My View: City Not Out of Woods Yet on Pension Risk

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Back in late October and early November, State Controller John Chiang dropped a bit of a bombshell when he added public pensions to the public fiscal database.

As Columnist Dan Walters noted in a November 1 column, “One chart reveals that their ‘unfunded liabilities’ – the gap between assets and liabilities for current and future pensions – exploded from $6.3 billion in 2003 to $198.2 billion in 2013.”

Most distressing is that this number “assumes that pension systems will see asset earnings of about 7.5 percent a year – a number that some are beginning to see as unattainable.” If 7.5 percent growth is too high, then that $198.2 billion figure is actually far higher.

Writes Mr. Walters, “The debt rose as pension funds’ earnings plummeted during the recession and new benefits kicked in, despite dramatic increases in mandatory contributions.”

Hit hardest are cities because of their relatively high percentage of general fund revenue that goes to payroll.

Two weeks later, on November 18, CalPERS (California Public Employees’ Retirement System) released their annual review of funding levels and risks.

They found, “Employers are exposed to a considerable amount of contribution rate volatility and a risk of further changes in funded status. Contribution rates are expected to remain high for an extended period unless there is a period of exceptional returns in the markets.”

“For many plans, the contribution rates have never been as high as they are now. Current contribution levels already exceed 30% of payroll for over 100 miscellaneous plans. Safety plans generally have higher contribution levels with over 150 plans having contribution levels of more than 40% of payroll,” they continue. “Employers are reporting that these contribution levels are putting significant strain on their budgets and limiting their ability to provide services to the people in their jurisdictions.”

The news gets worse. Currently, funding levels are between 65 and 85 percent as of June 30 which is significantly below the goal of 100 percent. The plans will remain fully funded over the next 30 years, but only if contribution levels remain high.

CalPERS warns that “there is a significant amount of risk being taken in the funding of the system. The probability that the system will face a period of severe stress is still at a level that may be unacceptable.”

In the fall of 2007, the CalPERS investment portfolio was valued at $260 billion. That number fell to as low as $160 billion by March 2009 before climbing back to nearly $300 billion presently.

Ed Mendel reported,“Even full funding is risky, Alan Milligan, the CalPERS chief actuary, told the board last week. CalPERS was 100 percent funded on June 30, 2007, he said, and two years later on June 30, 2009, CalPERS was only 60 percent funded.”

“Being 100 percent funded isn’t necessarily the target,” Mr. Milligan said. “Being 100 percent funded at an acceptable level of risk should be the target.”

Where does that leave Davis? In 2007-08 Davis paid out $4.4 million in pension costs, and by 2013-14 that number climbed to $7.4 million. They did that despite reducing the number of employees from a peak of 464 in 2007-08 to more than 100 fewer presently.

That represents a 21.8% decline in employees but a 68.2% increase in PERS costs over the same period of time. The full pension hit has not even taken effect. In February 2014, the board voted 7-4 to begin a three-year phase in of the rate hike on July 1.

This rate hike will cover the costs of retirees who are now living longer than original projections.  It is the third such rate hike in the last two years which included a lower earnings projection and a more conservative actuarial method.  Mr. Mendel reports that government rates could increase by as much as 50 percent by 2020.

“CalPERS estimates that the new mortality assumptions will cost local agencies an average of up to 9 percent of payroll for safety classifications and up to 5 percent of payroll for miscellaneous employees by year five of the phase in. Some city officials believe these estimates may be low because of the continued decline in the local government workforce in many cities, reducing the number of active employees contributing to CalPERS,” the League of California Cities warned.

2014-15 Projected PERS Contributions
Source: City of Davis, Budget Report 2014-15

The city’s five-year forecast suggests employer contribution rates will soar over the next four fiscal years. In the present year, the employer contribution for public safety was 28.81 percent, which will reach 39.40 percent – a 36.8 percent increase over a four-year time period.

For miscellaneous employees that number increases from 24.8 percent to 32.4 percent, a 30.6 percent increase.

The latest news perhaps means that those rate increases are just the tip of the iceberg. Although some members of the CalPERS board suggested that, while reducing the target rate of return was probably in order, they may be able to wait to a point in time when it is less painful to do so.

However, these numbers are something the city needs to bear in mind when discussing the next contracts with employees, as any increase to employee salary will end up costing the city both on the front and back end of employment.

—David M. Greenwald reporting

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About The Author

David Greenwald is the founder, editor, and executive director of the Davis Vanguard. He founded the Vanguard in 2006. David Greenwald moved to Davis in 1996 to attend Graduate School at UC Davis in Political Science. He lives in South Davis with his wife Cecilia Escamilla Greenwald and three children.

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7 thoughts on “My View: City Not Out of Woods Yet on Pension Risk”

  1. South of Davis

    Yesterday Rich pointed out that the reduction in training for firefighters puts the younger guys at risk but helps the higher ups (that don’t actually run in to burning buildings) with their political games.

    It is the same thing with pensions where the higher ups are pulling out HUGE (see below) money while the younger guys are going to have no chance at getting what was promised them (unless CA residents are OK with state income taxes HIGHER than federal taxes).

    “In 2013, as a reward for thirty years of humble public service, retired Los Angeles Fire Department Assistant Chief Tony Varela took home a pension payment of $983,319. Two fellow assistant chiefs took home over $850,000. Their takes, while the highest, were hardly unique. With benefits factored in, 96 retired workers in California took home at least $500,000 in pension payments last year.”

    http://dailycaller.com/2014/06/20/california-public-employees-making-bank-on-pensions/

    LA has quite a few “public servants” (many who “retired” at 50) doing very well:

    http://projects.latimes.com/big-pensions/los-angeles/

  2. Anon

    “Some city officials believe these estimates may be low because of the continued decline in the local government workforce in many cities, reducing the number of active employees contributing to CalPERS,” the League of California Cities warned.”

    And there is the rub.  Getting rid of employees actually may backfire, as it reduces the number of employees contributing to CalPERS; and if they remain unemployed, they don’t pay as much in the way of taxes either.  No real good solutions here, other than pension reform moving forward.

  3. Michael Harrington

    Without the Vanguard we the general population of Davis would know Zero about this critical issue of rocketing pension costs.

     

    The employees sure as heck are not going to agendize it.

     

    Apparently the CC is now more focused on employee morale than our tax dollars.

    And the Chamber of Commerce is using the unbalanced city budget as an excuse to attempt o blow open our borders to vast amounts of new sprawl under the guise of generating city revenue.   Where’s  the housing for those new jobs???   Covell Village, of course.

    Do we want to keep Davis a small, university and family focused town, or make it into Silicon Valley East?

    The fight is on.

    1. Alan Miller

      “Where’s  the housing for those new jobs???   Covell Village, of course.”

      Not such a tragedy, in my opinion.  I thought Covell Village was a very decent project, and it included some nice under-crossings for bicycles.  I’d much rather see CV go in then residential sprawl to the west of east.

  4. Tia Will

    Apparently the CC is now more focused on employee morale than our tax dollars.”

    I see no reason that the CC cannot be simultaneously focused on employee morale and our tax dollars.

  5. Anon

    Apparently the CC is now more focused on employee morale than our tax dollars.”

    Where is your evidence of this?

    And the Chamber of Commerce is using the unbalanced city budget as an excuse to attempt o blow open our borders to vast amounts of new sprawl under the guise of generating city revenue.

    The only solutions you have proposed thus far to balance the city’s budget/address the city’s fiscal woes is to cut services/employees.  So what specific services do you propose cutting and which particular employees?  If you have any other ideas for solving the city’s fiscal problems other than creating well planned innovation parks, I’m all ears.

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