Below Steven Greenhut explains how CalPERS is now projecting a much lower rate of investment return for the assets of local governments which have terminated their pension plans. That's because once a municipality exits the giant California pension fund, it can't go back to the town or city and demand that it make up shortfalls if CalPERS doesn't meet its aggressive investment goals. The new, lower discount rate CalPERS is assuming may make it prohibitively expensive for any municipality to opt out of CalPERS, which may be the real aim of the switch.
Even before the change, the cost of exiting CalPERS was high, as several communities have discovered. Officials in Pacific Grove, alarmed by a sharp rise in pension costs from $100,000 in 2001 to $2.2 million in 2005, began exploring ways to get out of CalPERS. In 2009, voters in the municipality passed an initiative approving shifting workers into a 401(k) style plan. But that was before they discovered that CalPERS would charge them $20 million to $25 million to end their traditional pension. That was because the state's pension benefits are so rich that even with the sharp rise in annual pension contributions over the years, the city's plan was underfunded as the stock market stagnated.
But with an annual budget of just $15 million, Pacific Grove had no way to raise the cash to exit CalPERS. Of course, city officials would have been happy to simply move their workers into a 401(k) plan offered by CalPERS, except the California pension system offers no such a plan.
With CalPERS now assuming that the assets of terminated plans will earn a much lower rate of return, the fee to exit the clutches of the giant pension system will skyrocket even higher, because the projected assets in these plans will plummet.
This is what Chriss Street means when he says you can check into CalPERS, but not out...
But with an annual budget of just $15 million, Pacific Grove had no way to raise the cash to exit CalPERS. Of course, city officials would have been happy to simply move their workers into a 401(k) plan offered by CalPERS, except the California pension system offers no such a plan.
With CalPERS now assuming that the assets of terminated plans will earn a much lower rate of return, the fee to exit the clutches of the giant pension system will skyrocket even higher, because the projected assets in these plans will plummet.
This is what Chriss Street means when he says you can check into CalPERS, but not out...
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