Things might be looking a bit better, but let’s not let it go to our heads.
Anaheim is still staring down a public pension hole more than half a billion dollars deep.
Santa Ana has a $429.5 million hole to call its own. Huntington Beach’s is $308.2 million. Newport Beach’s, $258 million. And so on.
Even after California’s most massive public pension system reported that it’s regaining ground lost in the recession, many Orange County cities continue to grapple with painful shortfalls, especially the older burgs sporting their own police and fire departments. The newer, contract-heavy cities look lean and mean by contrast.
Here’s the big picture:
- Thirty-three county cities have promised $3.1 billion to current workers that local governments do not, in fact, have. That’s better than a few years ago, when that hole was $3.3 billion deep. The overall “funded status” of O.C. cities – how much of what they need is currently stashed away – is up to 72 percent, from 68.2 percent.
- Some communities are hurting more than others. The local cities with the lowest-funded status were Costa Mesa (65.1 percent), Newport Beach (65.8 percent), Garden Grove (69.2 percent) and Huntington Beach (69.7 percent). Note that each has its own police and fire departments. (Public safety pensions are more generous and allow members to retire earlier, meaning they require more cash.)
- Why should you care about all this? Because money that goes into higher pension contributions is money that can’t pay to fix roads or keep pools open or provide other services. And because retirement benefits are guaranteed: If there’s not enough money in the pot, you, Jo Citizen, must make up the difference.
A recent Watchdog column explained that the California Public Employees’ Retirement System as a whole reported a 77 percent funding level. That’s this close to what some pension experts say is the magic number for a solidly funded pension plan: 80 percent (though some think even that is too low, and CalPERS actuaries say the “ideal” but unnecessary level is 100 percent).
Part of the reason CalPERS is regaining this lost ground is that it now requires participating cities, special districts and other agencies to kick in millions more each year to shrink their unfunded liabilities.
This is painful in the short run, but wise in the long run, experts say. For many agencies, we’re talking 35 to 50 percent higher annual payments, which puts a squeeze on their budgets; but the more money set aside now, the more time it has to grow. Consider:
• The 33 O.C. cities will pay $40.2 million morefor pensions next year than they did in 2012-13. That total will be $299.2 million, an increase of 15.5 percent.
• That average masks some wild variations and big numbers. Anaheim’s bill has grown by $4.8 million. Newport’s, by $4.5 million. Huntington’s, by $4.4 million.
• San Clemente’s bills have gone up 64.1 percent over the three years (reflecting its recent switch into CalPERS from another retirement program manager, officials said). Los Alamitos’ bills are up 56 percent. Seal Beach is up 49.4 percent.
That will not dissipate any time soon.
“Current contribution levels are high relative to historical levels and, for almost all employers, scheduled to increase further as our amortization policies phase in previous asset losses,” CalPERS analysts warned in their annual review of funding levels and risks, which went to the board in November. “For many plans, the contribution rates have never been as high as they are now. … Employers are reporting that these contribution levels are putting significant strain on their budgets and limiting their ability to provide services to the people in their jurisdictions.”
Agencies can expect to see a wee reduction in required contributions in 2020-21, but “the rates in that year are still expected to be above current levels,” CalPERS said.
Meanwhile, in just about every agency, employees are being asked to kick in more to help cover rising costs. Costa Mesa’s general workers, for example, have agreed to pick up 60 percent of future increases.
Will all that be enough? “There is a significant amount of risk being taken in the funding of the system,” the CalPERS report says. “The probability that the system will face a period of severe stress is still at a level that may be unacceptable.”
For a tutorial we turn to Dave Kiff, Newport Beach’s city manager, who summarizes things nicely.
Back in 2007, the seaside city’s pension plans were a luxurious 99.7 percent funded, with a wee hole of just $1.7 million. Then came the 2008 market crash and the great recession. Then came CalPERS lowering its expected return rate on investments to be more realistic. Then came CalPERS’ decision to make all its members pay off those liabilities within a set time frame. And then came the mortality studies showing that – on top of everything, egad! – people are living longer in retirement. “What a good thing that is!” Kiff said. “But how costly!”
In 2012, Newport hit what Kiff hopes was the zenith of its unfunded liability: $275 million (about $273 million more than just five years before). Mature plans like Newport’s were hit harder because they tend to have more retired folks than active employees, but the hole has shrunk to $258 million,because of good returns and heftier contributions, and the city working to ensure the trend continues.
Like many agencies, Newport Beach has lower benefit formulas for new hires and asks employees to pay more of their pension costs (they’re kicking in about $7.4 million this year). Full-time staff has shrunk by nearly 100 positions. And Newport no longer pays the worker’s portion of pension costs as well as the employer’s portion, once a common perk.
“All municipalities continue to grapple with public pension liabilities and seemingly constant changes in CalPERS methodologies that continue to force these rates upward,” said Westminster Mayor Pro Tem Sergio Contreras. “This is a problem that didn’t materialize overnight and won’t be solved overnight. ”
A few exceptions
A bright spot: Some fledgling plans for new workers, ushered in after Gov. Jerry Brown’s pension reform proposals passed, showed small surpluses – a rare sight in recent years.
Laguna Beach and Laguna Hills logged $14 surpluses for their (tiny) new plans, all the way up to a $7,350 surplus for a plan in Tustin. These new plans offer more sober benefits than the plans most workers enjoy, but won’t do much to relieve agencies’ burden until there’s a large turnover of workers – that is not for many years in most places.
In small cities, however, the turnover of just a few positions can trigger big savings. Rancho Santa Margarita is a good example.
The city has only 20 employees, and five positions have changed hands – a turnover of 25 percent of the work force in the last 18 months, said City Manager Jennifer M. Cervantes. They were among the higher earners as well, she said.
All new hires are required to kick in more for their pensions, so Rancho’s payments to CalPERS dropped by more than 20 percent over the three years examined – down $67,751.
It’s an early indicator that the reforms can do what the governor hoped they would do – sooner for smaller agencies, and eventually for the rest of them.
Meanwhile, Irvine refuses to wait. In 2013, city leaders decided to “aggressively” pay down their unfunded liability over the course of a single decade, so retirement plans are 98 percent funded. That means an extra $5 million a year, for 10 years, on top of its required annual payment ($20 million next year).
A stitch in time may certainly save nine: Only 18 months into that plan, Irvine has made $13 million in accelerated payments to CalPERS, and is on track to finish up two years early. The push is expected to save about $143 million over 29 years, with a “present value” savings of $33.1 million.
Newport is doing something very similar. In November, the City Council decided to pay down its unfunded liability over a 19-year period, boosting payments by some $23 million over the next five years. That should save more than $129 million over three decades, with a present value of about $47 million, Kiff said.
A lot of this is a crapshoot. One might argue that projections 30 years into the future about how much money will be needed to fulfill pension promises is far more art than science. It depends on a boatload of variables – from what the long-term return on investments will be to how long retirees will actually live.
Just 15 or so years ago, actuaries crowed that the system was so super-funded officials could afford to give workers big benefit increases, and it wouldn’t cost them a dime. They were wrong.
“Those projections change as often as I change my shirt,” said Villa Park Councilman Rick Barnett, who’s making an issue of all this at the Orange County Fire Authority. “You really can’t project these kinds of factors over that long a time period. Defined benefit plans are speculative, and government isn’t supposed to make speculative investments. The government can’t guarantee you that, no matter what, you’re going to get all this money.”
Steven Maviglio, spokesman for Californians for Retirement Security, a coalition of public employee unions, stressed that the numbers are getting better. “We are at the beginning of the recovery from the worst Wall Street fiasco since the Great Depression,” he said. “Pension plans are far better off than 401(k)s. They lost less during the downturn and gain more in an upturn. Pension plans are built for the long term and the trend is positive.”
John Moorlach, former county supervisor, current candidate for state Assembly and pension reform warrior, urged caution. “I would warn that one good year does not a strong pension plan make,” he said. “Good years are followed by down years. So taking a deep breath may be fine, but putting your legs up on the Ottoman may be premature.”
Source: OC Register