San Leandro has essentially two options when it comes to addressing its ballooning employee retirement liability: pay more now or wait and hope the state employee retirement fund starts getting a better return on its investments.
That was the scenario pitched to the City Council Monday night by a consultant hired to review the city’s pension liabilities.
John Bartel, an actuary and expert on the (CalPERS), warned that the amount the city contributes to CalPERS will probably keep increasing.
“We expect your contributions are likely to rise and to be particularly painful as time goes by,” Bartel told city officials.
How can the city keep those rising costs under control? Find money now to pay down a debt related to the city’s pension plan for public safety employees (police and fire), Bartel said.
Next, start paying more into CalPERS for the pension plans of all other employees, Bartel recommended. This would help reduce the city’s unfunded pension liability and, hopefully, protect against large upward spikes in the city’s yearly CalPERS contributions, Bartel said.
Last year, San Leandro contributed $7.3 million to CalPERS for employee pensions, or 10 percent of the city’s General Fund expenditures.
Local governments across the state are struggling to cope with rising pension costs stemming from a variety of factors, including huge losses in CalPERS’s stock portfolio in recent years.
The pension system lost more than $100 billion in investments between 2007 and 2009, according to CalPERS data.
The state pension system is funded by a mix of employee and employer contributions and interest generated from investments.
San Leandro, like many other cities in California, pays the required pension contribution of its employees for them. (This could change under pension reforms proposed by Governor Jerry Brown. Brown seeks to prohibit employers from paying their employees’ portion of pension contributions.)
While the city has little immediate control over some aspects of its CalPERS liabilities, there are several things it could do to rein in costs, according to Bartel.
First, it could make a concerted effort to pay off a debt stemming from pension costs for firefighters who worked for the city’s former fire department.
San Leandro began contracting out fire services to Alameda County in 1995. While the city’s main pension fund for safety employees was pooled with other agencies in 2003, the city’s pre-2003 liabilities were placed into a CalPERS “side fund” that has to be paid off by the city.
The balance of that fund owed by the city as of June 30, 2011 will be $24.4 million, according to Bartel, about half of its total liabilities for safety employees. The fund has a fixed interest rate of 7.75 percent, and according to the current payment schedule, it’s supposed to be paid off by fiscal year 2024.
However, Bartel said the city could save money by paying off that debt sooner.
“You should do what you can afford to do to pay that debt down,” he told the council. Bartel said doing so would result in a higher rate of return than most other investments the city could make.
In terms of the city’s non-safety employee pension fund (for everyone except police and fire), Bartel said the city should also try to pay more now rather than later.
The city has an unusually high ratio of retirees compared to active employees, Bartel said at the council meeting.
While the number of non-safety city employees has gone down in recent years, the number of pensioners has gone up. In 2009, there were 477 former city employees receiving benefits and just 314 employees working for the city.
The amount the city pays into CalPERS is based on a percentage of its current employee payroll. To keep down unfunded liabilities for future pensions, Bartel suggested the city start paying a greater percentage of payroll into the non-safety pension fund than the minimum required by CalPERS.
In 2009, San Leandro had about $26 million in unfunded liabilities for non-safety employee pensions, according to the city’s 2009-10 Comprehensive Annual Financial Report.
“There is a lot of incentive, from my perspective, for you all to think about this [non-safety employee pension] plan a little more fiscally conservatively than you otherwise would,” Bartel said.
Both of Bartel’s recommendations would require the city to come up with extra cash from an already squeezed budget, or borrow money elsewhere. City staff will be discussing the pension issue further at the next finance meeting this Friday.