“Everyone is entitled to his own opinion, but not to his own facts”
Pensions
Background: Due to a change in government financial reporting rules, PVE was required to disclose its long-term pension obligations for the first time in FY 15. The City’s audited financial report for that year, (the CAFR), showed a total of $11M in Unfunded Pension Liability (UAL), as reported by CalPERS, the state agency that manages the City pension plans. This debt has continued to grow each year. According to the most recent CalPERS valuation reports, the UAL balance was $16.6M at June 30, 2018 and is now estimated to be over $19M. Increases in the debt are the result of several factors, including failure of CalPERS to meet its earnings targets, accrued interest*, changes or inaccuracies in actuarial assumptions and underpayment of the annual pension cost incurred by the City. While the City has little to no control over some of these factors, it does control payment of the current year’s pension expense, known as the “Normal Cost.” However, for a number of years the City has “short-paid” the Normal Cost, paying only the minimum amount required by CalPERS. This is like paying only the minimum due on a credit card. Additionally, the City does not pay the full interest amount accrued on the UAL each year, again opting to pay only the minimum required. When we continue to “short-pay” pension related expenses, we add to the increasing debt burden.
Furthermore, the total liability will dramatically increase if CalPERS continues to fall short of their investment goal of 7% and could potentially double or triple. For example, if the return on the CalPERS pension portfolio going forward were to drop to 4%, the debt would increase from about $19 to an estimated $62 million (based on GovInvest).
The City Council has formed a Pension Ad Hoc Committee to address this issue but the Committee has not yet presented its findings and recommendations.
* Interest rates vary by year and by “tranche,” but range from 7% to 8%.
Question: What is your perspective on the pension issue? What specific ideas do you have and what would you do about it?
Responses:
Gayne Brenneman
“GAYNE BRENNEMAN
”The majority of our pension expenses relate to policing. It represents one ‘segment’ of their pay. The other ‘sizable’ parts, that ‘equal’ or ‘exceed’ the pension contribution, are ‘overtime’, and ‘other misc pay’, and then ‘double the pension contribution is the ‘benefits’ portion. Since the Sept 15 report, is pending (from our PVE Pension ad Hoc committee), is not out yet, then the current numbers are approximations. My perspective on the problem is that we would have to combine our ‘current’ expenses, with ‘unfunded’ liabilities, to see ‘exactly’ where we stand, for our budget, and to make ‘informed’ decisions, on moving forward, with keeping all or part of the staff.
We have to reduce the number of staff members in all departments to reduce the pension costs related to salaries. I would further examine the need for ‘overtime’, for ‘other misc pay’, for ‘benefits’, etc.. and whether is was, or is prudent, to continue giving generous annual ‘raises, and bonuses, and merit awards, coupled with COLA (cost of living allowances), plus ‘training’, food deliveries, subscriptions, travel reimbursements, car allowances, dues, and memberships.
I will reorganize the city entirely before I would suggest any taxes to pay this debt!””
Sanford Davidson
“SANFORD DAVIDSON (incumbent)
(Councilmember Davidson declined to supply answers to any of the questions posed)”
Dawn Murdock
“DAWN MURDOCK
”The City must address our pension costs to stabilize our financial state.
The rising annual payments (2016=$1.2M, projected 2020=$1.9M, 2026=$2.9M) are squeezing the city budget, reducing funds for services. Weeds are aplenty, trees are not trimmed regularly, fountains sit idle, and infrastructure needs additional funding.
Worse, these payments do not fully cover the cost of pensions, causing annual pension debt increases.
As a member of the Pension Ad-Hoc Committee with councilmembers, employees, and residents, we studied issues, identified options, and vetted viable options for solving our pension problem. The report is expected to be presented to the public in September.
Addressing our pension debt requires:
1) Stopping the accumulation of new debt:
• Fully fund the cost of pensions each year;
• Review pensionable benefits to seek alternative approaches to compensation;
• Create a culture shift to ensure pension cost impact is part of every relevant financial decision.
2) Paying off existing debt:
Options to be vetted by Council and residents include:
• Developing a clear Council policy for use of ending-fund balances where all or a portion are applied to debt payment; and
• Considering a temporary tax to pay down the debt – residents would need to evaluate the value of projected savings in interest payments and potential to fund other services.
3) Communicating with and engaging residents and staff in a transparent manner so everyone understands the solutions and the impact of inaction. “”
Jim Roos
“JIM ROOS
”Our City’s pension liability cannot be ignored. The unfunded liability has grown significantly as CalPERS has continued to underperform its targets. In the meantime, our City has continued to underfund the “normal cost” of pensions attributable to current payroll.
I support budgeting against the true cost of employee pensions using a discount rate that accurately reflects the return we can expect from CalPERS. We cannot continue to make negative amortization payments or rely on CalPERS to achieve its 7% target return. Our City Council must act to fully fund pensions against current payroll so that we are not contributing to additional unfunded pension liability.
We must also act to reduce the unfunded liability by setting a target funding level and developing a plan to achieve that goal. I support efforts to reduce our unfunded liability, which will free capital for other purposes in the long run. These efforts must be balanced against the City’s short and medium-term cash flow needs so that we do not risk bankruptcy.””
Bill Sewell
“BILL SEWELL
”As I indicated in my response to question #1, the long-term financial viability of PVE depends on solving the pension problem; not just the existing debt (UAL) but also future pension costs that if not addressed can become new debt. I propose the following:
1. Pay down our pension debt
2. Shorten our CalPERS amortization schedule to ten years which would save taxpayers $8.5 million in interest.
3. Use more accurate actuarial assumptions to better anticipate costs.
4. Split pension costs with employees to keep new debt from amassing.
5. Disclose ALL costs in the budget and make it simple and easy for everyone to understand.
We can, ourselves, choose to select different actuarial data upon which to base our budgeted payment to CalPERS. When CalPERS exceeds the discount rate that we have set for ourselves, we take the difference between our budgeted amount and the CalPERS payment and put it into a special bank account that can be drawn on when CalPERS’ does not achieve our budgeted rate.
There are certainly other innovative ways to fix the pension issue. Key would be to get out from under CalPERS. I would explore making PVE a charter city like Torrance or L.A. This would put more control into our hands and would allow us to renegotiate our pension agreements. This is an opportunity to reduce pension costs significantly.””