(Bloomberg) — The California Public Employees’ Retirement System on Wednesday approved cutting the benefits of a small group of retirees in the second such move in four months.
The reduction, effective in July, was triggered by the failure of a defunct public agency, the East San Gabriel Valley Human Services Consortium, to pay Calpers the entire cost of covering the pensions of its former employees.
Most of the roughly 200 workers of the job-training service — of which 62 are currently receiving pensions — would see their benefits reduced by 63%, the rate by which the agency fell short of its obligations, according to meeting documents.
"This is a terrible situation we all find ourselves in, but we have to protect the fund so we have to take this action," Calpers board member Bill Slaton said before voting.
The step is likely to be replicated as communities in California struggle to meet rising pension obligations, said Dane Hutchings, a lobbyist for the League of California Cities, before the board meeting.
"It’s incredibly unfortunate, but unless something can be done legislatively or by other means, retiree benefits are going to get cut significantly," he said.
Across the country, states and local governments have about $2 trillion less than what they need to cover retirement benefits -- the result of investment losses, inadequate contributions and perks granted in boom times.
Calpers says it’s following its fiduciary responsibility. It doesn’t set benefits but manages them on behalf of local governments, most of which are paying what they owe. Permitting monthly checks to flow to retirees whose former employers haven’t paid their bills undermines a system that has just two-thirds of what it needs to cover liabilities due in the years ahead.
Calpers had asked the cities that formed the agency known locally as LA Works — Azusa, Covina, Glendora, and West Covina — to pay the debt to the retirement plan, but they declined, pointing to the lack of a legal obligation. The consortium went out of business in 2014 after Los Angeles County severed its relationship, citing overbilling.
If the cities do end up taking over the entity’s debt within 60 days, the retirees would avoid the reduction, according to the Calpers’ action Wednesday.
That’s what retirees will ask representatives of those communities on the agency’s board, which is set to meet later Wednesday, said Sandra Meza, who stands to lose much of her $3,300 monthly pension. They will appeal to the cities to at least pay the current bill to give them more time to come up with a plan, she said.
"We only had two months notice," Meza said. "We need to regroup and consider which path to take."
Calpers in November approved reducing retiree benefits for former workers in the tiny city of Loyalton.