Fiscal Year 2013-2015 Special Budget Meeting

California Public Employees' Retirement System P.O. Box 942709 Sacramento, CA 94229-2709 Reference No.: ^^f^ (888) CalPERS (or 888-225-7377) Circular Letter No.: 200-019-13 \ T \ r T \ 0 "TTY" (877) 249-7442 Distribution: VI C - ' 3 l P £ ( K 3 www.calpers.ca.gov Special: Circular Letter Apri 26.2013 TO: ALL PUBLIC AGENCY EMPLOYERS SUBJECT: EMPLOYER RATE INCREASES DUE TO AMORTIZATION AND SMOOTHING POLICY CHANGES The purpose of this Circular Letter is to inform you of recent changes to the CalPERS amortization and smoothing policies. These changes are expected to increase employer contribution rates in the near term but result in lower contribution rates in the long term. Background At the April 17, 2013 meeting, the CalPERS Board of Administration approved a recommendation to change the CalPERS amortization and smoothing policies. Prior to this change, CalPERS employed an amortization and smoothing policy which spread investment returns over a 15-year period with experience gains and losses paid for over a rolling 30-year period. After this change, CalPERS will employ an amortization and smoothing policy that will pay for all gains and losses over a fixed 30-year period with the increases or decreases in the rate spread directly over a 5-year period. The new amortization and smoothing policy will be used for the first time in the June 30, 2013 actuarial valuations. These valuations will be performed in the fall of 2014 and will set employer contribution rates for the Fiscal Year 2015-16. Analysis The current amortization and smoothing policy was designed to reduce volatility in employer contribution rates. The policy has accomplished this goal fairly well since its adoption, however a number of concerns have developed: • The use of an actuarial value of assets corridor can lead to significant single year increases to rates in years when there are large investment losses. • The use of long asset smoothing periods and long rolling amortization periods result in slow progress toward full funding. • The use of an actuarial value of assets requires the disclosure of two different funded statuses and unfunded liability numbers in actuarial valuation reports. This adds confusion and inhibits transparency. • The use of rolling amortization and long asset smoothing periods makes it difficult for employers to predict when contribution rates will peak and how high that peak will be.