“Now that we have a clear picture of our future obligations, all stakeholders have to come together to address this challenge in a thoughtful, responsible way that protects both the retirees who were promised these benefits and the taxpayers who have to write the check,” said CalPERS Board President Rob Feckner. “CalPERS can help. We have established an OPEB prefunding program for CalPERS employers that provides tremendous benefits. Prefunding greatly reduces future costs for employers and taxpayers.”
In March of this year, CalPERS launched the California Employers’ Retiree Benefit Trust Fund, an investment vehicle that allows public employers that contract with CalPERS for employee health benefits to prefund their future OPEB costs.
Under the prefunding plan, participating employers make regular contributions to the trust fund so that the money can be invested and grow. In the future, participating employers can use investment earnings to pay for their retiree health benefits costs, similar to the CalPERS pension plan in which three out of four dollars paid in benefits come from investment earnings rather than taxpayer dollars or employee contributions.
“CalPERS has been successfully managing retirement plans for 75 years; we can do the same thing for retiree health benefits,” said George Diehr, Chair of the CalPERS Board Health Benefits Committee. “A similar prefunding approach for retiree health benefits is the smart way to manage future costs. Steady, regular contributions, along with professional investment management of the trust fund, provides employers with an affordable way to pay for retiree health costs. We should not turn our backs on hardworking public servants after a career of serving the public. We need to efficiently manage those costs. Prefunding does that.”
The California Employers’ Retiree Benefit Trust Fund was established by CalPERS to help public employers address issues related to Governmental Accounting Standards Board Statement 45, commonly referred to as GASB 45, which requires public employers to begin reporting future OPEB liabilities in their financial statements.
Prefunding future OPEB costs produces many benefits:
- Earnings from trust fund investments reduce employer OPEB costs.
- Employer investment rate assumptions, known as discount rate assumptions, will be higher, reducing annual expenses and the unfunded liability for OPEB costs.
- Prevents an employer’s OPEB obligation from becoming a significant liability on their balance sheets.
- Lower unfunded liability may result in a higher bond rating.
- Improves financial security for active workers and retirees.
CalPERS has been administering public pension plans for 75 years with excellent results. Over the past 20 years, pension fund investments have averaged a 10 percent annual rate of return. Management fees have averaged 0.25 percent of assets over the past 10 years, well below most commercial investment funds.
Currently, only public employers that contract with CalPERS for employee health benefits are eligible to participate in the trust fund. CalPERS is sponsoring legislation (AB 554, Hernandez) that would allow all public employers to participate.
To participate in the California Employers’ Retiree Benefit Trust Fund, employers must take several steps:
- Certify that their agency is eligible under applicable laws and regulations.
- Obtain an actuarial valuation prepared in accordance with CalPERS guidelines.
- Have the agency’s governing body adopt the CalPERS agreement to prefund OPEB costs.
- Submit an original signed agreement, actuarial valuation report, certification that the actuarial valuation satisfies CalPERS requirements, and a summary of actuarial information on a diskette or CD to CalPERS for approval.
Additional information, application instructions, and all the necessary forms are available on the CalPERS Web site at www.calpers.ca.gov.
Employers may also call the CalPERS Employer Contact Center toll free at 888 CalPERS (or 888-225-7377) for assistance.
CalPERS, with more than $240 billion in assets, is the largest public pension fund in the U.S. It administers retirement and health benefits for 1.5 million active and retired California State, school, and local government employees and their families.
May 7, 2007