The CalPERS defined benefit pension plan is funded by employer-paid contributions, employee contributions, and the plan's investment earnings. Employer-paid contribution rates are adjusted each year in order to meet defined pension benefit obligations. In Fiscal Year 2020-21 the employer retirement rates for the Miscellaneous Tier 1 and Peace Officer/Firefighter decreased by 1.705% and 12.745% respectively from fiscal year 2019-20 retirement rates. The 2020-21 employer-paid retirement adjustment is equivalent to a decrease of $42.7 million. The state Department of Finance processes state agency retirement adjustments during the fiscal year. The following table provides a ten-year overview of CalPERS employer-paid retirement contribution rates and adjustments from 2011-12 through 2020-21:
Beginning with the 2013-14 fiscal year, the annual state budget placed a limit on the state’s obligation to adjust CSU retirement funding due to annual changes in CalPERS rates. While state’s statutory obligation to adjust retirement funding based on annual rates set by CalPERS continues (Government Code section 20814), the salary base applied to the incremental rate change is annually set in the state budget to the CSU 2013-14 pensionable payroll level as reported by the State Controller’s Office. Final 2019-20 pensionable payroll for the CSU was 32 percent ($735.5 million) above the 2013-14 frozen pensionable payroll level. The retirement increase amount above the frozen payroll level is an unfunded cost for the CSU, and it continues to increase each year when pensionable payroll or retirement contribution rates increase.
CalPERS retirement contribution rates decreased for 2020-21 for the first time in several years, due in part to advanced paydown of unfunded retirement obligations, so there is no request for additional retirement funding in 2021-22. However, use of this budgeting practice by the state is problematic and should be discontinued. Throughout the years that this budget practice has been in effect, the state or students ultimately covered the unfunded liability above frozen pensionable payroll because retirement costs are mandatory and unavoidable. While the rationale of this practice was to help reduce state funding increases and to examine more closely the cost of annual general salary increases and hiring of new employees, that has always been a key consideration as the CSU must balance the need to serve students with the level of funding available to the university, particularly as tuition rates have remained relatively constant since 2011-12 with only a $270 per year increase in 2017-18. The CSU cannot hire additional employees or provide continued investment to ensure competitive salary and benefits salary without the proper level of state funding.
For reference regarding 2020-21 employer-paid retirement rates, see CSU Human Resources Administration, Technical Letter HR/Benefits 2020-13.
Employee Retirement Contributions (for informational purposes only)
The Miscellaneous Tier 1 employee contribution rate established in July 1, 1976 remains in effect for employees that began state employment prior to 2013 (classic member). For employees with state employment dates on January 1, 2013 or later (new CalPERS member), the employee retirement contribution rate is determined by the Public Employees’ Pension Reform Act of 2013 (PEPRA).
Government Code Section 20677(b)(1) provides that employee retirement contribution rates for classic state Miscellaneous Tier 1 members employed by the CSU who are in the federal system (Social Security) and began employment prior to 2013 shall be 5 percent of compensation in excess of a $513 offset per month. The new CalPERS Miscellaneous Tier 1 members hired in 2013 and beyond under PEPRA shall contribute half of the normal cost of CalPERS retirement benefits, which is currently 6 percent of compensation without the $513 offset.
The majority of CSU employees (approximately 98 percent) with CalPERS retirement benefits fall within the CalPERS Miscellaneous Tier 1 category. The remaining two percent of CSU employees with CalPERS retirement benefits have designated CalPERS Peace Officer/Firefighter benefit levels. The employee contribution rate for this group is subject to Government Code Section 20687, which provides that employee retirement contribution rates shall be half of the normal cost of CalPERS retirement benefits, which is currently 10.5 percent of compensation in excess of $238 per month. Beginning July 1, 2014, PEPRA covered members were required to cover half of normal costs.
Pension reform changes began in 2010 and continued to be expanded through 2013. Pension reform measures have included changes in contribution percentages and retirement benefit formulas based on employment dates. The following CSU Systemwide Human Resources technical letters provide further details on pension reform measures: