There is more than market in play in pension debt
The article about Arcata’s $29.6 million pension debt hole says Arcata’s minimum pension contribution will increase by $1.32 million in the next fiscal year. According to GovInvest consultant Ira Summer, the cause is the market. The cause is much more complicated than just the market.
In 2015, Humboldt County had $220 million in pension debt and the Dow Jones Industrial Average (DJIA), the market, was around 17,500. In early 2021, Humboldt County announced: 1) its pension debt had increased to $330 million, 2) pension debt payments will increase by $17 million per year for at least the next decade, and 3) over the last 11 years pension costs had increased from 18% of payroll costs to over 32% of payroll costs. At this time, early 2021, the DJIA was around 35,000. In just 6 years, we see a 100% increase in the market, yet Humboldt County’s pension debt grew by $110 million, making the pension debt hole 50% deeper with a dramatic increase in the percentage of payroll taken by pension costs.
In 2015, Eureka’s pension debt payment was $900,000.
Six years later, in 2021, with that 100% increase in the market, Eureka’s yearly pension debt payment had increased to $6 million. Eureka’s yearly pension debt payments will increase to $8.4 million in 2029 and continue until 2040.
So much more than market forces are creating this negative economic situation.
The fundamental economic foundation of the California pension system is not viable. With the pay-in based on an individual’s current salary, and the pay-out for so many based on an individual’s highest salary, set many years later, the plan is not economically sound. This is especially hard on smaller, lower-revenue governmental agencies, like those in Humboldt County.
If an individual starts locally and works one-third of their time here and then moves on and works twothirds of their time at another larger, higher revenue, higher compensation governmental agency, their retirement is set by the highest yearly salary paid by that other agency. The local governmental agency is still responsible for onethird of the retirement cost. This puts a large economic burden on local governmental agencies and puts them at a distinct economic disadvantage. Local agencies are further hurt economically by the fact that so many retirements have been spiked by individuals buying extra years of service and piling on overtime and unused sick time and unused vacation time to enhance their highest year salary to spike their retirement.
Funding pensions is absolute and guaranteed and funding services is optional and variable. With pension debt payments for Eureka lasting until 2040, for Arcata lasting another 20 years, and with Humboldt County fallen into the abyss, along with expenses increasing, we will all be dealing with governmental agencies trying to make do with less, for a long, long time. The DJIA has dropped to around 32,000. We are headed into a recession. Inflation is high. The cannabis industry is collapsing. Tax revenue is decreased. Salmon season has just been shut down for the year. We are faced with aging infrastructure. Damage from storms and earthquakes is costing significant amounts of money. YIKES!
Thanks for listening.