Governing Magazine had a conversation with an official from the City of Irvine regarding its plan to prepay its pension liabilities over the next ten years. The move will bring the City’s unfunded liability down to just two percent by 2024. And the money to buy down the debt is all coming from the City’s reserves.
Currently, the reserve fund earns just 1 percent interest per year. However, unfunded liabilities accrue interest at 7.5 percent, meaning that the City is losing money by not spending money. Instead, over the next decade, the City will use annual payments from the reserve fund of $5 million to bring their pension to 98 percent funded. Once funded, the City will be able to save $33 million over the remaining 20 years of amortization.
The City will not, however, seek to fund its pension to 100 percent due to the continued requirement to make annual payments to CalPERS. The City’s interests, according to Sean Joyce, the City Manager, are best served by attaining 98 percent. The program will be assessed each year to compare the interest being earned by the reserve fund to the amount of savings realized through CalPERS pre-payments. If, at any point, the savings benefits are compromised by improved investment returns on reserve funds, the program will be re-tooled to maximize the money’s impact.
Read the full conversation at Governing.com.