By Ed Mendel
Monday, February 12, 2018

The use of the word “unsustainable” had a distant echo this month as the League of California Cities issued a study of CalPERS rates, a move to get stronger local options for controlling rising pension costs.

Over the next seven years, the study found, city CalPERS costs will increase more than 50 percent. The annual pension bite for the average city will reach 15.8 percent of the general fund, nearly doubling from 8.3 percent a decade ago.

A key finding of the study by Bartel Associates actuaries, using CalPERS data and survey replies from 229 cities, is that “city pension costs will dramatically increase to unsustainable levels.”

Nearly a decade ago the CalPERS chief actuary then, Ron Seeling, made a similar prediction at a seminar sponsored by the Retirement Journal in August 2009. The CalPERS investment fund had just lost $100 billion during the financial crisis and market crash.

“I don’t want to sugarcoat anything,” Seeling said. “We are facing decades without significant turnarounds in assets, decades of — what I, my personal words, nobody else’s — unsustainable pension costs of between 25 percent of pay for a miscellaneous plan and 40 to 50 percent of pay for a safety plan … unsustainable pension costs. We’ve got to find some other solutions.”

The average CalPERS contribution for local governments in the current fiscal year is approaching Seeling’s “unsustainable” level — miscellaneous 21 percent of pay and safety (police and firefighters) 40.45 percent.

In seven years, the League study expects rising CalPERS employer rates to be well above those mentioned by Seeling. By then a gradual rate increase will be fully phased in, filling the funding gap created by lowering the investment earnings forecast from 7.5 to7 percent.

“In FY 2024–25, half of cities are anticipated to pay over 30.8 percent of their payroll towards miscellaneous employee pension costs, with 25 percent of cities anticipated to pay over 37.7 percent of payroll,” said the study. (see chart)

For safety or police and firefighters: “By FY 2024–25, a majority of these cities are anticipated to pay 54 percent or more of payroll, with 25 percent of cities anticipated to pay over 63.8 percent of payroll.”

A call to “convene the stakeholders” was another similarity between the League study finding of “unsustainable” pension costs and remarks at the seminar in 2009 that followed Seeling’s call for solutions.

“It is our hope that this report today helps inform the discussions that can be used across stakeholders to acknowledge that there is a problem and encourage all of us to come to the table to help forge solutions,” Carolyn Coleman, League executive director, said this month.

At the seminar in 2009 the CalPERS chief executive then, Anne Stausboll, said the CalPERS board had talked about the “cost and sustainability of pension benefits” the previous week and decided that the system should take a “proactive role” on the issue.

“They asked us to formulate a way to convene our stakeholders — employers, labor, legislators and other stakeholders in our system — to convene everybody and start having a constructive dialogue on sustainability of pension benefits,” Stausboll said.

At the League news conference a reporter’s request for a definition of “unsustainability” was answered by Daniel Keen, a former Vallejo city manager with two decades of experience in five cities.

The ability to absorb rising pension costs varies from city to city, Keen said, but one thing unsustainable for all is the erosion of basic services. He said uncertainty causes reluctance to fully staff police, fire departments, and public works maintenance.

As discretionary services such as libraries, parks and recreation are threatened, long-term commitments are less likely. Though the economy is growing and unemployement is low, cities are forced to make tough budget decisions.

“That’s not a good model for sustainability, considering that we will probably see recessions again in the future that will be much more difficult to manage through simply because of these rates,” Keen said.

To read expanded column, click here.