2019 PEPRA compensation limits

The 2019 PEPRA compensation limits are $124,180 for Social Security members and $149,016 for non-Social Security members.

These limits are the maximum pay that a California public agency can recognize in a defined benefit plan for PEPRA members, i.e. those first hired by a public employer in 2013 or later.  “Classic” members hired from 1996 through 2012 are subject to the higher §401(a)(17) pay limit that applies to private sector employees.

Each year, the California Actuarial Advisory Panel (CAAP) publishes an “unofficial” calculation of the PEPRA compensation limit.  The 2019 limits are published on the State Controller’s Office website at Agenda Item #2 –PEPRA Pension Compensation Limit Letter for 2019.

CalPERS usually publishes the limits early in the calendar year.  The 2018 PERS notice is at https://www.calpers.ca.gov/page/employers/policies-and-procedures/circular-letters.  Search for letter #200-001-18.

We’ve confirmed all the PEPRA calculations in the CalPERS and CAAP letters.  The table below shows a complete set of the PEPRA compensation limits through 2019.

PEPRA Compensation Limit
Year Social Security Members Non Social Security Members
2013 $113,700 $136,440
2014 115,064 138,077
2015 117,020 140,424
2016 117,020 140,424
2017 118,775 142,530
2018 121,388 145,666
2019 124,180 149,016

For PEPRA members in the CalSTRS Defined Benefit (DB), Defined Benefit Supplement (DBS) and Cash Balance (CB) Benefit programs, the 2018-19 pay limit is $146,230.  Each year’s adjustments are based on February CPI figures and the limits apply to fiscal years.  Since CalSTRS members aren’t included in Social Security, only the non-Social Security figures are shown in the table below.  CalSTRS publishes a similar table at https://www.calstrs.com/post/final-compensation.

Fiscal Year PEPRA Compensation Limit  for CalSTRS Members
2013-14 $136,440
2014-15 137,941
2015-16 137,941
2016-17 139,320
2017-18 143,082
2018-19 146,230


CERBT Audited vs. Reported Assets

For most California public agencies funding Other Post-Employment Benefits (OPEB) through CERBT, there is a small difference between the 6/30/2017 assets originally reported and the final audited assets (Fiduciary Net Position, or FNP).  Our clients have been asking what to do about it.

Even the State of California has the same issue.  We’ve discussed it with the State Controller’s Office, and they’ve chosen to go with the amount originally reported by CERBT for the State’s CAFR.

Many of our clients have chosen the State’s approach, because their OPEB actuarial valuations were completed before the audited assets were announced by CalPERS in a 3/27/2018 circular letter.

Most of the differences in audited vs. reported assets are quite small.  Your options include:

  1. using the CERBT assets originally reported, or
  2. waiting to finalize your OPEB actuarial valuation until audited CERBT assets are available.

If you ever want to change from option 1 to option 2 (or vice versa), you’ll need a one-time adjustment to your FNP reconciliation.  Either way, you’ll want to check with your auditor.

2018 PEPRA compensation limits

The 2018 PEPRA compensation limits are $121,388 for Social Security members and $145,666 for non-Social Security members.

These limits are the maximum pay that a California public agency can recognize in a defined benefit plan for PEPRA members, i.e. those first hired by a public employer in 2013 or later.  “Classic” members hired from 1996 through 2012 are subject to the higher §401(a)(17) pay limit that applies to private sector employees.

Each year, the California Actuarial Advisory Panel (CAAP) publishes an “unofficial” calculation of the PEPRA compensation limit.  The 2018 limits are published on the State Controller’s Office website at Agenda Item #4 – Draft CAAP 2018 PEPRA Limit Letter November 21, 2017.

CalPERS usually publishes the limits in late February or early March.  The 2017 PERS notice is at https://www.calpers.ca.gov/docs/circular-letters/2017/200-010-17.pdf.  Update 1/16/2018: the 2018 PERS notice is at https://www.calpers.ca.gov/page/employers/policies-and-procedures/circular-letters.  Search for letter #200-001-18.

We’ve confirmed all of the PEPRA calculations in the CalPERS and CAAP letters.  Here is a complete set of the PEPRA compensation limits through 2018:

PEPRA Compensation Limit
Year Social Security Members Non Social Security Members
2013 113,700        136,440
2014 115,064        138,077
2015 117,020        140,424
2016 117,020        140,424
2017 118,775        142,530
2018 121,388        145,666

OPEB Funding Policy Opportunities

New Governmental Accounting Standards Board (GASB) statements 74 and 75 are intended to make accounting for OPEB (Other Postemployment Benefits, usually retiree medical) more transparent by moving the entire unfunded liability to the face of the financial statements. This post discusses some of the OPEB funding policy opportunities that employers should consider as they prepare to implement GASB 74/75 over the next two years.

Opportunity #1: The potential for funded status improvement. Unlike pension plans which are generally pre-funded, most public sector OPEB liabilities are unfunded and benefits are pay-as-you-go. But employers should consider that ANY funding policy is better than nothing – and even a modest level of pre-funding will improve the plan’s funded status and balance sheet impact.

Opportunity #2: A funding policy can help lower the calculated liability. The ultimate cost of retiree medical benefits can never be known exactly until benefits are actually paid in the future. However, the best estimate of those costs in today’s dollars is impacted by how (and if) funds are invested. To the extent that investment returns can help fund future benefit costs, an OPEB trust with higher expected returns can help reduce your calculated OPEB liability.

Opportunity #3: Attention can drive action. OPEB liabilities are becoming front-page headlines – particularly because of their unfunded nature. Employers should harness this increased scrutiny to compel stakeholders (e.g., employers, employees, and taxpayers) to collaboratively review OPEB terms and create a strategy to prudently prefund these promises.

There will be pitfalls along the way. It may be difficult to secure additional funding sources when employers and employees are already trying to eliminate existing pension debt. Plus, OPEB costs are usually more volatile than pensions, so an OPEB funding policy will need to consider strategies to deal with this “moving target”.

There may also be situations where an employer does not want to prefund OPEB. Perhaps they fear that “committing” money towards OPEB will reduce their ability to reduce benefit levels in the future. However, this rationale just skirts the larger issue of knowingly promising benefit levels which are unaffordable.

GASB 74/75 is a catalyst for public employers to revisit their OPEB funding policies. There is a limited timeframe for stakeholders to develop a meaningful funding strategy before the entire unfunded liability goes “on the books”.

Top 5 Take-Aways from the GASB OPEB Accounting Exposure Draft

Last week the Governmental Accounting Standards Board (GASB) released its long-awaited exposure draft of proposed Other Post-Employment Benefits (OPEB) accounting changes. Although there may be modifications before the rules are finalized, public employers should be aware of the potential consequences. Here’s our list of the top 5 items from the exposure draft:

1. Most of the proposed GASB 67/68 pension changes are carrying over to OPEB – which is not surprising. These include:

– The Net OPEB Liability (NOL; essentially the entire unfunded liability) goes on the face of the financial statements. This will be a major change from the incremental Net OPEB Obligation currently used as the balance sheet liability.

– The discount rate will be based on a projection of whether the employer’s current assets plus projected contributions are expected to cover current plan members’ future benefit payments.

– Enhanced disclosures of historical contributions, funded status, and the basis for selecting actuarial assumptions.

– Accelerated recognition of liability changes in OPEB expense; no more 30 year open amortizations.

– Funding and accounting are officially separated; this means no more ARC.

2. Goodbye community-rating exception to the implicit subsidy liability. Now everyone with blended premiums must calculate an implicit subsidy liability.

3. All plans will now use the Entry Age Normal (level percent of pay) actuarial method to allocate liabilities between past and future service periods. Although OPEB benefits are not usually pay-related, this new requirement is intended to make liabilities more comparable than the 6 different methods currently allowed under GASB 45.

4. Disclosure of the Net OPEB Liability’s sensitivity to changes in medical trend (+/- 1%), discount rate (+/- 1%), and combinations thereof. This means a total of 9 different NOL measurements.

5. Calculation of an Actuarially Determined Contribution (ADC) and development of a funding policy. Although not technically required, employers will need these two important items if they are prefunding their OPEB and not simply using pay-as-you-go funding.

And, as an added bonus, the exposure draft requires actuarial valuations at least biennially and has eliminated the triennial option for employers with fewer than 200 members. Given the volatility of OPEB liabilities, this is probably a better policy.

What do all of these changes mean for public employers? We’re still sorting through all of the details, but the primary outcome is that more effort will be required to prepare OPEB actuarial valuations and the results will have a greater impact on employers’ financial statements.

Although these changes aren’t scheduled to be effective until the fiscal year beginning after December 15, 2016, public employers will want to start thinking about the potential financial impact and whether they will prompt updated OPEB funding and investment policies. Comments regarding the exposure draft are due no later than August 29, 2014.

Public Pension Plan Funding Policy – The Time is Here

“Every state and local government that offers defined-benefit pensions [should] formally adopt a funding policy…,” according to the Government Finance Officers Association (GFOA) best practice recommendations. Guidelines for Funding Defined Benefit Pensions (2013) (CORBA)

SOA and GASB Provide Guidance

Blue Ribbon Panel. Last month, a blue ribbon panel formed by the Society of Actuaries went one step further to endorse risk measures, disclosures and actuarial assumptions as well as guidelines regarding plan governance and benefit changes. These recommendations come at a time when public pensions have come under mounting criticism since the “great recession” and it’s imperative that public plan sponsors be able to demonstrate that their plans are sustainable in the long-term.

GASB 67/68. Furthermore, it’s critical that public sector plan sponsors follow a written funding policy now that GASB 67 and 68 explicitly separate pension funding and pension accounting,. These accounting standards are effective for plan years beginning after June 15, 2013 and June 15, 2014, respectively. For many plan sponsors this means the fiscal years ending June 30, 2014 (!) and June 30, 2015.

Funding Policy Checklist

The place to begin is to gather the facts, actuarially and politically. Here is a checklist of items to assist in providing a basis for developing an effective funding policy:

  1. Assemble a history of plan benefit levels and changes.
  2. Develop a history of contribution levels by members and sponsors.
  3. Compare benefit levels, locally and nationally, to determine appropriateness.
  4. Consider the political history of plan changes.
  5. Identify the politically “hot” topics.
  6. Review legal constraints on plan changes.
  7. Analyze collective bargaining agreements and recent changes.
  8. Calculate the plan’s current funded status.
  9. Determine sustainable funding goals.
  10.  Evaluate options for achieving goals.


We recently assisted a large Midwestern city in developing a comprehensive funding policy that linked future benefit changes to achieving a targeted funding level. In addition, the city Council adopted guidelines for amortization periods and for direct smoothing of actuarially-determined contributions. Indeed, funding policy, investment policy and pension benefit policy must be linked and reinforce one another.

The time is here for every plan sponsor to develop or review their pension plan funding policy to make sure that it is actuarially sound.

OPEB Investments – The Danger of Playing It Safe

CautionUnder GASB 43 and 45, public sector employers are required to account for retiree medical benefits under special rules for Other Post-Employment Benefits (OPEB).  Many have chosen to pre-fund these liabilities in a trust similar to a retirement plan trust.  At the recent Minnesota School Board Association convention, Van Iwaarden Associates teamed up with an investment advisor to emphasize how actuaries and investment advisors should work together to develop a prudent investment policy based on projected benefit payments.

Most policy makers at public sector employers are not investment experts nor are they experienced with pre-funding long term liabilities.  Too often, the decision is made to invest trust assets in “safe” investments just as they do with operating funds.  This is potentially a major mistake, especially now with short term interest rates near zero!

The best practice is to pre-fund retiree medical liabilities and to invest the trust assets in a way that is consistent with the projected cash flow.  Certainly, a substantial portion of the assets should be invested for the short term to meet short term cash flow.  However, the balance of the assets should be invested for the long term to meet projected cash flows twenty to thirty years away.

The recommended action plan for decision makers includes:

1.    Estimate the projected life of the OPEB Trust
2.    Review investment policy and its handling of OPEB
3.    Amend policy and investment strategy appropriately

A detailed actuarial report is the start of the process to manage OPEB liabilities and assets.  The actuarial report can and should be much more than just a perfunctory exercise to meet GASB accounting requirements.
The full presentation can be found through this link.

The Value of Tax Deferral

Happy couple

We often hear the question “why should I contribute to a qualified retirement plan if tax rates might go up”?  Good question; here’s why:  you’ll probably end up with more money after tax.  That’s true even if tax rates go up in the future.

How much more you’ll end up with depends on your investment return, the deferral period, and your marginal tax rates at three different times:

  • when you contribute the money,
  • while it’s invested, and
  • when you withdraw it.

The key is that in a taxable account, you lose some of the power of compound interest every time you’re taxed on your contributions and investment earnings.

Let’s start with a simple example, using a 33-1/3% marginal tax rate all the way through.  That’s a bit lower than the 35% top Federal rate, but it makes the math easy.  Suppose you have $3,000 to contribute, and investment earnings average 6%.

Tax deferred account / qualified plan

Contributing your $3,000 to a 401(k) or other qualified plan, you have the whole amount to invest and investment earnings are tax free – but you have to pay tax when you withdraw it.  Leaving it in for, say, 20 years you would have $6,414 after paying your tax:  $3,000 x (1.06 ^ 20) x (1-.3333).

Taxable account

Contributing to a taxable account, you have $2,000 to invest after tax ($3,000 x (1-.3333)) and investment earnings are taxable so your effective investment return is 4% (6% x (1-.3333)).  But then you’re done paying taxes.  After 20 years you would have $4,382:  $2,000 x (1.04 ^ 20).

What if’s:  rising tax rates, capital gains, return, deferral period, Roth

In this simple example, the qualified plan clearly beats the taxable account.  But what if tax rates are higher at withdrawal?  For the $4,382 in the taxable account to beat the qualified plan, the tax rate would have to suddenly jump to 54.5% at withdrawal:  $3,000 x (1.06 ^ 20) x (1-.545) = $4,378.   Any tax increase that happens more gradually would be worse for the taxable account, with no effect on the qualified plan.

What about capital gains?  If the current 15% long term capital gains rate is sustainable and all your investments qualify, your effective return is 5.1% (6% x (1-.15)).  You still start with $2,000 to invest after tax, so after 20 years you would have $5,408:  $2,000 x (1.051 ^ 20).  That’s not bad, but it’s still less than the $6,414 you would have had from a qualified plan.

What about different investment returns and deferral periods?  We’ve used 6% return for 20 years in this simple example, but how does it change for other returns and time periods?  The short answer is that higher investment returns and longer deferral periods favor the qualified plan.  Lower returns and shorter time favor the taxable account.

What about a Roth IRA or 401(k)?  As it turns out, Roth and regular 401(k) results are identical if your marginal tax rates are equal at contribution and withdrawal.  Roth is better if your marginal rate at withdrawal is higher than at contribution time; otherwise a regular 401(k) is better.  And they both blow the taxable account out of the water.

“Measure It Before You Promise It” for GASB 45 OPEB

Over the past several years, GASB 45 has required public employers to recognize the cost of Other Postemployment Benefits (OPEB: e.g., retiree health insurance, life insurance) while employees are accruing the benefits, not after they retire. For many public entities, the true cost of their healthcare promises has been an eye opener.

However, public employers (especially local entities) should remember that GASB-type calculations are valuable in the “off-season” too. This post discusses one of the biggest missed opportunities for cost-saving: Measuring the cost impact of changes to retiree OPEB before contracts are signed.

In the corporate world, it is almost unheard of for employers to adjust their retiree benefit promises without first measuring the cost impact. This is especially true of collectively-bargained pension and retiree health plans. Both sides hire an actuary to estimate the cost of these benefits and bring their numbers to the table.

However, many local public entities may not be used to this process yet. During the biennial GASB 45 valuation process, we still encounter contractual changes to retiree benefits that occurred after the prior actuarial study but were not reported to us in the interim. There are two main problems with this approach:

  1. It’s not prudent to make or change benefit promises without estimating the cost impact. Suppose an employer is renegotiating a contract and there is a proposal to change the retiree health benefit from “fully-paid single premiums until age 65” to “fully-paid family premiums for up to 5 years”. Is this a cost increase or decrease? There’s no way to know unless you measure the cost beforehand.
  1. GASB 45 requires a full actuarial valuation if there is a significant change in benefit promises.  As we discussed in a previous post, public employers shouldn’t wait until the next scheduled actuarial study (2 or 3 years, depending on plan size) to reflect significant plan changes in their financial statements.

As public employers get acquainted with valuing the actuarial cost of their OPEB benefits for GASB 45 financials, they should embrace the philosophy of “measure it before you promise it” for any changes to these benefits. Public sector OPEB are becoming front page news and administrators must proceed cautiously when adjusting benefits or making new promises.

Top Reasons to Change Your GASB 45 Valuation Schedule

GASB 45 requires a complete actuarial valuation of public retiree health plans to be completed every 2 to 3 years (depending on number of plan members), and sponsors usually don’t look forward to the administrative hassles of their next study. However, there are several situations where a new valuation could be advantageous and, likely, mandatory.

In addition to the standard 2 or 3-year cycle, GASB 45 rules also state that:

“A new valuation should be performed if, since the previous valuation, significant changes have occurred that affect the results of the valuation, including significant changes in benefit provisions, the size or composition of the population, … or other factors that impact long-term assumptions.”

Below are some factors which can compel a new valuation sooner than the standard 2 or 3- year cycle:

  • Establishing an OPEB trust.
    • If a revocable trust is established, then this won’t change the unfunded liability for accounting purposes, but it can affect the liability discount rate. See our previous post on the effect of OPEB trusts on GASB 45 discount rates.
    • If an irrevocable trust is established, the discount rate may be impacted and the assets will decrease the plan’s unfunded liability. This will likely reduce the GASB 45 annual accounting expense (Annual OPEB Cost).
  • Large change in retiree health benefits. This includes changes to plan coverage levels (e.g., deductibles and co-pays), premiums, or eligibility for benefits.

If employment contracts are amended to scale back (or increase) the amount of retiree health benefits paid by the employer, then this can have a big impact on plan liabilities as costs are shifted to retirees. See our previous post on the leveraging effect of OPEB liabilities.

Plan changes will affect the per-member costs and will likely affect future assumptions about retiree participation in the plan. A new valuation should be performed to capture this liability increase (or decrease) as soon as possible for the year of change.

  • Large change in number of employees or retirees. If there are significant employee layoffs/retirements or if many retirees drop coverage due to increasing costs, then a new valuation may be needed to accurately capture the effect on the plan’s GASB 45 liabilities.

There are likely many other scenarios which would require a new GASB 45 study. This is especially true in the case of a plan on the 3-year cycle where there is an increased likelihood of a significant change in the “off-cycle” periods.