Lodi weighs in on CalPERS problems
Lodi city manager testifies before CalPERS board
Lodi City Manager Steve Schwabauer and several other city managers from around California testified before the CalPERS board on Tuesday, sending a joint message that cities across the state face dire financial consequences if spiraling pension obligations are not addressed. “The CalPERS board, one of things that they did in the morning was they terminated their contracts with a couple of special districts and when they terminated those contracts, they basically set in motion a series of events that will cut employee benefits significantly for those districts,” Schwabauer said. “I was trying to tie together a story that basically says if you force cities to make a decision about whether or not they are going to terminate their participation in CalPERS you run a risk of hurting your pensioners a lot more than if you start exploring ways to reduce the principal pension obligation.”
Schwabauer gave the example of Loyalton, a small city in Sierra County. The city terminated its CalPERS contract because it couldn’t afford it anymore. According to Schwabauer, CalPERS cut benefits to the city’s pensioners by more than 60 percent in order to have enough money to continue to pay out the remaining pensioners.
“I’m trying to get across to the CalPERS board and ultimately to the State of California and the state legislature that it has got to be better for pensioners to not have cities face that Rubicon,” Schwabauer said. “Do not force cities to look at their only option as either joining the terminated agency pool, which would significantly harm their retirees, or pursue significant cuts in their services.”
Schwabauer said the CalPERS board seems to focus on the belief that they have a fiduciary obligation to protect the full benefits of pensioners.
However, Schwabauer feels that if that outlook is not economically sustainable, then the agency has a responsibility to preserve as much of the benefits as it possibly can.
“The CalPERS board have never come to that realization,” Schwabauer said. “Basically a bird in the hand is worth more than two in the bush and the CalPERS board is betting on two in the bush.”
Despite the difference in opinion, Schwabauer said the board was very receptive to what he had to say.
“I think they understand the predicament that cities are in financially, but I don’t think they are prepared to think that they can or should try to do anything about it,” Schwabauer said.
Schwabauer said that he and the other city managers are in the beginning stage of getting their message across to CalPERS.
According to Schwabauer, it’s important to increase the number of cities paying attention to the issue as they search for solutions.
Schwabauer said that CalPERS is only 65 percent funded and he doesn’t know how the agency can invest its way out of financial trouble.
“I don’t see how we invest our way out of the fact that we’re (Lodi) paying $2 million a year more in pensions than what we are collecting,” he said.
Late last year, CalPERS voted to lower the discount rate — the assumed rate of return on investments — from 7.5 percent to 7 percent over the next three years, placing a larger financial burden on cities, counties and school districts and leaving local officials and leaders wondering how they are going to fund the escalating costs of pensions. The reduction of the discount rate was expected to increase Lodi’s unfunded liability from $105 million to $127.5 million at that time.
If CalPERS doesn’t do anything about the issue, Lodi may reduce service levels. Other than that, Schwabauer said it’s too far out for him to forecast what exactly will happen to Lodi if the pension situation doesn’t change. He said Lodi will be in a situation that unless the city makes significant changes in the way it does business, its expenses will far outstrip its revenues.
“I want to compliment the city council and the city’s employees because they have been diligent in trying to put aside resources to address the pension problem and that’s giving us some time to figure out what it is we’re going to do,” Schwabauer said.