Bad news for the bottom line

Things just got worse – much worse – for the City of Alameda’s bottom line.

Previously, City staff had projected that the General Fund will begin to incur deficits – i.e., revenues won’t be enough to cover expenses — in Fiscal Year (“FY”) 2015-16.  As a result, the reserve balance in the General Fund will drop from $18.6 million to $7 million by June 30, 2018, well below the 20% floor mandated by Council.

Then, two weeks ago, the Board of Administration of the California Public Employers Retirement Fund (“CalPERS”) adopted a change in the “smoothing” methodology used to compute the annual employer contribution rate for CalPERS members.  The change was designed, the Board stated, to move the Fund toward “fully funded” status  – i.e., having enough money to pay the pensions its members had promised their employees – within 30 years.

The change in the methodology will force employers like the City to increase their annual contributions to CalPERS beginning in FY 2015-16.  Based on data published by CalPERS, the change in methodology will raise the City’s CalPERS bill – which already exceeds $11 million per year — significantly.  Add these increases to the deficits already projected and you’ve got real trouble: By June 30, 2018, the reserve essentially will have been exhausted.

Here’s the not-so-pretty picture:

FY 2015-16 FY 2016-17 FY 2017-18
Opening reserve balance $18,600,000 $14,398,800  $8,396,400
Already projected deficit ($3,100,000) ($3,800,000) ($4,700,000)
Additional deficit due to CalPERS change  ($1,101,200) ($2,202,400) ($3,303,600)
Closing reserve balance $14,398,800 $8,396,400     $392,800

And more bad news for the City budget from CalPERS is on the horizon.  According to Bartel Associates (Alameda’s actuarial consultant), CalPERS is considering lowering the discount rate – i.e., the expected investment return – and changing the mortality assumptions – i.e., the estimated life expectancy — used in its computations.  Both of these changes will result in further increases in employer contribution rates that will take effect in FY 2015-16.  If such increases occur, the City will burn through its reserves – and run out of money – even more quickly that the table above suggests.

Those who pay attention to pension issues have been warning for years that, when CalPERS finally took action to put the pension plans it manages on a sounder footing, the burden would fall on governmental employers like the City of Alameda who are CalPERS members.  Indeed, just last October, Alameda’s own Pension and OPEB Task Force specifically called out CalPERS’s existing “smoothing” methodology, which, it said, had kept the City’s contribution rates artificially low.

But these warnings have gone unheeded.  If local politicians were listening at all, the usual response was: It’s CalPERS’s problem, not ours, and there’s nothing we can do about it anyway.

In fact, the pension reform law passed last year gave cities a way to cushion the blow of any cost increases imposed by CalPERS.  Under prior law, public employees could agree to shoulder a narrowly defined portion of the required employer contribution (in addition to paying the statutorily mandated employee contribution).  The new law removed the cap, and now a city can get its employees to take on as much of the required employer contribution as its unions will agree to.

For Alameda, this created the potential for major budget savings.  For example, the firefighters and cops who benefit from a system allowing retirement at age 50 at 90% pay with lifetime health benefits could have agreed to chip in as much as $8.9 million in FY 2013-14 (and higher amounts in later years) toward the City’s public safety pension costs.

But it didn’t happen.  Instead, when the City negotiated four-year contracts with the public safety unions last year, all the City got was an agreement by the unions that their members would contribute an additional 1% of their pay toward their pensions in each of the next four fiscal years.  The “savings” produced by this “concession” lighten the City’s load only a little.  For example, staff estimates that employee cost-sharing by IAFF (fire) and APOA (police) members will reduce the City’s multi-million dollar CalPERS tab for public safety pensions by all of $581,000 in FY 2013-14.

Moreover, the public safety union contracts fix the percentage of salary to be contributed by the employees over their four-year term:  If CalPERS raises the City’s required employer contribution rate, the employees don’t share in the pain.  So the recent increases resulting from the CalPERS methodology change will be solely on the City’s nickle.

Even before CalPERS announced its decision, City Manager John Russo had identified pensions as one of the major challenges facing the City in the next five years. Now the challenge has gotten even more acute.  Let’s see how the politicians and staff propose to deal with it.  Is it too much to hope that the City will invite the public employee unions back to the bargaining table?  Or, if invited, they will step up?

SOURCES:

CalPERS 4/26/13 circular letter: http://www.calpers.ca.gov/eip-docs/employer/cir-ltrs/2013/200-019-13.pdf

CalPERS 4/17/13 press release: http://www.calpers.ca.gov/index.jsp?bc=/about/press/pr-2013/apr/actuarial-policies.xml

Bartel Associates 4/13 analysis: http://bartel-associates.com/docs/articles/ba-13-04-23-calpers-rate-changes-approved-and-more-expected.pdf?sfvrsn=2

CalPERS 10/12 annual valuation report on Alameda safety pension plan: http://www.calpers.ca.gov/eip-docs/about/pubs/public-agency-reports/cities-towns/2011/alameda-city-safety-2011.pdf

CalPERS 10/12 annual valuation report on Alameda miscellaneous pension plan: http://www.calpers.ca.gov/eip-docs/about/pubs/public-agency-reports/cities-towns/2011/alameda-city-miscellaneous-2011.pdf

City 4/18/13  budget forecast: http://alameda.granicus.com/MetaViewer.php?view_id=6&clip_id=1110&meta_id=38884

City 12/11/12 staff memo re public safety MOUs: http://alameda.granicus.com/MetaViewer.php?view_id=6&clip_id=1054&meta_id=37349

HansonBridgett 9/12/12 analysis of new pension law: http://www.hansonbridgett.com/Publications/pdf/~/media/Files/Publications/Pension-reforms-analysis-2012-09-12.pdf

About Robert Sullwold

Partner, Sullwold & Hughes Specializes in investment litigation
This entry was posted in Budget, Firefighters, Pensions and tagged , . Bookmark the permalink.

One Response to Bad news for the bottom line

  1. Alamedan says:

    Perhaps we can sell off a library or two to help pay for these pensions.

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