Lodi’s Sch­wabauer, other city man­agers tackle pen­sion cri­sis

Lodi News-Sentinel - - Front Page - By Danielle Vaughn NEWS-SEN­TINEL STAFF WRITER

Lodi City Man­ager Steve Sch­wabauer con­tin­ued ad­vo­cat­ing for Cal­i­for­nia cities fac­ing a pen­sion cri­sis as he gave tes­ti­mony dur­ing a CalPERS As­set Li­a­bil­ity Man­age­ment Workshop on Mon­day in Sacramento.

There are two is­sues the CalPERS board is con­sid­er­ing that raise con­cern, Sch­wabauer said. The first is whether or not CalPERS, an agency re­spon­si­ble for man­ag­ing pen­sion and health ben­e­fits for mil­lions of Cal­i­for­nia pub­lic em­ploy­ees, is go­ing to de­crease its dis­count rate, and the sec­ond is a pro­posal to change its pay­ment sched­ule for un­funded li­a­bil­i­ties.

The dis­count rate is the as­sumed in­ter­est rate that the board be­lieves it will earn on the city’s $225 mil­lion pen­sion in­vest­ment. Late last year, CalPERS voted to lower the dis­count rate from 7.5 per­cent to 7 per­cent over the next three years. The re­duc­tion of the dis­count rate was ex­pected to in­crease Lodi’s un­funded li­a­bil­ity from $105 mil­lion to $127.5 mil­lion at that time.

“They as­sume they’ll earn 7 per­cent,” Sch­wabauer said. “So if they’re go­ing to earn 7 per­cent, then they need to col­lect less money from us in pay­ments than if they were as­sum­ing they were go­ing to earn 6 per­cent, be­cause they’re go­ing to get 1 per­cent of $225 mil­lion from in­ter­est earn­ings.”

If the board re­duces the dis­count rate be­low 7 per­cent, they’ll have to col­lect funds else­where rather than from the city, he said.

“Every time they re­duce their dis­count rate, they in­crease the bill to the City of Lodi for pen­sions,” he said. The CalPERS board will make its de­ci­sion on the dis­count rate at their De­cem­ber board meet­ing.

Chang­ing the pay­ment sched­ule is also a con­cern, Sch­wabauer said.

When CalPERS in­creases a city’s bill — be­cause they’ve ei­ther lost money in the mar­ket, they’ve in­creased their mor­tal­ity as­sump­tions or the li­a­bil­ity ended up larger than an­tic­i­pated for any num­ber of rea­sons — they take the un­funded ac­tu­ar­ial li­a­bil­ity associated with that change in as­sump­tions and put it on a 20- or 30-year re­pay­ment sched­ule, Sch­wabauer said. The sched­ule de­pends on what kind of li­a­bil­ity it is, he said.

As a city starts pay­ing that bill, it has five years to slowly in­cre­men­tally in­crease the bill.

“If your ul­ti­mate bill for a prob­lem was go­ing to be $1,000 a month for the 20-year or 30-year amor­ti­za­tion pe­riod, in the first year you’ll pay $500 a month. In the sec­ond year you’ll pay $750 a month and in the third year you’d pay what­ever un­til you get to the fifth year and you’re pay­ing $1,000,” Sch­wabauer said.

That ei­ther stretches the amount of time it takes to re­cover the full amor­tized cost, or in­creases the amount of the bill over sev­eral years, he said, rather than start­ing with the full cost right away.

CalPERS staff is propos­ing that the board elim­i­nate the step-in ap­proach and that cities pay the amount of the bill im­me­di­ately in­stead of grad­u­ally step­ping in over the span of five years.

“The value from CalPERS’ per­spec­tive is that it de­creases the amount we are go­ing to owe at the height of the pay­ments for the 15-year pay­ment stream, and it gets them a higher fund­ing level sooner,” Sch­wabauer said. “That’s per­fectly log­i­cal. From a fi­nan­cial per­spec­tive that makes a lot of sense. The prob­lem is, of course, the city doesn’t have that much time to re­act to a very large po­ten­tial in­crease in the bill.”

At least 40 cities were rep­re­sented at Mon­day’s workshop, with many of­fi­cials shar­ing Sch­wabauer’s con­cerns that CalPERS needs to con­sider the fi­nan­cial health of the cities when it set rates.

“If you draw every penny out of a city, you’re not go­ing to have a city to col­lect from in fu­ture years,” Sch­wabauer said.

The sol­i­dar­ity be­tween the cities was en­cour­ag­ing, he added.

“A lot of cities have been very quiet about it, and fi­nally there are cities rec­og­niz­ing that if CalPERS drops the dis­count rate ... at that point there is just no catch­ing up,” he said.

“There is just no ques­tion that in my mind that CalPERS is bet­ter off get­ting the best deal they can with cities in­stead of push­ing cities into bank­ruptcy be­cause once the city goes into bank­ruptcy ben­e­fi­cia­ries suf­fer more than if CalPERS were will­ing to ne­go­ti­ate deals with cities to al­low them to con­tinue to pay into the sys­tem at a rate that they can sus­tain.”

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