By Randall Dziubek, CalPERS Deputy Chief Actuary, Valuation Services
Special districts across California are integral to the state's public service ecosystem, providing essential services ranging from water management to public safety. As districts plan for the future, financial feasibility of their pension commitments with CalPERS is key.
As the nation’s largest public pension fund, with over 2 million members and assets exceeding $500 billion, CalPERS offers substantial support to special districts. Its extensive resources and expertise can help districts navigate financial planning, manage pension obligations, and optimize their retirement systems to ensure long-term sustainability and stability.
Understanding Your Agency’s Commitment
For special districts considering joining, CalPERS offers retirement security for your public employees, but it also requires careful consideration of long-term financial commitments. Baseline projections of future contributions, provided to new districts in the “New Agency” report, are a good starting point, but districts should review all potential financial scenarios. Specifically, understanding how investment returns could affect contribution rates is crucial for financial planning.
While CalPERS’ projected investment return is 6.8%, actual returns can vary, and this can have a significant impact on your required contributions. Districts can use the Pension Outlook tool to run “what-if” scenarios, exploring the effects of different investment returns on your financial obligations. By planning for both best-case and worst-case scenarios, districts can ensure they remain financially viable even in less favorable economic conditions.
Managing Unfunded Liabilities
Another key consideration for special districts is the management of their unfunded liabilities. CalPERS encourages districts to actively reduce these liabilities. Special districts can make Additional Discretionary Payments (ADPs) or accelerate their payment schedules.
While these strategies may require higher contributions in the short term, they often result in material long-term savings by reducing interest costs. Districts must weigh the benefits of these strategies against their current financial capacity to ensure they are making the best decision for their long-term fiscal health.
How to Reduce Contribution Volatility
Contribution volatility can be a significant challenge for special districts, especially smaller ones. To help with this challenge, districts may consider establishing a “Section 115” trust. This separate fund can be used to pay CalPERS-required contributions during years when the district’s budget is under pressure. CalPERS offers the California Employers’ Pension Prefunding Trust (CEPPT) that is specifically designed to help districts manage this volatility. By setting aside funds during better financial years, districts can maintain stability and predictability in their contribution schedules.
Risk Pooling and Its Impacts
As of June 30, 2023, there were roughly 900 special district plans in CalPERS. Over the last five years, more than a dozen new special districts joined CalPERS. Special district plans range in size from zero to just under 4,000 active members. Most special district plans within CalPERS are classified as “pooled” plans, meaning they are grouped with other small plans to share the risk of events that differ from actuarial assumptions. This pooling helps reduce the year-to-year volatility in required contributions, but it also means that the demographic experience of other plans in the pool can impact an individual district’s required contributions.
Looking Ahead: Future Projections and New Streamlined Valuations
The June 30, 2023, actuarial valuations have been released in myCalPERS, offering a five-year projection of required employer contributions. The required contributions determined in these reports will be due during the fiscal year beginning July 1, 2025, and will also be posted on CalPERS' website in September.
For many special districts, contributions are expected to increase slightly in the near term before gradually declining. These projections account for the continued phase-in of past investment losses, which will eventually taper off as unfunded liabilities are paid down. Districts must keep a close eye on these projections and adjust their financial planning accordingly, especially as the workforce transitions to a higher percentage of lower-cost Public Employees’ Pension Reform Act (PEPRA) members.
CalPERS is working on a new project that will streamline and combine actuarial valuation reports for our “pooled” plans. Currently, pooled member groups within districts receive separate reports for different member classifications.
For example, a special district agency with only non-safety members may be receiving three individual actuarial reports – separate reports for classic tier 1 members, classic tier 2 members, and PEPRA members. In the future, a single report will be provided for each group of members, making it easier for districts to understand and manage their financial commitments.
CalPERS will be working with districts and other stakeholders for feedback throughout this process to ensure a smooth transition. CalPERS believes this approach will provide for greater overall understanding of financial commitments to CalPERS and the ability to more effectively manage unfunded liabilities.
Strategic Financial Planning for Special Districts
Participating in CalPERS offers both opportunities and challenges for California’s special districts. The system provides a stable retirement plan for employees, but it requires districts to engage in strategic financial planning to manage contributions, unfunded liabilities, and potential risks. By fully understanding the financial implications and using the tools and strategies available, special districts can make informed decisions that ensure their financial sustainability while continuing to provide essential services to their communities.
If you’re interesting in contracting with CalPERS, you can view more information about the CalPERS contracting process on our website.