Category: CalPERS

The Wrong Kind of Hike

CalPERS enrollees receive notice of long-term care rate hikes

2/20/13, Sacramento Bee, Jon Ortiz [excerpt]

With an 85 percent premium hike looming, government workers and retirees covered by CalPERS’ costliest long-term care insurance policies face a crucial decision: Swallow the increase or get out of a program they have been paying into for years. The reality of the increase literally came home this week as letters from CalPERS hit the mailboxes of 148,000 policyholders. The fund’s board last year voted to raise premiums for the 90 percent of insured members who bought the top-tier plan – lifetime coverage and inflation protection for things like nursing home and assisted-living care. Half of those policyholders are in the very highest tier and also face two small increases over the next two years before the 85 percent jump kicks in. In all, rates for them will roughly double. CalPERS says it is hiking rates to keep the insurance fund solvent long-term. Losses from higher-than-expected claims, lower-than-expected investment returns and loose underwriting standards early on forced the decision…


Does this matter for UC employees?  UC is not part of CalPERS.  But as state employees, UC employees at one time were offered the “opportunity” to subscribe to CalPERS’ long-term care plan.  There is a larger lesson from this episode.  Long-term care policies are essentially a promise to provide resources for what could be an expensive future event.  But the premiums you will pay for such policies/promises are not fixed.  Moreover, you are depending on some insurance company – which between now and then may be merged, acquired, or who knows what? – to honor the policy when you may not be in a good position to appeal denials of claims.  

Long-term care insurance is truly faith-based insurance.  But if you believe…
[youtube http://www.youtube.com/watch?v=AWewQIrLUvM?feature=player_detailpage]

How High?

A prior post on this blog noted that CalPERS was considering raising its rates for long-term care insurance by 75%.  We noted that although UC was not under CalPERS, as state employees, UC employees have been allowed in the past to participate in the program. We also noted that such insurance is a very iffy proposition since it is hard to forecast costs many years ahead for long-term care and thus rates could go up (a lot).

Turns out, that CalPERS is indeed planning to raise the rates.  But now the increase may be as high as 85%.  From the Sacramento Bee:

CalPERS is preparing to impose a rate hike of up to 85 percent on most of its long-term care insurance policyholders. The rate hike would begin in 2015 and would be phased in over two years. It would affect three-fourths of the 150,000 CalPERS members who’ve bought long-term care policies, which pay for stays in nursing homes, convalescent homes and so on.

The proposed increase is somewhat higher than the 75 percent rate hike contemplated by CalPERS officials the past several weeks. The earlier estimate “was a work in progress,” CalPERS spokesman Bill Madison said Wednesday. As an alternative, CalPERS staff said the pension fund could raise rates 79 percent but do it in one year instead of two…
Full story at:
So how high could rates go in the future?  One might ask, how high is the moon?
[youtube http://www.youtube.com/watch?v=bZFKeyGpgK0?feature=player_detailpage]
Update: Jon Ortiz of the Sacramento Bee provides a link to the CalPERS agenda item:
CalPERS LTC Recommendation and Analysis

Update: It looks like they are going ahead with the rate hike:
http://www.sacbee.com/2012/10/16/4916230/calpers-committee-votes-to-hike.html

Cautionary Note About CalPERS Long-Term Care

Although UC employees are not covered by the basic CalPERS retirement plan, they are eligible to buy long-term care insurance through CalPERS as state employees, if such policies are offered. Some UC employees, who would be reluctant to buy such policies from commercial insurance companies, may have bought or considered the CalPERS version in the past.

Today’s Sacramento Bee carries a cautionary story for you, if you have bought a CalPERS long-term care policy or might consider doing so in the future (if they are again offered).  Excerpts below:

…CalPERS is considering imposing a 75 percent increase in premiums on the vast majority of its long-term care policyholders… Leading private insurers, facing declining profits and many of the same financial issues confronting CalPERS, are dropping coverage or restricting sales. Because it’s difficult to buy coverage once someone turns 80, many CalPERS policyholders would have no alternative but to pay the higher premiums if they wanted to stay covered… Details on the proposal will be presented to CalPERS’ pension and health benefits committee Oct. 16, with final approval by the full governing board expected a day later…

Because of the program’s financial problems, CalPERS has suspended selling new policies since 2008…  CalPERS also plans to give members the option of switching to a less comprehensive policy as a way of mitigating the rate hike.  Currently, most policies provide lifetime benefits with inflation protection. The new plan would cap benefits at 10 years without inflation protection. Because most people don’t need more than a few years of nursing home care, CalPERS says the cheaper policy will prove popular.

In short, although long-term care plans may seem appealing, as a practical matter it is very difficult for individuals to lock in a benefit and cost that will extend years into the future.  Long-term care is really part of that more general U.S. healthcare system which is in flux.

Read more here: http://www.sacbee.com/2012/10/04/4880202/calpers-weighs-hugh-premium-hike.html#storylink=cpy
Read more here: http://www.sacbee.com/2012/10/04/4880202/calpers-weighs-hugh-premium-hike.html#storylink=cpy
Read more here: http://www.sacbee.com/2012/10/04/4880202/calpers-weighs-hugh-premium-hike.html#storylink=cpy

Follow the Leader? Will UC Follow CalPERS on Health Costs?

From the Sacramento Bee: The California Public Employees’ Retirement System plans to raise health care premiums to its members by an average of nearly 10 percent next year, one of the biggest increases in recent years. The increase of 9.6 percent would be more than twice as big as the rate hike that took effect for this year. It would have significant implications for health care affordability in California and beyond. CalPERS is a major purchaser of health insurance; it covers nearly 1.3 million public employees, retirees and their family members…


“Wow – that’s pretty high,” said Joanne Spetz, an expert on health care finance at the University of California, San Francisco. She said CalPERS has substantial influence on the health care marketplace, and a 9.6 percent increase suggests price inflation is taking off again. CalPERS raised rates just 4.1 percent for this year, less than half as much. “They tend to push back (on insurers), so if they accepted it, that kind of sets the tone for what the rest of us can expect…”

Full story at: http://www.sacbee.com/2012/06/12/4557662/calpers-to-raise-health-care-premiums.html
Best advice: Don’t get sick:

Hobgoblin Pensions

Yours truly is not exactly sure what a hobgoblin is, except that consistency was said by Emerson to be the hobgoblin of small minds.

As readers of this blog will know, the Regents and UCOP have been effusively praising the governor for somehow committing to funding the UC pension system fully, even though all he has done is said that UC could use some of its state allocation for the pension (which was always the case).  Absent some larger understanding between UC and the powers-that-be in the state on funding UC operations generally as well as the pension, such statements don’t mean much.  To be meaningful, there would need to be a deal that includes a long-term formula/agreement on UC funding for operations plus full funding for the pension on top.

When it comes to the governor’s attitude toward funding CalPERS (which handles the CSU pension), one doesn’t find consistency – which I suppose demonstrates a large mind. Calpensions.com reports that the governor is annoyed because the CalPERS board did not choose to bill the state for what it would deem full funding and instead raised the bill for the coming year by a lesser, phased-in amount. See: http://calpensions.com/2012/05/17/calpers-ignores-brown-delays-pension-payment/  (Apparently, public sector unions prefer the phase in so that there will be less immediate pressure on the state budget and thus less immediate pressure on them for concessions.)

The calpensions.com article closes with this: “Your vote today to institute a phase-in period reinforces the same practice of prior years — to not pay our pension bills when due,” Brown told the board.  In closing his brief letter, the governor said: “Given the outlook for long-term investment performance, the system may well choose to lower its return assumption again in the near term. Whether CalPERS implements a phase in or not, it is my intent that the state fully pay for the change in investment return assumption this year.”

Such gubernatorial commitment to real full funding for the UC pension would be appreciated – and consistent. Time to decide on a consistent policy on pensions, governor?

[youtube=http://www.youtube.com/watch?v=mpnDbJjBW8A&w=512&h=312]

On Our Level

CalPERS’ governing board voted to cut its earnings forecast to 7.5%, the same level assumed in UCRP. There were earlier reports, as readers of this blog will know, that CalPERS would cut below us to 7.25%.

If CalPERS had dropped below UCRP, the Regents might well have reduced their forecast.

As noted in earlier posts, changing the earnings forecast does not change the future actual earnings.  The future will be what it will be. But lowering the forecast increases the estimated unfunded liability and could thus trigger higher contributions or some other adjustment.

We will see at the upcoming Regents meeting if there is any discussion of CalPERS’ action.

For an article on that action, see:
http://www.sacbee.com/2012/03/13/4333636/calpers-committee-votes-to-reduce.html

Update: The final action took place 3/14/12:  See:
http://www.sacbee.com/2012/03/14/4336927/calpers-oks-reduction-in-investment.html

Details on Governor’s Pension Plan?

CalPERS has released (or someone has leaked) a draft set of comments about the governor’s 12-point pension plan. Much of what is questioned is not relevant to UC which has its own problems with the plan. (See prior posts on the legislative hearings on the plan and other aspects of it.) However, the CalPERS draft makes it clear that there is much more to be resolved than just okaying the governor’s proposed 12 points.

The fact that the proposal has different implications for the various plans that CalPERS administers – something clear from the document – opens the door to the idea that there should be separate policies for different plans. That, in turn, opens the door to UC having already adopted changes suited for its plan and opting out of some statewide solution.

Also worth noting is a legal test that may come out of an attempt by San Jose to change the benefit formula for current employees going forward:

Audio of Legislative Hearing on Public Pensions


Audio of Dec. 1, 2011 hearing by the legislative Conference Committee on Public Employee Pensions on Gov. Jerry Brown’s proposals for state and local public pensions in California.

Click on link above. If you don’t want to listen to the full four and a half hours, scroll towards the bottom to hear the governor’s testimony and UC’s testimony.

Testimony by representatives of the Dept. of Finance, the Legislative Analyst’s Office, Gov. Jerry Brown in person, CalPERS, CalSTRS, State Assn. of County Retirement Systems, University of California pension system, Employer groups (League of California Cities, California State Assn. of Counties, California Special Districts), Employee union groups (CTA, California School Employees Assn., Professional Engineers & Scientists, AFSCME, Peace Officers Research Assn.), Public Comments. See earlier post for agenda of this hearing. Gov. Brown was not on the original agenda.

Dept. of Finance: The governor’s 50-50 sharing of contributions idea refers to the normal cost, not the unfunded liability. The 75% notion is not a cap but a kind of goal. There was vague reference to a dollar cap. But much was unclear. It was said that the Dept. of Finance would be hiring a consultant to work out details. There would be a minimum early retirement age but it is not clear what that will be. There was an allusion to a 6-month period to get an actual hybrid plan in shape. There was some discussion of legal issues surrounding “impairment of contracts” but again there was fuzziness. It came up in the context of what the governor wanted to put on the ballot in the way of constitutional changes. The only clear cut response was that it would be necessary for voters to approve changes in the CalPERS board.

Legislative Analyst’s Office (Jason Sisney): Noted there are thousands of pension plans and occupations so putting together a plan will be complicated. There was reference to the total compensation idea (if you cut pensions, other forms of compensation may need to rise so the savings may be offset). The details are not yet in the governor’s plan. Legal doubts raised about changes for current employees, even changes in contributions. Recommended not fiddling with current workers. Thus, changes would be for new hires so there would be little short term savings. Specifically cautioned about high paid workers and need to be competitive, particularly university professors who are recruited in a national market.

Gov. Brown: Philosophized about debt, Greek financial crisis, Europe. At one point, referring to a statement by CalPERS that freezing its plan would cut off incoming contributions from new hires, said that seemed like a Ponzi scheme. That is, if a plan depended on new people coming in, it sounded like a Ponzi scheme. This remark could be a media sound bite. Told the Democrats that there will be taxes on the ballot they would like voters to pass but unless there is a pension reform also on the ballot, the taxes won’t pass. So there needs to be compromise, balance, etc.

Note: The Ponzi scheme quote has already hit the news:

http://blogs.kqed.org/capitalnotes/2011/12/01/browns-pension-musings-from-ponzi-to-castor-oil/

CalPERS: Prefers pure defined benefit to hybrid of defined benefit and defined contribution. The latter is more expensive to administer and will earn less. Said the proposed ban on contribution holidays when plans become overfunded could violate tax rules and lead to loss of tax-exempt status. Tried to respond to governor’s Ponzi comment without using the word Ponzi. Said what was meant was that if a pension plan such as CalPERS is frozen (closed), it no longer gets cash from new hires and it needs cash for paying benefits. Need for cash flow would cause it to invest in assets that throw off a lot of cash and therefore have lower rates of return. The answer was not great since if the plan were really 100% funded, you could in theory freeze it and pay off the obligations. CalPERS problem (and the reason for the governor’s proposal) is largely a matter of unfunded liabilities.

CalSTRS: CalSTRS is recognized as the most problematic state plan. Spokesperson noted that the governor’s plan doesn’t deal with CalSTRS’ unfunded liability. Complained about fuzziness in governor’s plan as to who pays for the defined contribution component. But polite language that the governor’s plan was a good “starting point.”

County Systems: Noted that there were many plans. They are already negotiating two-tier arrangements and other features such as increased contributions similar to the governor’s plan. Doubts raised about hybrid proposal. Total compensation point made (if you cut pensions, you have to raise something else).

University of California: (Nathan Brostrom and Gary Schlimgen) Some history of the UC system. Discussed the two-decade contribution holiday. The other sources of funding are paying but not the state. Regents have been ramping up contributions but must pay for state share out of operating budget funds. Defined benefit model helps retain mid-career faculty but encourages retirement so that there is faculty renewal at older ages. Discussion of Regents’ pension changes of 2010 after PEB report. Many features of the governor’s plan have already been adopted by UC such as two tier. We already have 3-year HAPC to prevent spiking. UC doesn’t offer “airtime” purchases of past service unlike CalPERS. Regents are not plan members so no conflict of interest in serving as plan trustees. UC doesn’t make retroactive improvements. UC is less generous than the state on retiree health care. UC has problems with 50-50 contribution proposal for current employees. Hybrid model is problematic. 75% replacement target is too low for retention/recruitment. Some UC unions have already agreed to two tier. The constraints in the governor’s plan would make collective bargaining more difficult. UC plan has the right balance. (Note: brief break in audio stream towards end.) In Q&A period, pointed to current projection of full funding by 2039. Notes that contributions of current employees are rising as part of that projection.

Local Employer groups: There was again reference to the idea that the tax status of plans could be at risk if an overfunded plan could not have a contribution holiday.

State and Local Employee groups: No unexpected points.

Public comment: Included some external groups pushing pension reforms.

Part 1 of Gov. Brown’s testimony

Part 2 of Gov. Brown’s Testimony

Part 1: UC Testimony


Part 2: UC Testimony

The Guv on Pensions: What did he say?

Governor Brown has now held his press conference on public pensions. His proposals clearly covered CalPERS and CalSTRS. Coverage of UC was not mentioned. But the governor did make an off-hand reference to UC’s long pension holiday, i.e., the two-decade period of zero contributions.

The governor released a 12-point plan but one element, a kind of total cap on pension amounts, was not mentioned on the list of the twelve. [A cap is mentioned but not linked to defined contributions.] Yet, in response to a reporter’s question, he said a cap was intended but that it was complicated because of his proposal for a “hybrid” plan for new hires. A hybrid plan means a combination of defined benefit and defined contribution. It was vague but the governor seemed to want the likely payout from the defined contribution part of the system to be factored into the calculation of the cap. Lots of uncertainty remains in this aspect of the proposal.

Let’s assume that UC is not covered officially. Might there nonetheless be elements in the governor’s plan that would potentially push the Regents to follow suit?

The plan for new hires puts 67 as the age of normal retirement. There could be pressure on the Regents – if the plan is adopted – to set the normal retirement age in our lower-tier plan at 67.

More significantly, the governor’s proposal has as one of its points a 50-50 split in contributions to the plan; employee pays half and employer pays half. CalPERS figures suggest that right now only about one third of the contributions are from employees. So 50-50 would be a significant bump up in employee contributions under CalPERS. And the higher contribution applies to ALL employees, not just new hires. The Academic Senate’s position has been that the employee contribution should be no more than 7%. Seven percent, or even the 8% that has figured in some discussions, would not be half of the long-term contributions planned for UC.

Another concept that might raise pressure for emulation by UC is the idea – mentioned by the governor in the news conference – that career retirees should have an income equal to 75% of final salary with one-third coming from each of Social Security, defined benefit, and defined contribution. Exactly how this would be applied and how it would mesh with a cap is unclear. [It may be that the 75% is what is meant by a cap.]

It might be noted that the proposal needs legislative approval. A KPCC radio program (embedded below) after the governor’s conference featured comments by Democratic and Republican leaders in the legislature as well as yours truly. The Republican was surprisingly positive. Elements of the plan will require a vote of the people, including some restructuring of the CalPERS board. The legislature could put a proposition on the ballot, but bipartisan support would be needed to do so. In theory, a proposition could be put on the ballot via the initiative process. But initiative signature gathering requires $1-$2 million for signature gathering firms. The governor doesn’t have that kind of money lying around.

As more info becomes available, we will update you via this blog.

The press release with the 12-point plan is at: http://gov.ca.gov/docs/Twelve_Point_Pension_Reform_10.27.11.pdf

Here is the governor’s press conference:

Here is the radio interview:

UC or not UC? – That is the question (to be answered in a few hours)

Bits and pieces of Governor Brown’s public pension plan are leaking out ahead of his news conference later today. UC or not UC, that is the question, as Hamlet might say. But the leaked reports don’t provide the answer so we will have to wait a few hours more. The Capitol Alert report from last night and another from KCAL indicate that the reason Brown wants a ballot prop is to change the CalPERS board. Excerpt from Capitol Alert:

Gov. Jerry Brown will propose a higher retirement age and a less generous pension system for newly-hired state workers, sources familiar with Brown’s pension plan said this afternoon. The Democratic governor, who is expected to release his pension plan Thursday, will also propose prohibiting the purchase of additional retirement service credit, or “airtime,” for existing employees. And he will call for a ballot measure to reshape the governing board of the California Public Employees’ Retirement System, requiring changes to Proposition 162, the 1992 initiative that strengthened the retirement board.

The proposal includes some of the same ideas Brown discussed with Republicans in failed budget talks in March. At the time, however, Brown was thought to be considering for new employees a “hybrid option” involving 401(k)-style benefits, not making that hybrid mandatory for new employees.

The hybrid option Brown will propose for new non-public safety employees will be a three-pronged plan that combines a smaller, defined benefit with Social Security and a 401 (k)-style benefit. The plan, as presented privately by the Brown administration to labor leaders this afternoon, also includes increasing the retirement age from age 55 to 67 for most new, non-public safety employees, the sources said…

Full story at: http://blogs.sacbee.com/capitolalertlatest/2011/10/jerry-brown-to-propose-mandatory-hybrid-among-pension-changes.html

Here is the similar report from KCAL Channel 9 (that Shane White pointed me to):

http://losangeles.cbslocal.com/2011/10/26/governor-brown-seeks-pension-reforms-raising-retirement-age/

However, the KCAL story says ALL employees – not just new hires – will pay half of pension contributions. Even if UC is not included, that contribution formula could put pressure on the Regents to follow. Stay tuned.