CalPERS is encouraging government employers to make extra payments to reduce their pension debt or “unfunded liability” if budgets allow, saying millions can be saved in the long run.
Annual CalPERS reports to 1,581 local government agencies this fall began showing estimates of future savings when extra payments, going beyond the required amount, are made to the pension fund.
The Newport Beach city council approved a plan for extra payments to CalPERS last month that is expected to save $47 million over 30 years, compared to the standard payment plan.
Huntington Beach approved extra payments to CalPERS last fiscal year based on an analysis by an independent actuary, Bartel Associates, showing each additional $1 million contributed to CalPERS saves $5 million over 25 years.
CalPERS estimates that about 60 employers made 111 extra payments to CalPERS last fiscal year. The new “alternate amortization schedules” in the annual reports to local governments are a response to requests from employers.
“The message we want to get out to employers is that if they have the ability, the financial means, to pay off some of this unfunded liability, it’s a smart business move and can really benefit them over the long run,” Anne Stausboll, CalPERS chief executive officer, said last week.
CalPERS debt or unfunded liability ballooned after heavy investment losses during the recession. The pension fund lost about $100 billion, plunging from $260 billion to $160 billion before climbing to $294 billion last week.
Projected investment returns and employer-employee contributions covered 100 percent of future pension obligations in 2007, dropped to 60 percent two years later and recently increased to an estimated 77 percent.
To close the funding gap, a California Public Employees Retirement System employer rate increase of roughly 50 percent is being phased in over a half dozen years, squeezing funding available for other government programs.
A focus on paying down pension debt, amid worry about another stock market plunge before recovery from the last one, is a contrast to the headier days around 2000, when a booming stock market pushed the CalPERS funding level to about 135 percent.
A CalPERS-sponsored bill, SB 400 in 1999, gave state workers a large retroactive pension increase notable for a generous Highway Patrol formula, which became a bargaining benchmark for local police and firefighters.
In 2001 CalPERS offered to inflate the value of pension fund assets to help local governments provide pension increases authorized in a bill, AB 616, notable for a top formula (3 at 60) providing a pension of 120 percent of salary after 40 years of service.
In the late 1990s CalPERS took another step, in addition to the benefit increases, that would increase pension debt. Employers got a contribution “holiday” when their annual contributions to the pension fund were dropped to near zero.
Now to reduce future pension debt, Gov. Brown pushed legislation two years ago, AB 340, that bars employer contribution “holidays” and cuts pensions for new hires in CalPERS and 20 county retirement systems.
The Newport Beach city council chose the smallest extra CalPERS payment among three options presented by staff. The plan to pay off the unfunded liability in 19 years costs the city $6.6 million next year and a total of about $23 million over five years.
The council’s finance committee and staff recommended the 19-year option as a good balance between reducing standard long-term pension costs by $47 million, while still allowing some “opportunity” spending on services, programs and facilities.
In addition to Newport Beach and Huntington Beach, two other cities in the well-to-do parts of Orange County also reportedly have made extra CalPERS payments expected to yield savings in the long run.
Tustin approved a $4 million side fund payment last month, expected to save nearly $1 million over five years. An Irvine plan adopted last year to pay off the unfunded liability a decade early was expected to save about $33 million.
A city that would not seem to have money to spare, Vallejo, made a $6 million debt-reducing extra payment to CalPERS as it exited from a 3½-year bankruptcy, leaving pensions intact but cutting retiree health care and bond debt.
Market timing can be a problem while making extra CalPERS payments. A city still in bankruptcy, Stockton, issued a $125 million pension obligation bond in 2007 and gave the money to CalPERS just before its big losses in the 2008 market crash.
Newport Beach adopted a plan last year to pay off the unfunded liability earlier than the CalPERS standard of 30 years. But the savings were reduced by a CalPERS rate hike to cover an increase in the expected life span of retirees.
The new plan adopted by Newport Beach last month calls for “dollar cost averaging,” spreading the extra payment over a period of time to reduce the chances of investing at a market peak just before a big downturn.
In a rare wrinkle on extra pension payments, most Newport Beach city employees pay more toward their pensions than the usual CalPERS employee share, which has been roughly 8 to 10 percent of pay in recent years.
Newport Beach began negotiating increased employee pension contributions before the pension reform in 2012 that calls for an equal employer-employee split of the pension “normal cost,” excluding the debt or unfunded liability from previous years.
Many California cities went the other way, agreeing in labor negotiations to pay all of the employee pension contribution in what some call the “pension pickup” or more formally the “employer paid member contribution.”
A survey of San Francisco Bay Area local governments last year by the San Jose Mecury News found they spent more than $221 million the previous year paying “the employee share of 63,000 public workers’ pension contributions.”
The chart below shows how the Newport Beach employee contributions increase under current labor contracts. Lifeguards and firefighters have contracts negotiated before the city began its “sustainability” policy of increasing employee contributions.
“We have done better I would say than most agencies in Orange County in having labor peace, getting to a contract agreement and still having our employees pick up a fair share,” said Terri Cassidy, Newport Beach deputy city manager.
Last week four new members of the seven-member Newport Beach city council were sworn in and elected a new mayor, Edward Selich. The four new members became known as “Team Newport” during their campaign.
“The reform-minded slate emphasized fiscal conservatism and slammed the perceived overspending by city council members,” the Daily Pilot newspaper reported.