CalPERS: A Patch Primer

California residents can expect the unfolding of a great drama over the coming months — a fiscal opera where the many actors throughout the state will recite monologues to protect their hides from the budgetary axe.

But wrapped in the debates over which departments will face the worst of the deficit cleansing in Gov. Jerry Brown's proposed is another beast yet to be addressed: How to remedy current and future public pension liabilities.

For those unfamiliar with the California Public Employee Retirement System (CalPERS), this article is meant to be a brief guide to the country's largest public employee pension system. We hope it will help readers better understand the issues involved when the pension reform discussion ramps up.

CalPERS was formed in 1932 to provide retirement benefits to state employees. Over the years, its mission and role grew to include expanding retirement benefits to employees of public agencies and schools. It eventually expanded to include health benefits for its members.

CalPERS also offers a number of alternative ways to invest money for those who apply, such as the CalPERS 457 deferred compensation plan. This allows members to defer a portion of their salary from income tax and place it in a special account where it accumulates tax-free until distributed.

As of June 30, there were about 1.6 million public employees, retirees, and families invested in CalPERS. Of that number, 514,000 are either retirees, beneficiaries or survivors who receive an average $2,220 in monthly retirement benefits.

On average, a public employee works for about 20 years before receiving benefits.

As of June 30, 2010, 30,119 employees joined the ranks of other retirees during the past fiscal year. That was a 23 percent increase from the previous year.

CalPERS paid out $13 billion in benefits last year through its main deferred benefit plan.

The system is funded in three primary ways: contributions by employees, contributions by employers, and interest generated from a number of investments.

Employees contribute the least in the equation with an average of 5 to 10 percent of their salaries. Employers—public agencies, cities, schools, and other qualifying entities—typically pay 12.5 percent, but that percentage depends on how yields on investments play out.

CalPERS is a big player on Wall Street. With a portfolio last estimated at about $226 billion, the retirement system ebbs and flows with the health of the stock market.

Most years, investments accrue a healthy amount of cash. However, after the CalPERS portfolio peaked at $260 billion in 2007, the recession began to wreak havoc, and the fund lost $100 billion over the next two years.

Although the fund has recovered this past fiscal year, there is still a problem with CalPERS overall. The fund's responsibilities in terms of payments to its beneficiaries are becoming greater than the amount of cash flowing into the fund.

It is estimated that only 70 percent of the fund's liabilities is currently available.

Gov. Brown hasn't yet offered any proposals on how to reform the pension system. Meanwhile, local governments continue to struggle over how to pay for increased costs to the system.

Much of the debate in days to come will be about how to reform the current pension system to close the estimated $700 billion in liabilities when factoring all pension obligations to the 1.6 million employees in the system today.