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.
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