City’s plans to review pension payment strategies as obligations rise

ENCINITAS — The city’s pension and retiree healthcare debt has risen from $50 million to $56 million this year, despite ongoing efforts to pay down the liability in recent years. 

City officials learned about the rising amount last month at a City Council meeting closing the books on the 2017-2018 fiscal year. 

In recent years, the city has been paying $500,000 annually towards what it owes for post-employee retirement benefits on top of its regular payments to CalPERS, while also offering less generous retirement packages to new employees. 

For example, a new city employee would have to retire at age 62 to receive full retirement benefits, which would amount to two percent of the employees highest three-year salary average during that period times the number of years employed. 

Prior to the change, employees would get 2.7 times that highest salary and could vest at age 55. 

But the state retirement system, known as CalPERS, has decreased the amount of its contribution in recent years, shifting the burden towards cities, as the result of CalPERS lowering what is known as the “discount rate.”

That rate — the anticipated long-term rate of return on the state pension system’s investment portfolio — was at 7.5 percent in 2016, but CalPERS that year voted to gradually step its return rate down to 7 percent by 2020. City officials called the overall pension picture “concerning.”

“The 800 pound gorilla in all municipal efforts is the pension obligations, and it concerns me a little bit that the the report that lays out a significant jump in our unfunded liability mentions the increase … was the result of lower CalPERS discount rate assumption,” Councilman Tony Kranz said. “The discount rate assumptions are a real problem.”

Kranz pointed out that some critics of the state retirement system argue that the discount rate is still too high, and by maintaining the 7 percent rate will leave the pension crisis for the next generation of municipal officials to grapple with, a sentiment echoed by Councilwoman Jody Hubbard.

“The problem with being gentle is…at the end of the day you gotta pay it,” she said. 

Gary Caporicci, a certified public accountant with the Pun Group, which audited the city’s financial statements, said that there are some critics who have argued that CalPERS should lower its projections to 4 to 5 percent, but they choose to not do so because the impact would devastate some municipalities.

State retirement officials, Caporricci said,  base their investment projections on 30-year windows of returns, so while current returns might not be in line, history dictates they ultimately meet their mark, he said. 

Whether that materializes in the current situation remains to be seen, he said. 

Meanwhile, Mayor Catherine Blakespear said the council in an upcoming meeting would take a look at its pension payment approach to see if there are other payment options. 

Blakespear said that the cities are grappling with the unsound financial decisions of both local municipalities and state retirement officials of decades past.

“In the ’90s, many cities considered it sound financial policy to bet on a rising market to cover generous pension benefits,” Blakespear said.  “By the early 2000s, the folly of this plan became obvious.”

“We’ll be discussing whether it makes financial sense to take another approach to paying down our existing pension debt while still operating critical government functions (like funding sheriff’s deputies and keeping parks open) and also investing in longer term capital projects,” she said.