One city’s struggle with mounting CalPERS costs

November 27, 2017

Monrovia’s city manager, Oliver Chi, told the city council the budget could absorb the CalPERS employer pension rate increases enacted in 2012, 2013, and 2014 — but a large fourth rate increase last December could push the city into insolvency.

After six months of study and negotiation, the city of more than 36,000 located in the foothills of the San Gabriel Mountains east of Pasadena developed an unusual five-point “CalPERS Response Plan that does not cut staff or services.

Instead, the plan cuts the pay of all employees, pays off current pension debt with a large bond, increases the hotel-bed tax, adds a special parcel tax on new real estate development, and speeds up payment of new pension debt.

There was no sigh of relief earlier this month as the city council, acknowledging that Monrovia is in better financial condition than many cities, approved the plan that includes rare pay cuts negotiated with city unions.

A bond could pay off a pension debt totaling $112 million, making the Monrovia pensions fully funded. But in a system that expects to pay 60 percent of future pension costs with a risky stock-laden investment portfolio, a plunge in a record-high market could quickly add new debt.

“The greatest challenge to Monrovia’s long-term fiscal sustainability — and the fiscal sustainability of government agencies in California — relate to unfunded CalPERS pension cost obligations,” said Chi’s introduction to the Monrovia plan.

He said “the impetus for the current pension crisis in California” began when then-Gov. Gray Davis signed a CalPERS-sponsored bill, SB 400 in 1999, that allowed local governments to give safety employees a large pension increase.

“What’s so sad is that this is a reoccurring problem, probably, and it’s not going to stop here,” council member Becky Shevlin said after Chi presented the plan (video 1:52) at a council meeting on Nov. 7.

Chi said the labor-friendly CalPERS board does not appear to favor reshaping the pension cost structure, which some argue is unfair to taxpayers. He also was skeptical that change would follow if the state Supreme Court allows pension cuts in two pending cases.

“There has to be the political will to institute those changes,” said Chi, “and based on our assessment I don’t know that that political will exists.”

Mayor Tom Adams said the will does not exist, even though Davis told the Los Angeles Times that signing SB 400 was a “big mistake in retrospect.” He mentioned a prediction at a Sacramento meeting several months ago that 25 percent of cities will be bankrupt in three years.

“Monrovia will be fine,” Adams said. “But boy, it’s going to be a real struggle to get there, and hopefully the next group up in Sacramento will maybe be willing to address this and fix it.”

In September, the CalPERS board rejected a proposal to analyze the cost of measures that are similar to two of the “Pension Sustainability Principles” adopted by League of California Cities directors last June.

One would temporarily suspend cost-of-living adjustments for retiree pensions. The other would give employees hired before a pension reform on Jan. 1, 2013, the lower pension earned by employees hired after the reform.

The full-service city incorporated in 1887 (named after a developer not the fifth U.S. president, James Monroe) has its own police and fire departments. The rare pay cut or “giveback plan” was negotiated with all three of the city unions.

“Everybody’s pitching in on this. I think that’s really great,” council member Larry Spicer said as the plan was approved. When the giveback is mentioned while comparing notes with colleagues at other cities, Chi said, “everybody looks at us like we had three heads.”

Permanent pay cuts range from $325 a month for the city manager, beginning last month, to $85 a month beginning next July for members of the municipal, police, and firefighter unions. Projected cost savings are about $300,000 a year.

Chi said the giveback nearly has employees paying a 50-50 split with the city of the “normal cost” of the pension, “the statutory maximum that we can ask our staff to pay.” The normal cost covers the amount of a pension earned during the year.

Only the employer pays the debt or “unfunded actuarial liability” usually from below-target investment earnings or a change in actuarial assumptions — like CalPERS last December dropping its earnings forecast used to discount future pension costs from 7 to 7.5 percent.

It’s the growing unfunded liability payment that threatens Monrovia’s solvency, a projected 80 percent increase in the next five years. The payment is expected to go from $4.9 million this fiscal year to $8.9 million in fiscal 2022-23, reaching $11 million by fiscal 2030-31.

Monrovia makes another unfunded liability payment, $1.2 million this fiscal year, on a 17-year $12.75 million pension obligation bond issued in 2010 to pay off a “side account” created when CalPERS pooled the safety plan with other small employers.

The main part of the Monrovia CalPERS response plan is a 30-year pension obligation bond that would refinance the unfunded liability, currently $112 million being paid off with an interest rate around 7 percent.

Because the municipal bond market is trading at an historic low, the Monrovia plan sees a “unique opportunity” to refinance all of its pension debt at a 4 to 4.5 percent interest rate, saving $43 million over 30 years.

Could a pension bond go awry, not yielding savings? As of June 30 last year, said the plan, CalPERS investments yielded 5.1 percent during the previous 10 years (which included huge losses during the financial crisis), 7 percent over 20 years, and 8.3 percent since 1988.

Monrovia’s hotel bed or transient occupancy tax would, if approved by voters, increase from 10 percent to 12 percent, yielding $400,000 a year in new revenue. The plan said total similar taxes are around 15 to 16 percent in Pasadena, Glendale and Burbank.

Creating Community Facility Districts (Mello-Roos) for new property development to pay for public improvements and services could yield up to $300,000 a year in parcel tax revenue.

In a change that could cost more at first but save in the long run, new pension debt or unfunded liabilities from below-target investment earnings and other sources would be publicly disclosed each year and paid off in a much shorter period.

CalPERS policy pays off new debt over 30 years. Monrovia’s plan pays off new debt of up to $5 million between one to five years, new debt of $5 million to $10 million in five to seven years, and three other increments topping out at $20 million or more paid off in 10 to 15 years.

Researching higher funding levels and lower debt, Monrovia looked at prompt debt payment by New York funds, a $6 billion extra CalPERS payment for state workers this year, and extra payments by Newport Beach, Santa Monica, Huntington Beach, and Costa Mesa.

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at Calpensions.com. Posted 27 Nov 17


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