Lodi’s Schwabauer, other city managers tackle pension crisis

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.”