Cal­i­for­nia’s Ris­ing Pen­sion Tide Push­ing Ser­vices Un­der­wa­ter

The Bond Buyer - - Front Page - By Kyle Glazier

PHOENIX – Ris­ing pen­sion costs mean Cal­i­for­nia cities are in­creas­ingly strug­gling to pro­vide ser­vices and be­gin­ning to talk un­com­fort­ably about in­sol­vency, ac­cord­ing to tes­ti­mony from city of­fi­cials and a new re­port.

Sev­eral city of­fi­cials spoke dur­ing pub­lic Cal­i­for­nia Pub­lic Em­ploy­ees’ Re­tire­ment Sys­tem board meet­ings in Septem­ber, of­fer­ing sup­port to re­quests from state Sen. John Moor­lach, an Or­ange County Repub­li­can, that CalPERS an­a­lyze the po­ten­tial ef­fect of sus­pend­ing au­to­matic cost of liv­ing ad­just­ments tem­po­rar­ily un­til the fund is sta­bi­lized, as well as the im­pact of mov­ing all re­tirees into ben­e­fit tiers for new hires es­tab­lished by 2013 pen­sion leg­is­la­tion.

The pub­lic of­fi­cials urged the board to work with them to re­duce pen­sion costs, and painted a dire pic­ture of city af­ter city strug­gling to keep the lights on and meet other ba­sic stan­dards due to their pen­sion con­tri­bu­tion obli­ga­tions.

“Corona is strug­gling with CalPERS rate in­creases,” said Kerry Eden, as­sis­tant city man­ager and ad­min­is­tra­tive ser­vices di­rec­tor for the River­side County city of 167,000. “Which is lead­ing us to make some very dif­fi­cult de­ci­sions.”

The rate in­creases have been am­pli­fied by CalPERS’ de­ci­sion to be­gin re­duc­ing its dis­count rate, which is the pen­sion fund’s as­sumed rate of re­turn on its in­vest­ments. The board voted in De­cem­ber to re­duce that rate from 7.5% to 7% over a three year pe­riod, a rate of re­duc­tion some aca­demics and pen­sion hawks still said was in­suf­fi­cient.

It’s a zero-sum game; the re­duced dis­count rate means that CalPERS must nec­es­sar­ily in­crease con­tri­bu­tions from a com­bi­na­tion of the state, em­ploy­ers, and plan par­tic­i­pants in or­der to avoid slip­ping even fur­ther from its cur­rent sta­tus of 68% fund­ing.

Corona has al­ready had to make bud­get re­duc­tions to parks and recre­ation, pub­lic safety, and other de­part­ments, Eden said, and is ac­tively ne­go­ti­at­ing with all its em­ployee groups in an ef­fort to off­set rate in­creases. Since 2003, Corona’s an­nual CalPERS con­tri­bu­tion has in­creased to $23.5 mil­lion from $5.5 mil­lion. The city now ex­pects the con­tri­bu­tion to rise by an­other $14 mil­lion or more over the next sev­eral years, she said.

“We are on a path to in­sol­vency,” Eden said, pro­ject­ing that Corona will ex­haust its re­serves by 2021.

Of­fi­cials from other cities gave sim­i­lar tes­ti­mony, in­clud­ing Lodi and West Sacra­mento.

The board never ended up vot­ing on Moor­lach’s pro­posal, which Moor­lach on his web­site blamed on the in­flu­ence of union in­ter­ests who tes­ti­fied against his re­quest.

Lawyers have ex­pressed doubt that the op­tions Moor­lach asked the board to an­a­lyze would be le­gal, as courts have held that the Cal­i­for­nia Con­sti­tu­tion gen­er­ally pro­hibits modifying re­tire­ment ben­e­fits for ex­ist­ing em­ploy­ees. Moor­lach wrote that he found the string of tes­ti­monies “amaz­ing.”

“To have city man­agers state that they are fac­ing Chap­ter 9 bank­ruptcy and even pro­vid­ing the pre­cise up­com­ing year they may be fil­ing is a mas­sive dis­clo­sure,” he wrote.

An Oct. 2 study by Joe Na­tion of the Stan­ford In­sti­tute for Eco­nomic Pol­icy Re­search also re­in­forced the dif­fi­cult choices lo­cal gov­ern­ments face.

The pa­per, “Pen­sion Math: Pub­lic Pen­sion Spend­ing and Ser­vice Crowd Out in Cal­i­for­nia, 2003-2030,” looks at a va­ri­ety of lo­cal case stud­ies and their pen­sion sit­u­a­tions un­der sce­nar­ios in which pen­sion re­turns match their tar­geted rates and in which they come up 2% short. The pa­per looked at the lo­cal pen­sions ad­min­is­tered by the lo­cal­i­ties, and also fac­tored in debt ser­vice on any pen­sion obli­ga­tions bonds they have out­stand­ing.

“Em­ployer con­tri­bu­tions are pro­jected to rise an ad­di­tional 76% on av­er­age from 2017-18 to 2029-30 in the base­line pro­jec­tion and 117%, i.e., more than dou­ble, in the al­ter­na­tive pro­jec­tion,” the pa­per said. “Em­ployer pen­sion con­tri­bu­tions from 2002-03 to 2017-18 have in­creased at a much faster rate than op­er­at­ing ex­pen­di­tures. As noted, pen­sion con­tri­bu­tions in­creased an av­er­age of 400%; op­er­at­ing ex­pen­di­tures grew 46%. As a re­sult, pen­sion con­tri­bu­tions now con­sume on av­er­age 11.4% of all op­er­at­ing ex­pen­di­tures, more than three times their 3.9% share in 200203.”

In case study af­ter case study, Na­tion’s cal­cu­la­tions showed costs ex­pected to rise sharply in the next decade.

In Los An­ge­les County, for ex­am­ple, 2017-18 pen­sion con­tri­bu­tions of $1.5 bil­lion reach $2.5 bil­lion in the base­line pro­jec­tion, and $3.3 bil­lion in the al­ter­na­tive pro­jec­tion where re­turns fall short of pen­sion fund tar­gets.

In Vallejo, which al­ready filed for bank­ruptcy in 2008, con­tri­bu­tions reach $24.7 mil­lion in 2017-18 , which is al­most five times the 2003-04 amount. By 2029-30, Na­tion’s pro­jec­tions show the city’s con­tri­bu­tions in­creas­ing to $52 mil­lion un­der the base­line pro­jec­tion and $60 mil­lion un­der the al­ter­na­tive pro­jec­tion.

“By 2029-30, pen­sion con­tri­bu­tions con­sume 23.7% of Vallejo’s op­er­at­ing ex­pen­di­tures un­der the base­line pro­jec­tion, and 27.3% un­der the al­ter­na­tive pro­jec­tion,” the pa­per said. That num­ber was just 3.1% in 2003-04, and re­sults in a likely “crowd out” of pub­lic ser­vices as the city strug­gles to stretch its re­sources.

Even un­der a sce­nario in which CalPERS ex­pec­ta­tions about fu­ture in­vest­ment re­turns are met, the ex­tra bud­get pres­sure from Vallejo’s pen­sion con­tri­bu­tions would re­quire 24% re­duc­tions in po­lice and fire ex­pen­di­tures or more than 8% in across-the­board bud­get cuts, the study said. If CalPERS in­vest­ments fall short, those num­bers rise to 33% and 12%, re­spec­tively.

CalPERS spokesper­son Amy Mor­gan told The Bond Buyer that CalPERS lead­er­ship is fo­cused on keep­ing CalPERS sus­tain­able long-term, and that lo­cal­i­ties are pri­mar­ily re­spon­si­ble for ben­e­fits.

“We are the ad­min­is­tra­tor,” she said. “The cities and the em­ploy­ers con­trol the ben­e­fits. The leg­is­la­ture sets the ben­e­fits.”

Na­tion’s study ac­counts for all pol­icy changes cur­rently an­nounced by CalPERS and other funds, in­clud­ing CalPERS’ phased-in dis­count rate re­duc­tion.

“There is con­tentious de­bate about what is driv­ing these cost in­creases—sig­nif­i­cant retroac­tive ben­e­fit in­creases, un­re­al­is­tic as­sump­tions about in­vest­ment earn­ings, op­er­a­tional prac­tices that mask or de­lay recog­ni­tion of true sys­tem costs, poor gov­er­nance, to name the most com­monly cited,” wrote Na­tion, a for­mer Demo­cratic state Assem­bly mem­ber. “But there is agree­ment on one fact: pub­lic pen­sion costs are mak­ing it harder to pro­vide ser­vices that have tra­di­tion­ally been con­sid­ered part of gov­ern­ment’s core mis­sion.” ◽

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