Fitch Says CalPERS Decision Boosts Pension Obligations, Funding Concerns

Fitch Ratings says a recent decision by the board of the California Public Employees' Retirement System (CalPERS) will raise funding pressures on public employers.

The Sacramento Bee reported that staff at CalPERS, the nation’s largest public pension plan, recommended that the fund’s board authorize 99 types of special payments as counting toward pension calculations for employees hired since the state’s Public Employees' Pension Reform Act of 2013 (PEPRA) signed into law by Gov. Jerry Brown (D) took effect on Jan. 1, 2013. Among them: longevity pay, police marksmanship certification pay, physical fitness pay, smog inspector license pay, notary pay, cement finisher pay and holiday pay.

Fitch, whose ratings are used as a guide on the credit-worthiness of corporate, state and municipal bond issues, said that the expanded definition of pensionable compensation exposes public employers to higher pension liabilities and contribution expenses, and appears to be a step backward from recent reforms. Fitch explained that while PEPRA “…narrowed the definition of pensionable compensation for public employees in an effort to address "pension spiking," the inflation of base pay for purposes of pension benefit calculations. This decision expands the definition of pensionable compensation, in apparent conflict with PEPRA, and will increase pension costs for public employers if implemented.” 

“Today's decision by the CalPERS Board brings much needed clarity to the definition of what is pensionable compensation for new CalPERS members,” said Rob Feckner, President of the CalPERS Board of Administration, in a press release. “If the law is ever changed, CalPERS will of course amend our regulations accordingly.”

Fitch noted that while the magnitude of impact from this decision is not yet clear, “…it raises more questions about the sustainability of California's pension reform efforts, which continue to face legal and institutional challenges.” The ratings agency said if found “particularly worrisome” the absence of detailed information on the analysis of its projected costs. 

“The decision has been sharply criticized by Gov. Jerry Brown, who cited its conflicts with recent state legislation intended to reduce pension costs,” Fitch noted. “City-led pension reform efforts in San Diego and San Jose remain mired in litigation while this CalPERS decision appears to open up a new front for challenging reform efforts.” Fitch said it expected legal and institutional battles to continue given the high stakes of pension reform for both public employers and employees.