ESCONDIDO — To combat the unfunded pension liability, the City Council is moving forward with a new plan.
The council approved a Section 115 Irrevocable Pension Trust during its Feb. 14 meeting, along with pension funding options and a policy on the use of one-time money. An initial deposit of $1,984,000 from the Reserve for PERS Rate Smoothing is required to fund the program.
Escondido follows in the footsteps of 122 other public agencies including La Mesa, Coronado, National City and Solana Beach in implementing a Pension Stabilization Program. Public Agency Retirement Services was awarded the agreement from the city.
“The next big step is we will come back in April for funding,” City Manager Jeff Epp said.
In five years, the employer pension contributions are projected to increase yearly by $15.3 million or 68 percent.
The unfunded liability is projected to reach $13.7 million in Fiscal Year 2017-18, while total PERS projected costs are $22.5 million. Those figures grow to $26.7 million and $37.8 million, respectively, by FY 2022-23. The city’s total unfunded liability is $244 million.
As for the fund, the city will engage in a “moderately conservative” plan, which estimates return between 6.51 and 4 percent.
“If rates get really high or there is a downturn in the economy, we would be able to draw out that money,” said Joan Ryan, the city’s assistant finance director.
The council conducted a workshop in September 2017 where it established the parameters for the pension issue. The benefits of the Section 115 are it allows city control to withdraw funds at any time to make a PERS payment and it’s also irrevocable.
The increased pension costs, though, are largely the result of rising pension unfunded accrued liabilities, according to a staff report. The unfunded accrued liabilities is the gap between pension assets and pension liabilities. One of the most critical assumptions in attaining full pension funding is the rate of return on investments, according to the report.
Prior to FY 2016-17, CalPERS assumed an annual investment rate of return on pension assets of 7.5 percent. However, CalPERS does not always reach the return and the outlook was “increasingly pessimistic.”
“This is the best option to address the unfunded liability,” Mayor Sam Abed said.
As a result, a long, low-interest rate environment and movement toward a more “risk averse” portfolio, was adopted by the council.
The CalPERS board approved a plan on Dec. 21, 2016, to reduce the assumed rate of return from 7.5 percent to 7 percent over a three-year period. This phase in began in FY 2018-19 with required employer pension contributions being calculated using an assumed rate of return of 7.375 percent.
When lower investment earnings occur, future contributions must increase to make up the expected difference.
The council has stressed this issue for years as it pertains to balancing the budget. However, one casualty was the library, which is now under contract with a private operator and will save $400,000 per year, according to city officials.
The CalPERS gradual decrease in the assumed rate of return of 50 basis points over the next three years will result in much higher employer pension contributions for the city, according to the staff report.