Editor’s note: the following guest commentary was written by G. Dana Hobart, Mayor Pro Tem of Rancho Mirage.
The Rancho Mirage City Council eliminated $2.9 million of its $13.9 million unfunded pension liability to the California Public Employees’ Retirement System (CalPERS).
The remaining $11 million in unfunded pension liability will also be eliminated as soon as CalPERS amends its rules to allow cities to pay off the balance of what is due and owing. Incredibly, current CalPERS rules prohibit paying off the unpaid debt. The board of directors was scheduled to consider this anomaly at its May meeting on Monday, but a change of rules is not likely to be announced before August.
The funds for our $2.9 million payment primarily come from the Rancho Mirage general fund’s $77 million reserves. However, that figure is misleading when we consider our bloated debt obligation of $13.9 million that we owe to CalPERS for payment of current and future pension obligations. If we pay our entire $13.9 million debt from our reserve funds, that would reduce our reserves to about $63 million.
The only reason Rancho Mirage is not paying this debt in its entirety now is because CalPERS’ rules prevent cities in the “small employers” risk pool to pay down or eliminate their debt to CalPERS. The only exception is the “side fund” debt, which can be reduced or eliminated by a payment of the amount due to that specific fund. This is the fund to which Rancho Mirage owed the $2.9 million but will soon owe nothing.
Each California city pays approximately 25 percent of every employee’s annual salary into the CalPERS retirement fund for those employees who are scheduled to receive the 2.5 percent at 55 retirement plan. The annual cost is less for those with lesser plans, but most cities’ indebtedness rose because of the prevalence of these 2.5 percent at age 55 plans throughout the Coachella Valley and the state. Lesser plans, which are now gaining widespread acceptance because of revised state law, are much more manageable. This 25 percent figure can change depending on how much the fund has earned or lost on its various investments during the prior year
It is each city’s payment record that creates its individual indebtedness status. Under California law, employees have no role in creating this debt. Year in and year out, employees pay a flat annual amount of 8 percent of their salaries. Only the cities’ contributions are adjusted in relationship to CalPERS’ annual earnings and losses.
Recognizing the excessive financial obligations that went with the 2.5 percent of final year’s salary times the number of years of public service at age 55 pension plan, the council, on its own initiative, enacted a reduced retirement benefit plan in 2012. All employees hired after 2012 were placed into lower retirement benefit plans that will result in millions of dollars in savings over the service life of those employees. But that change does not lower our pre-existing debt.
Retiring the city’s CalPERS debt makes economic sense because the failure to pay it creates an annual “interest” obligation the city must also pay. CalPERS currently projects that it will earn 7.5 percent per year on its investment portfolio. They take the position that if Rancho Mirage had paid what was due, CalPERS would earn 7.5 percent on that money. Therefore, it requires that cities pay additionally, the equivalent of 7.5 percent in “interest” on the debt.
Because money sitting in the Rancho Mirage reserve account is earning roughly 1.5 percent, it makes economic sense to eliminate the annual 7.5 percent additional payment to CalPERS. By eliminating the interest payment, spendable city funds will increase annually by a little more than $1 million per year — money that can be used for the betterment of our city. Or saved. The debt is created when cities do not pay CalPERS the full amount required to fully fund the pension pool of a city’s current employees and past retirees.
From the time the city hires a new employee the city incurs the responsibility of setting aside enough funds when, together with earnings on those set aside funds, the city will be in position to pay through CalPERS each employee’s pension benefits when he or she eventually retires. In short, the city must have paid to CalPERS enough money — less income earned over the years by CalPERS and less the 8 percent employee contributions — to cover all of the pensions payouts they promised to pay as new employees were hired.
Of course not every city is in position to retire its incurred debt to CalPERS. Even modest pay-downs, however, will produce financial benefits for most cities.
Originally posted at The Desert Sun and reprinted with permission of author.