Submitted Anonymously through YoloLeaks
Recently several articles have been published in the Vanguard discussing the increasing costs of labor for the City of Davis and the lack of “appetite” City Council members, City employees and labor unions have to fix this problem. Here is some information that should help clarify the current situation and the City’s options.
What does the City of Davis pay for retirement benefits?
With general fund revenue of about $60 million every year the City of Davis spends about 70% of that revenue on employee compensation or about $41.7 million. Of the $41.7 million in employee compensation about $15.4 million is spent on pensions and retiree healthcare. The City also has an unfunded liability (it owes) another $90 million for pension and health benefits that they have already promised to people in previous years and have not yet paid.
How are annual retirement benefit payments and unfunded liabilities calculated?
Each member of CalPERS has its own account with money that the member (the City) has contributed to their pension plan. Every year CalPERS makes certain assumptions like what they think their return on their investments will be and how long retirees will live in order to calculate the percentage of payroll each member will need to pay into the retirement plan.
What happens if CalPERS changes any of its assumptions?
Recently CalPERS made a few adjustments to their assumptions that will have an effect on what the City of Davis is going to have to pay annually for retirement benefits and increase the City’s unfunded liability. Currently CalPERS estimates that they will earn an average of 7.5% return on their investment. However, over the last 15 years the rate of return on investments was less than 6% and CalPERS has estimated that investment returns will remain at 6% for the foreseeable future. So in 2016 CalPERS made the decision to slowly lower their expected investment return to 7%. This will increase the City’s unfunded liability to around $122 million and increase the annual retirement payments to around $21 million.
What would happen if CalPERS dropped the rate of return down to the amount they expect to earn on their investments?
If CalPERS used an investment return of 6% then the City’s annual retirement payments would increase to about $31 million per year and the unfunded liability would increase to $222 million.
What happens if the employee unions don’t agree to lower compensation and the City is unable to make the higher retirement payments because they need the funds to fix decaying infrastructure?
In 2013 Loyalton, California, made the decision to default on its contribution to the state pension system. After several collection attempts by CalPERS to get the City to make their required annual payments CalPERS found Loyalton in default. CalPERS then recalculated all pensions assuming a 3.25% rate of return and cut all Loyalton retirees pension payments by 60%.
Wouldn’t current and former employees sue if the City stopped funding retirement benefits that they are obligated to pay?
They could sue the City, however the City could then file for bankruptcy and have their obligation to pay discharged. This would save the City about $21 million per year. That money could then be spent on roads, parks and other City buildings.
“The state of the city is very strong right now” Dan Wolk 2014 State of the City Address
If I were a current City employee or a retired employee currently receiving a pension and medical benefits I would want to sit down and negotiate some sort of compensation package that the City can afford to fund rather than wait until the City is unable to make CalPERS payment and cut all pensions by 60% and stops paying for retiree’s medical insurance. The longer they wait the larger the unfunded liability grows as the City continues to contribute less than the true annual pension cost to CalPERS.