Tom McGreal | Stratford Court
Rookie’s First Budget Ride | Public Works Works | Securing Retirement
Del Mar’s Finance Committee provided an update and a series of recommendations to the City Council at the May 6th meeting on the important topic of City pensions. The committee’s report wraps up an extensive review over the past year of the City’s three Defined Benefit Pension pools. Del Mar’s pensions are managed by the California Public Employees’ Retirement System (CalPERS), the agency of California executive branch that manages pension and health benefits for more than 1.6 million California public employees. Today CalPERS is the nation’s largest state public pension fund with assets totaling $255 billion.
In recent years CalPERS has come under significant criticism for its investment policies and practices, which have resulted in unfunded pension liabilities totaling over $100 billion for State agencies, Counties, Cities and Districts across California. Although Del Mar is a small participant in the larger CalPERS program, the Del Mar City pools suffer from the same relative build up of unfunded liability as the overall program.
The latest CalPERS reports (for the fiscal year ended June 30, 2011) show that Del Mar has pension liabilities totaling $31.8 million with pension assets having a market value of $22.4 million, which means that the City has an unfunded liability of $9.4 million. CalPERS reports are calculated using a discount rate of 7.5%, which is the CalPERS “Expected Rate of Return.”
At the request of the City of Del Mar (and others), CalPERS also reported a hypothetical termination cost for the City of Del Mar which resulted in pension liabilities totaling $45.5 million. When reduced by the City’s pension assets of $22.4 million, the unfunded liability totals $23.1 million. Why is the hypothetical termination liability so much larger? CalPERS calculates the termination liability using a long term bond rate of 4.82%, which means that given prevailing market rates the unfunded liability for the City of Del Mar is $23.1 million.
Which numbers are really important? The Finance Committee is focused on the $23.1 million because it is represents our unfunded pension liability based upon market rates rather than CalPERS expected return rate.
How did CalPERS let this happen? CalPERS record of investment returns shows significant swings over the past ten years with big losses in fiscal 2008 and 2009. At the same time, CalPERS decided not to place a further financial burden on cities across California, who were already managing increasingly tight budgets. This means that CalPERS did not require sufficient payments each year to cover the shortfall in investment returns. The result is increasing unfunded liabilities.
What is CalPERS doing about it? Last month CalPERS Board of Directors decided to modify its actuarial methodology to reduce unfunded liability over the next 30 years. These new measures will result in a 50% increase in the normal contribution amounts paid by Del Mar over the next five years. These increases in annual costs will help reduce unfunded liability, provided CalPERS also meets its investment return targets each year. CalPERS own probability assessment suggests that they have a 50 / 50 chance of solving the problem with these actions.
How does the City of Del Mar balance its commitment to our valued employees and at the same time offer a pension program that is financially sustainable for the City of Del Mar? None of the answers are easy, but below are a few of the recommendations that the Finance Committee made to the City Council.
1) Build a Pension Reserve to cover the Unfunded Liability over the long term. These funds will be held on Del Mar’s balance sheet and will ensure that Del Mar can meet its pension obligations to all retired and existing employees.
2) Focus on developing a new pension plan for future employees that is fair, offers reasonable benefits to the employees and provides the City with greater cost certainty. Of course, this requires the agreement of employee groups and the City and a change from CalPERS.
3) Limit future increases to pension liability through staffing and work actions. These steps are difficult because they impact City operations, services and the work environment.
The Finance Committee is working with the City staff on these and several other staff recommendations that would reduce the City’s unfunded liabilities. For some financial perspective, as of June 30, 2012 Del Mar had Total Debt of $7.1 million, so unfunded pension liabilities (which are not required to be shown on City financial statements until fiscal year ended 2015) are a major liability for the City. General Government Fund Expenditures for the current Fiscal Year are budgeted at $12 million. This includes the annual payment to CalPERS of $1.2 million, which represents 27% of the total City payroll.
The pension situation should now be a focus for everyone. It is a significant component of the City budget. City employees, who also pay their share of the annual pension cost, don’t have access to Social Security as a fallback for retirement. Of course, ultimately staffing and budgets determine what level of services the City can provide to the residents.
It will take a village to get this fixed.
Tom McGreal is a member of the Del Mar Finance Committee and Pension Subcommittee.