases, CalPERS estimated the rate at which CHP officers would retire. But in the first three years of the new benefits, the actual retirement rate was less than predicted, so in 2004 CalPERS ratcheted back its forecast.
However, CHP retirements then took off, spurred in part by a temporary sweetener that provided an additional 8 percent bump in CHP pensions for those retiring from 2004 to 2008. When CalPERS actuaries reviewed retirement data in 2010, they reasoned the spike in CHP retirements was because of the temporary 8 percent bump, and that the higher rate would not continue, says Alan Milligan, who became chief actuary two months after that decision. They guessed wrong.
Interestingly, CalPERS in 2004 and 2010 accurately forecast retirement rates for local police receiving the same 3 percent benefit. For example, CalPERS predicted that 32 percent of local police with 30 years' experience at age 55 would retire; but only 16 percent of CHP would.
Milligan now recommends bringing the CHP forecast closer, but not equal, to the local police projection. It must be done. Unfortunately, it means that taxpayers will pay even more for these costly benefits.
Daniel Borenstein is a staff columnist and editorial writer. Reach him at 925-943-8248 or firstname.lastname@example.org. Follow him on Twitter: @BorensteinDan.