Senate Standing Committee on Labor, Public Employment and Retirement

Good morning. As Chair of the Assembly Committee on Public Employment and Retirement. Good morning to the public and Members of both committees and welcome to the joint hearing of my Committee and the Senate Committee on Labor, Public Employment and Retirement.

This hearing is required by law to hear an independent report from the California Actuarial advisory panel regarding CalPERS. CalPERS is the largest pension system in the country, serving around 2 million Members, including myself, who depend on the system to ensure that the promise of a pension when they accept their job is there.

After years of service to the public, public employment employee retirement law is complex and very technical and CalPERS works very hard, even through difficult times, to ensure that the pension promise is fulfilled for current and future public employees when they retire. A pension is a financial safety net by providing stable income to public employees when they retire.

Because of this, public employees have dignity and a reasonable quality of life during their later years in retirement, which allows them to be able to continue to contribute to local and state economies when buying goods and services. A combination of employer and employee contributions to a pension promise and CalPERS investments are critical to to making this happen.

The investments are a big part of its continued success to provide pensions and they also help drive important economic economic support for both employers and workers. Today we're going to hear from Scott Terando who is a Member of the California Actuarial Advisory Panel and is also the Chief Actuary at CalPERS.

We will also have a period for questions from both committees as well as public comment period. Before we begin, I'd like to turn it over to my co Chair Senator Smallwood-Cuevas for some opening remarks.

Senator, thank you so much. Assemblymember McKennor Good morning everyone. And I also join you in welcoming Scott Terando here from CalPERS and all the participants in today's hearing. Mr. Terando, we look forward to the presentation and particularly want to pay extra attention to CAP's report on the annual CALPERS actuarial evaluation.

I want to make a few remarks before we begin because I think this is a time where we have to be very, very conscious of the state of California's economy and this report and any subsequent data is going to be critically important for the people of California to understand how important all of our work is ahead, but in particular how important your analysis is for the work that California will have to do.

Your assumptions and calculations help determine how much General Fund dollars the state must spend to CalPERS to Fund state employee pensions. They also determine the long term health of our retiree pensions. And I want to say as the Member of our Senate General Operations Budget Sub, where we are looking at the issues of homelessness.

One of the fastest growing populations in our state for homelessness are seniors. And so pensions are critically important to the welfare of our state. And of course, we know that when we get it wrong, we here in the Legislature have the very, very difficult work to make decisions, very hard decisions about the state budget.

And it is no surprise what we're facing here in California as we are dealing with national and federal implications around our budget and our financing. In particular, this year, we're 405 days into the Trump Administration. We have 1,053 more to go.

And so this conversation today is as much about our state budget and how we have to make sure that we are dealing with the structural deficits that California is facing. And we know there are several reasons that are complicating that.

We know that The Trump administration's HR1 is causing great harm to our most vulnerable communities by choking off federal funding for many programs, including an unprecedented hit to Medicaid, which has our state currently in a medical crisis. And we also know that we have now embarked on a war that is impacting the Middle East.

And we know how much our state relies on energy from that part of the the world and what that will do also to our economy and the volatility in our economy.

So, you know, besides, we understand and every day we have to deal with the human impacts of these actions at the federal level and the impact in particular on human life. The president's policies are causing energy shocks. We're seeing those in the prices that are skyrocketing at this moment.

And we know that higher inflation is on the way. We hear every day from businesses about the chilling effect it's having in their sectors and the lower sort of forecast that they have for growth and the overall eroding confidence in the US Economy.

So I don't think there's any investor that is happy about where we are right now. And certainly the market's instability that we are experiencing will have shock waves that we know we will hear certainly today in your report as we are really focusing now on the 2024 data.

But we have been talking to economists that are telling us that next fall and early as September, October and the early parts of next year are going to be real compression areas for our state.

And so I hope that we can address in the conversations today whether your assumptions account for some of this economic disruption that is being caused by some of the radical actions that are being taken in the pursuit of power, but certainly will have economic ripple effects that Californians are going to have to brace for.

We want to make sure that we have all of the information necessary. We cannot afford this destabilization and we certainly know our pension funds cannot afford it. So no pressure, Mr. Terando, as you come forward.

But we look forward to hearing this very important information because it will guide us in the Legislature on the steps ahead that must be taken. So looking forward to the conversation.

Thank you, Senator. Let's get started. Mr. Terando, you may begin and you may step up and get started.

Can you hear me? Yes. All right. Good morning.

Can you pull it up close to you, please? Thank you.

Is that better? There we go. Yeah, I can hear it. Good morning, Members. My name is Scott Terando. I'm chief actuary for CalPERS. I'm also a Member of the California Actuarial Advisory Panel. I'm joined today accompanied by Michael Cohen. Michael Cohen is the chief officer for investment operations.

And while this is a presentation for the CAP or the California Actuarial Advisory Panel meeting, he's joining me today in case some questions come up on the investment side.

So moving forward with the presentation, let's start with kind of like on page two of the presentation we give some historical background for the California Actuarial advisory panel, or CAP, as we call, was established back in 2008 and it consists of an eight panel Member. Eight Member panel. It's housed in the state controller's office.

And since its creation, the CAP has issued several guidance documents related to actuarial practices in California. These guidance documents can be found on the SCO website and there's a link attached on the handout that's been provided to you on page three.

Page three, you can kind of see how kind of the appointing entities for the cap, there's Members from CalPERS, CalSTRS, the Governor appoints two Members and then both from the Assembly and the Senate committees also appoint Members for the this panel on page four.

And basically the main reason that we're here today is to fill the requirements of government code Section 20229, which which was added in 2010. This section requires CalPERS to disclose pension liabilities and contribution rates for the state employees. And it requires those disclosures to be based on plus and minus 2% compared.

The calculations to be using a discount rate of and -2% compared to the current discount rate that CalPERS uses for reference. CalPERS current discount rate is 6.8%.

Moving on page 5, the additional disclosures required for Section 2299 requires that we present information on the the role of the investment return assumptions and the amortization period used in the calculations of the contributions and describe as well the impact to budgets based on the returns of the investment assumption.

So I think let's get to the meat of this presentation. Here on page on six we can talk about the role of the investment return assumption. So basically the, the long term investment return assumption is the assumed rate of return that CalPERS assumes is going to get on their assets.

We use that rate to discount future benefit payments. It's also used to estimate how much investment earnings the Fund will get and it also determines the amount of contributions that we are required on an annual basis in terms of the impact of the contribution rate.

You know, let's consider if the returns are lower than the 6.8, we would expect the investment returns would be smaller. More money would have to come from the contributions and the contribution rates would go up. When the return's higher, the exact opposite happens. Earnings are higher, contributions are lower, and the rates go down.

Basically, the investment return assumption plays a central role because it determines the present value of liabilities, it drives the required contribution rates, it allocates risk between current and future taxpayers and affects the funding stability and volatility of the pension plan. In terms of consequences for the budget.

When the investment return assumption is not realized, we get an increase in the unfunded liabilities. The contribution rates would increase, budget flexibility decreases, fiscal stress increases for both the employers and the Legislature in terms of budget process, and we end up shifting costs to future taxpayers.

Moving to page seven, talking about the role played by the amortization period. The amortization period you can think about is like a house mortgage. And what is the amateur? What is the period that we use to pay off the unfunded liability? You know, a 15 year mortgage, a 20 year mortgage.

Currently CalPERS uses a 20 year amortization for new unfunded liabilities. What I mean by that is each year our office or the Calpers office performs a actuarial and actuarial valuation. And part of that process we calculate gains and losses.

And what we do is we compare the actual liabilities to the expected and that difference gets amortized over 20 years. And we create a new layer every year. Every year as we do these valuations in terms of impact, shorter amortization periods, increased contributions in the short term, but it lowers overall interest cost.

You know, you think about the mortgage 15 year versus a 30 year. The 15 year mortgage, your payments are higher. But when you compare that to the interest you paid over the lifetime of a mortgage, you end up paying half the interest charges.

So you have kind of a competing interest of higher payments in the short term is longer term savings. Same thing kind of works out here with the pension plan.

And so we try and strike a balance of trying to keep contributions at a reasonable level, but keep trying to keep long term costs down and maintain continual increases in terms of funded status for the pension plan.

In terms of the current amortization period, right now CalPERS is using a 20 year amortization period that exceeds the average service remaining period for the for employees. If you look at most of the state plans, the average service, the average expected lifetime and working period for employees is around 11 to 12 years.

And currently CalPERS is using a 20 year amortization period. Now that the California Actuarial Advisory Panel issued a paper and recommendation that a reasonable amortization period is between 15 to 20 years and Calpers is using 20 years.

Using shorter term amortization periods for open and large plans like CalPERS is a little bit inconsistent because it just increases short term cost and it creates a lot of volatility in terms of contributions that employers pay, where a lot of the volatility is transferred down from the investment side in terms of the return that the yearly returns that CalPERS gets and depending on that volatility that transfers into the volatility of the contributions.

And so what we try to do is we try to smooth that out over about 20 years. So you don't have large spikes or decreases in contributions, but we keep a steady price process. In terms of funding, the plan for 100% funded. In terms of meeting the government code section requirements.

All of the information is published in the report that CalPERS puts out annually. We go through all the five plans. The state Miscellaneous Plan is the largest plan, but there's Peace Officers, chp, State Safety and State Industrial. And all this information is provided in the report.

I know there was a comment made earlier about this, a 2024 information. So let me give you kind of like an explanation on the timing of that. So what our office does is we will take assets and census data as of as of the end of the fiscal year.

So say, let's say we were looking at say 63025 not this report 24, but let's move it up to 25. The assets are reviewed and audited and that goes to the board in November and it's approved in November. So the Assets get finalized in November.

From that point, our office will look at the millions of records, do data reconciliation and prepare the data and then do our analysis.

And then what happens is then we bring that analysis and present it to the board in April in time so the board can approve rates for the budget hearings in May, and then that moves forward.

So we're right now in the process of working with the 25 data that will go to the CalPERS board in 20 or in April, and then that information gets processed and supplied to the, the budget hearings in May.

So, so we are using, while it may seem that's old information, it's, it's actually probably the most current information that we have in terms of, you know, the assets. The last are, are of the last end of the fiscal year and we, we line it up with the participant information and then that, that's provided.

So every year it's a rolling year for the, for the budget process. And then that pretty much concludes my prepared remarks, but we'll open up for questions at this point.

Okay, thank you. Thank you for coming and updating us on this. We'll turn to the Committee first and if they haven't, if there's any question. Well, if there's any questions from commitment. Yes, yes, Senator, Cortese.

Thank you, Madam Chair. Well, first of all, thank you for walking everyone through that. I'm sorry I came in a few minutes late and missed some of that, but that's hard to do and it's, I, it's appreciated for me.

I don't know if anybody else has that feeling, but, you know, when somebody's not just reading from an agenda item that we already have, actually trying to explain it to us in ordinary terms. So thank you very much for that. Just one question you were talking about.

I may have the term wrong, but the remaining service years, I guess, I guess on average, of course, but for employees, as active employees, I assume. And then in that comparing that to the amortization period and you, I think you indicate the standard would be 15 to 20 years that somebody is set forth. Calpers is at 20.

I'm just trying to understand the concept a little bit more. I, I assume that 11 to 12 years is essentially constantly being replenished, so to speak, because of, of new hires coming on and making contributions. So if not, maybe you could just explain to me. Sure. Or maybe I'm, I'm, I'm hearing it all wrong.

No. So that that term is the average expected working lifetime. So say we take, we look at all our active Members we look at, and then we calculate their expected working lifetime over using our assumed assumptions in terms of, of withdrawal, termination, dying. And then that gives us how long we expect.

We, you know, we, we sum everything up over every person divided by the number of people and that gives us an expected working lifetime.

And that period or amount was, it's required in, in this, in Section 20229 in terms of what we're supposed to report on what that number is and compare that to what our amortization period is. Now.

When you think about it, you know, people, people are going to live or work for a certain amount of time and then they're going to live after retirement. So the average amortization period CalPERS is using is 20 years. It's pretty, I would say pretty standard amortization period.

You go back 2030 years and everyone was using a 30 or 40 year amortization period. And that was quite long. It was concerned about liabilities never getting paid off, extending beyond the average age of working lifetime and retired life. And so the industry as a whole is kind of brought the amortization period down for everyone.

Most plans as a little bit more precautionary amortization period. This is just another measure. This is how long are people working for? Some people would argue you should fund the pension plan under this short of a period. As I mentioned, that's a very short period.

It's going to just introduce volatility to the plan and it's not going to really get you funded too much faster than our current amortization period of 20 years.

The risk is to, you know, you just kind of laid it out there that the employees are there and then they retire. And you know, most, presumably whatever the actuarial says, you know, they live a certain period of time. The, there's, I get it that there's some risk if you keep extending.

And I, I know I'm not an advocate for, yeah, more than more than 15 to 20 years, but it, it seems to me the backstop is 20

is the longest period. And then what happens is like say there's an investment gain this year, we would amortize that gain over, you know, like I said, the mortgage, it's, it's 20 years and then the amortization period drops. 19, 18 it worked its way down.

And for large plans like CalPERS and CalSTRS and ongoing plans, 15 to 20 year amortization periods, reasonable giving. You have a working lifetime and then you have a retired life portion where people are easily living 10-20 years there are some plans that on the public agency side that CalPERS actually uses a shorter amortization period.

Just say for example, a new plan joined CalPERS or something like that, and they had an unfunded liability and the average age was 55. You know, most people are going to retire within the next five to 10 years.

We would amortize that, that initial unfunded over like 5 to 10 years to correspond to that, that working lifetime in that case. But as, as a plan becomes more mature, we want to be a little bit more accommodating in terms of where the plan is and the long term expectation of the plan ongoing.

Obviously what happens is the 20 years is on an ongoing basis, if changes were to happen or plan were to close or terminate, then we obviously make some adjustments on those amortization.

Yeah, you mentioned if there's a big gain, you can adjust the amortization down. If there's a big loss, it's the same way.

So the same way we amortize gains and losses over 20 years. On the investment side, Calpers uses a five year phase in. So, so it's like you think 1 fifth, 2 fifths, 3 fifths, getting all the way there to the, the payment.

So then this way it smooths in the investment gain or loss because most of the volatility and contributions comes from the gain or loss, the yearly gain or loss that CalPERS has on the investment side. And so we apply a bit more of a five year smoothing on the investment gain loss portion to account for that volatility.

So if you have a large gain, one year rates would come down, that's phased in. And if you have a loss, you think about gains and losses offset one another. And to the extent that these bases kind of stack on one another, they kind of offset one another.

And you don't to the point that we don't hopefully have large gains or loss basis that contribute to the unfunded liability.

Thank you. I understand it. Appreciate the response. Sure.

Thank you. Thank you. Senator, are there any more?

I just have a question and this just goes back to the comment about the 2024 data versus the 2025 data. I want to make sure I'm under. I'm understanding that the valuation report that we have now is based on 2024.

Correct. Okay. And the report that's being used to determine what our pension that determines the

Correct.

contribution rates for the 2526 year.

Okay, so and then.

So that means in the 202627 contributions will be based on data from June of 2025?

Yes.

That is correct.

Okay.

And then we are in the process of working on those rates right now.

Okay.

And that material goes to the Calpers board in April and then that establishes the contribution rates and the liabilities. With board approval, we forward that information over to Legislature so they have the information and then we start creating the report. It's like the report gets created after the approval of the rates to the board.

So is there a way that we could use more current data?

And the reason I asked that is just, you know, we are all watching what's happening on AI and technology and there's, we're all looking precariously at what the shifts and changes would, could happen and we know the stock market could dramatically drop, especially as we're looking at global war and so many other implications.

So is there a way to use more current data in this, in, in these kinds of circumstances?

Not really. But let me kind of address the two different pieces. Let me start with the participant data or the, the Member data. Generally that information doesn't dramatically change from a year to year basis.

Overall there are, excluding Covid, when a lot of people retired early, the experience is fairly stable in terms of the amount of retirements that happen, the amount of deaths that happen, disabilities and so forth from a year to year basis. And so we don't see much movement on a year to year basis.

So pulling the data a couple months later really wouldn't make a substantial difference in terms of contribution rates. Now in terms of the assets, we try to take a long term view on the assets. There is a lot of volatility obviously going on now with the assets.

And Michael can talk to you, but I mean if you're looking at the funded status, it can be going up or down 1% a day just because of the large swings going on in the market.

So, so you know, we do take a, a point in time, the end of the assets of fiscal years as of the end of June and that kind of sets the contribution rates.

But it's a self correcting thing where, where, you know, we look at the data, we look at the assets, we look at where we expect it to be and then we calculate, you know, gains and loss, what we call, what we call gains and losses.

If we expected 10,000 people to retire and there was 9,800 people that retired, you know, that's, that, you know, that's a gain to the system, less people retired. If more people happen to die versus or less people died, you know, that's a particular gain? How did that work out?

And we calculate all that and then we factor in those variances into the contribution rates that the state pays. And so every year, to the extent that the actual experience differs from our expectations, we factor those into the contributions that the state is required to make.

Now, in terms of like long term changes, we're keeping our eye on that and we would make adjustments as things change.

Right now we haven't seen the disruption with AI in terms of salaries or Members right now, but clearly that's something we'll be watching in terms of are we seeing decreases in participants and Member counts and so on. And to the extent that it starts to impact that, we will make some adjustments in our assumptions.

But right now, you know, it's kind of early to make, I think any, You know, I don't say guesses, but, you know, guesses on what might or might not happen in terms of overall impact.

Well, we know we see a lot of the projections by economists of what sectors will be directly impacted by AI, what the decrease in terms of manpower and job losses will look like.

So I'm glad that you're looking at those trends, but I would love to get more information in terms of the ways that that long term lens is, is being applied, especially as we are integrating particularly in our public sector, more and more and more of those kinds of tools in the workplace that unfortunately, as you look more broadly in sectors, does reduce the number of workers.

Yes, yeah. In terms of keeping the pension plan funded and on course to provide benefits for everyone and all the retirees, we'll be able to manage that in terms of requirements and contributions.

I think the impact on other areas in terms of people's lives and how AI impacts it is a little bit different than say the pension plan. The pension plan, in terms of the trust, we'll be able to make sure that that provides the adequate pension and payments to all the Members.

More to come.

Yes, more to come. I would say AI is new and it's all new for all of us in terms of whether it's going to impact all of us and how it's going to impact us. And I think it was kind of like right now, see how this evolves over the next year or two.

I think it's the long term, but it's also the short term data. And I think you answered my question in terms of, you know, how you manage the volatility from, from one year to another. So thank you for that. Sure.

Assembly Member, any questions? Comments? That's, that's okay, so I have a few questions. Are people, when we Talked about the 20 years, are people, do you find with the economy and the high cost of living, are people working longer?

And so I remember when I came in to work for government, we worked for 30 years, but I came in really young by the way, because I'm retired already. So I came in when I was 10 and so no, and so 30 years.

So now when you looking at a 20 year amortization, are people working shorter for government?

It's a bit of a mix, I was going to say, because what we've noticed is since Pepra came in 10 years, 11 years ago 20, 10 years ago, we've noticed that the average entry age for state workers is older or what? Older. So people are joining the state workforce later in life. Yeah.

So if they work the same amount of years, 20 years, 30 years, they're going to be retiring later. I, I think that that's part of it is, is there's just a later entry into the state workforce at a later age.

But I, I Pepper also had a shift in the retirement age of a few years, you know, to get the full formula, it's no longer 55, you know, you know, people don't have the two at 55, those to a 55 retired at 55 or as soon as they can.

I see more people retiring in their early 60s coordinated with Social Security and you just see a gradual shift and it's a combination of they're starting their career at the state a little bit later in life and then just hanging on a little bit later as well.

And when we talked about amortization, these are just questions that I'm thinking about and I'm being a little selfish here. And you talked about, you guys go and you review it every year so that you can, you can put together your forecast. Now does that affect how much the retirees receive as well?

No, no, it stays the same.

No, the retirees receive, their payments are set when they retire and it's based on their benefit formula, their final average compensation, how many years they worked and then inflation. The CPI plays a part because most retirees get 2% COLA.

But then there's also called a, what we call the triple pa, the purchase price protection, which limits how far inflation can erode the person's pension amount. So, so you know, for public agencies it's 80% and for state it's 75%. So what that means is, you know, once your pensions eroded by 25%, it will stay with inflation.

Thank you the funding, what was the funding status 10 years ago compared to what it is today?

I'd have to look up what it was 10 years ago if you needed that. But I would say about 10 years ago we were in the 60s, around 6566 maybe 67% and. Most recently was around 79% as of 630.

And then as of the end of the year we were up over 80%, pushing 85% because returns were a lot better over the last. Returns have been elevated over the last several years and CalPERS has made, I think, a lot of great strides in increasing its funded status over the last several years.

And I think that 80% being in the 80s is a lot more comfortable position, both from security sustainability, but also in terms of it's decreasing the unfunded liabilities, it's bringing down pressure on the contributions and it's relieving some of the financial pressure for employers as well.

Well, that's good to hear. Yeah. Good to hear. Mr. Cohen, last question for me. I know that the Administration of the Administration is asking for an audit of our CalPERS. Has that happened and how is that going?

Sure. So again, Michael Cohen, chief operating investment officer for the CalPERS investment office. So the federal Administration has sent requests for data which we're happy to comply with. We're independently audited every year, as is every other state agency.

So that's part of when Scott talked about having the, the latest data, you obviously want your contribution rates to rely on audited information. And so that takes place in the fall of every year. So those audits are available on our website for anyone to, to review at any anytime.

And so at this point, we've completely complied with information requests from Congress and we'll continue to do so, but we don't certainly, if you look back over a 20 year history, there's going to be some investments that have worked out fantastic, other investments that don't work out nearly as well.

That's to be expected in a $600 billion fund of made up of hundreds and thousands of individual investments. So at this point we're happy to continue to provide information as requested, but there has not been a formal federal review released at this point.

Thank you for clearing that up. So you didn't have to do a special audit for them. You just had to turn over documents from your crown. Thank you. Thank you for that. Senator. Any more questions? Not at this point. Okay. Would you like to close any closing remarks?

Well, I think at this point, I mean, I feel like there are so many There are a lot of questions to have, but I think at this point, you know, I think our concern is obviously the volatility in our market and the need for us to have a solvent and strong pension plan.

I look forward to seeing the updated data in terms of what will be presented. I do think that we have to be looking at the state's potential risk exposure and ways that we can prepare and safeguard ourselves against that.

I'm also appreciative of the update on the federal inquiry and hope that we have a way of being informed. I think we sort of learned about it, but it wasn't immediate, at least on our end.

So if there are ways that we can be informed of any correspondence that is coming to CalPERS so that we can put it in the stack of so many other inquiries and lawsuits and, you know, other expenditures that we are having to implement in defense of our, of our state and our folks.

But I want to thank you for this annual update. I want to thank you for continuing to do the great stewardship of our, of our pension fund and looking forward to updates in our office. Communicating with you, particularly in writing as we see what those early reports tell us. Thank you.

And we're happy to keep you posted as, as we learn anything new. Yeah.

Thank you, Senator. Okay, so now we'll go into public comment. Public comment will last about five minutes. Each person has one minute at the mic. Thank you.

Good morning. Chairs, Members of the Committee, Eric lawyers speaking on behalf of the California State Association of Counties. We represent all 58 counties who collectively employ over 400,000 public employees statewide. Just want to start by acknowledging and thanking the work of the staff and leadership of all public pension systems.

Thanks to them, our systems are in a much healthier place now. And I did quick research and the CalPERS funded status 10 years ago was at 69%. Climbing out of that to 84% is monumental.

Also want to acknowledge the important role of this body both in passing the comprehensive reform through PEPRA over 10 years ago and resisting efforts to interfere with the prudent investment management of our systems.

I think with that, with staying the course, we can get to an even healthier status and protect the hard earned retirement benefits of all of our public employees. Thank you.

Thank you. Thank you so much. Is there any further public comment? I'd like to thank Mr. Terando for, and Mr. Cohen for coming here and giving us this information. Before we close, I would like to emphasize something fundamental for millions of Californians. California Public employee retirement system CalPERS is not just a pension Fund. It's a retirement.

It's security for teachers, firefighters, nurses and public servants they all depend on. After decades of service to the state. These are people who spent their careers keeping our communities safe, educating our children and running the system that make California work. When they retire, they should have the certainty and the promise that been made to them.

This is why our fiduciary responsibility is so important. Our duty is clear to act in the best financial interest of beneficiaries and retirees. Not politics, not ideology, but prudence, stability and long term stewardship. If we do our job well, retirees can live with dignity and security.

If we fail, the consequences are real for millions of families across California. So as we move forward, let us remain committed to protecting CalPERS, honoring our fiduciary duty and ensuring that retirement security of California's public workers always come first. So thank you and this meeting is adjourned.