How to Correctly Value the Community Property Interest In a Public Retirement Plan

Often clients wish to consider offsetting the community property interest in a Santa Barbara County Employees Retirement System (“SBCERS”), CalPERS or CalSTRS pension against another marital asset such as the equity in a home or former spouse’s 401(k) plan. While this approach may not always be appropriate due to the access of liquidity or economic/actuarial assumptions, should the parties wish to proceed in valuing a public retirement plan for purposes of offset or buyout, it is extremely important you obtain an actuarial present value calculation from a qualified expert.
California Public Retirement Plans are considered contributory defined benefit plans, meaning members are required to pay a portion of their income each year into the retirement system. However, this represents only a small portion of the total amount required to fund a member’s future pension obligation. On average for every $1 spent on public pensions, funding comes from the following three sources: member contributions (approx. 13%) + employer contributions (approx. 29%) + investment earnings (approx. 58%) which makes up the total value of the pension as illustrated below.

The majority of a member’s pension is funded by their employer and future investment earnings, and not by the member directly. This fact is typically noted on the Member Statement issued annually by the retirement system. The amount a CalPERS member is required to pay into the retirement system (which can be as high as 15% of their pay) depends on the employer’s bargaining agreement with CalPERS. The amount a SBCERS member is required to pay into the retirement system is based on their age at entry and membership class. As these two illustrations show, member contributions clearly only cover a small portion of the overall funding requirements. Example: Assume a SBCERS Safety 3% at 50 (Plan 6A) member is retiring with 20 years of service, final average salary of $8,000 per month and $300,000 in their member contribution account. The member will receive a lifetime benefit of $4,800 per month (20 x $8,000 x .03 = $4,800), plus cost-of-livingadjustments. The actuarial present value of this income stream is approximately $1.5 million, not the $300,000 in contributions and interest from the member. It would take only 5.2 years of receiving $4,800 per month to fully deplete the $300k member contribution.

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