SLO pension liabilities skyrocketing

June 6, 2013

RetirementAhead

By JOSH FRIEDMAN

In a span of ten years, the city of San Luis Obispo has gone from having no pension debt to becoming more than $100 million in the red in its retirement benefit plans.

Between fiscal years 2001-2002 and 2010-2011, San Luis Obispo’s annual pension costs rose from $0 to approximately $8 million. By 2020, yearly pension costs are projected to rise to nearly $14 million, which would consume more than 25 percent of the general fund if expenditures remained the same.

President of the Center for Government Analysis Steven Frates authored a report on San Luis Obispo finances in 2005. Fates told CalCoastNews that the rising cost of pensions will leave city officials with a “conundrum” of choosing between cutting services and raising fees if employee salary and benefit structures remain the same.

“San Luis Obispo city councils over the years have awarded very lavish pensions and they have not been prudent paying for the pensions,” Frates said.

The city holds two pension plans with the California Employees’ Retirement System (CalPERS), which manages the retirement benefits. One plan is for the city’s retired police officers and firefighters, known as the safety plan, and the other, called the miscellaneous plan, is for all other retirees. Both plans have defined benefit status, meaning the retirees are guaranteed their pensions for life. About 450 retirees belong to the two plans, as well as about 350 current employees.

Retired San Luis Obispo public safety employees receive annual pensions of up to 90 percent of their highest yearly salary for the remainder of their lives. Their pension formula is 3 percent at 50. Beginning at age 50, public safety retirees receive a percentage of their highest annual salary equal to the number of years they worked multiplied by three. Retired police officers and firefighters who have worked for the city for 30 years receive annual pensions of 90 percent of their peak salaries.

All other retired employees receive an annual percentage of their highest salary equal to the number of years they worked multiplied by 2.7. These retirees, too, receive their pensions for the rest of their lives, but they do not have a cap on the amount of money they can receive.

Each retiree also receives yearly 3.25 percent increases to their pensions as cost of living adjustments.

Currently, 19 San Luis Obispo retirees receive annual pensions exceeding $100,000, according to a CalPERS database. Former city manager Ken Hampian, who retired in 2010, currently receives a pension of nearly $156,000. Four other former employees also receive annual pensions of more than $130,000.

To pay for the pensions, the city makes bi-weekly payments to CalPERS, which invests those funds and distributes pension benefits to retirees belonging to the two plans.

Beginning in 2012, city employees began contributing to the plans as well. Safety employees contribute 9 percent of their annual salaries to their pension plans, and miscellaneous employees pay 8 percent.

Each year CalPERS tallies payment totals that San Luis Obispo makes. In the years 1999-2000 through 2001-2002, San Luis Obispo paid CalPERS $0 annually. When the investment money accumulated in a plan exceeds the amount of benefits owed to retired and current employees, CalPERS does not require the plan holder to make payments.

The 1999 through 2002 period was unusual because they are the only years out of the 25 in which the city did not make any contributions to CalPERS. In 1999-2000 and 2002-2003, San Luis Obispo paid into its safety fund only and not into its miscellaneous account.

By the end of 2011, the two plans accumulated a combined total of $107.3 million of unfunded liabilities. Whereas in 2002 San Luis Obispo had more money in its pension plans than it owed in benefits, in 2011 it owed more than $100 million more than it had invested.

City Manager Katie Lichtig said a variety of factors caused the sharp rise in pension debt. Some contributing factors included investment losses by CaPERS and rising employee salaries.

But, as CalPERS suffered investment losses and employee salaries increased, the city did not proportionally increase its annual payment to offset the rising liability.

In 2002, San Luis Obispo had more than 100 percent funding for both of its plans. By 2011, the money held to benefits owed ratio dropped into the 60 percentile for each plan. The funding level of the safety plan fell to 65.6 percent and the miscellaneous to 61.6 percent.

“Generally speaking, anything below 80 percent is not good and anything below 70 percent is a matter for acute concern,” Frates said.

The lower the level of funding, the more difficult it becomes to pay down the unfunded liabilities, Frates said.

“It’s going to take a tremendous amount of money or a change in benefit structure.”

CalPERS requires plan holders to amortize, or pay off, their unfunded liability over a 30-year period. Thus, as San Luis Obispo’s pension liability has increased, so have its annual payments.

In 2011-2012, the city paid CalPERS a total of $8.4 million. San Luis Obispo is expected to pay CalPERS $9.7 million over 2012-2013 and $10.4 over 2013-2014.

In 2013-2014, the city will owe approximately $200,000 extra because CalPERS lowered its discount rate from 7.75 percent to 7.5 percent. The additional liability will increase as the city’s annual rate increases.

CalPERS also created a new set of standards in April that will accelerate the pace at which plan holders amortize their unfunded liability. Beginning in 2015-2016, municipal members of CalPERS will face five-year rate hikes intended to increase the funding levels of their plans and reduce the risk posed by potential investment losses.

CalPERS currently projects annual payments beyond 2013-2014 only as a percentage of payroll. In 2004-2005, the city’s pension costs, as a percentage of payroll, were 13.7 percent and 29.5 percent for its miscellaneous and safety plans respectively. By 2014-2015, CalPERS projects the city’s contribution rates for its two plans will rise to 25.8 percent and 44 percent. CalPERS projects that by 2019-2020, those rates will increase to 31.3 percent and 55 percent.

Based on a currently projected payroll of $35 million, San Luis Obispo will owe CalPERS $13.7 million for its annual pension contribution in 2019-2020. That total could increase if employee salaries increase or CalPERS investment returns are not as high as projected.

Last year, the city did negotiate reduced salaries and benefits after San Luis Obispo voters passed a pension reform initiative in August 2011. Following the passage of Measure A, San Luis Obispo labor groups accepted agreements with the city that require employee contributions to pensions and a two-tier system for new hires.

Newly hired police officers will receive 2 percent at 50 pensions, new firefighters will receive 3 percent at 55, and all other new hires will receive 2 percent at 60. Both formulas use an average of the highest three years of compensation, as opposed to the single highest year. Employees, however, can convert unused sick leave into additional pay to boost their pensions. Also, employees often work a lot of overtime in the year or years that will determine their pension size.

Frates described San Luis Obispo’s pension reform efforts as “window dressing.” He said the change in pension formulas would create some savings, but several decades would pass before the city would reap the rewards of the two-tier system.

Since the second-tier pension plans only affect new hires, current retirees continue to receive their pensions as initially structured, as will most current employees when they retire.

In 2011-2012, the city had $51 million in general fund expenditures, $40.1 million of which went to staffing costs. While pension costs totaled $8.4 million, CalPERS projections show they will rise to $13.7 million by 2020 with all else constant.

Lichtig did not indicate whether she expects reductions in city services or increases in fees to occur as a result of rising pension costs.

 


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Jorge Estrada

I have to laugh at the term pension when it sound more like a great life-time salary. I will get a pension when I retire after many years, maybe 5 decades, but it will be more like an unemployment check not a great salary. Is there any wonder why the benifit of government has become questionable. If the government took over my company I would get a 25% pay raise to retire and then I could shut my mouth too.


slo Fact Finder

So let me get this straight; the population of San Luis Obispo has gone up less than one half percent in the last fifteen years, while the cost to operate the city have risen over 250% during the same period,

city fees, fines & surcharges (including water and sewer rates) have skyrocketed, due in part to the significant sacrifices & conservation efforts of the citizens, city staff costs & associated benefits (including lifetime pension contributions) are now consuming inordinate percentages of the city’s operating budgets.the city has a harder and harder time balancing its budget each year due to overspending which requires”creative” deficit spending techniques to be employed in borrowing ever increasing amounts of money from the city’s four “sacred” Enterprise Funds resulting in account reserves dipping below the 20% policy limits in the General Fund , deferring legitimate capital improvements (not routine maintenance projects) indefinitely by “kicking the public improvement can down the provincial road”, creating more long term debt due, in part, to the underfunded pension liabilities and the need to buy more non-essential toys like the two story monster bus and the 100′ boom fire truck which can not navigate many downtown streets, while both the quantity & quality of city services continue to decline and/or deteriorate…..Whats wrong with this model in today’s world anyway?


Tried to reach a city staff member lately? It must be extremely frustrating not to be able to speak directly with the one of the best and the brightest high paid city employees who must be somewhat busy calculating their personal pensions within the current irrational “Defined Benefit Pension for Life System”

based on the ability to “spike” your final year of service which is the basis for several (about 20) $100,000 plus per year city pension club members. REVOLTING huh??


r0y

Careful, you’re actually beginning to see what those hateful “TEA baggers” have seen for over 8 years… Don’t want to get lumped in with THOSE types! Golly no! Not while my “learned” colleagues are watching.


OnTheOtherHand

If the “Tea Baggers” had limited themselves to issues like spending limits and balanced budgets, I would have been right there with them. Unfortunately, many want to include other positions that I find repugnant or just plain stupid. Blind support for corporations, permitting governmental entities to be used by religious fundamentalists to advance their views and climate change denials lead the pack. (There is room to question the amount of climate change and appropriate responses but the basic science is there.)


r0y

I’ve only spoken with TEA partiers that wanted smaller government, less spending and less taxes. Occasionally, they throw in pro-Gun (2nd amendment) and pro-Life (abortion) positions, but their core belief is taxes and government size/spending.


Oh well.


Rambunctious

Don’t worry guy’s…the state has a surplus…


tomsquawk

ha! i read that a union, which shall remain nameless, is asking for money back because of their support for a recent proposition. pay raises.


r0y

So why won’t you name this union?

Everyone should know what it’s name is…

I can’t believe you would not just spell it out!

Unions are so wonderful in the public sector, they’ll have nothing to hide!


tomsquawk

good one! don’t want the Feds searching for keywords, though.


womanwhohasbeenthere

Outstanding article! Our city is in very dangerous financial waters due to a complete lack of leadership and passing the buck to the next council.


The voters overwhelmingly passed Measure A to alter pensions but almost nothing has been done. Many of these employees need to go; some services must be outsourced; nonessential services must be cut completely. We need citizen oversight on all these things as staff’s first priority is staff: And frankly, given the track record of Dietrick and Lichtig, they should be the first ones to go!


I heard Paul Brown state on the radio that he had a problem with any public employee making over $150,000 a year. Maxing salaries at this is a great start. Don’t like it? Go find another job! I doubt anyone will quit in this economy.


Let’s take back government of, by and for the PEOPLE and not of , by and for the EMPLOYEES.


r0y

$150K cap?! Try $80K CAP. Period. Don’t like, leave… there’s plenty of people who can do your useless, unskilled job – don’t fool yourself.


SLOBIRD

So, Ken Hampien retires in 2010 with a $156,000 lifetime pension and in 2011 it is discovered the two pension plans accumulated $107.3 million in liability. Thanks Ken, it was under your leadership this happened and then you and Bill Statler, Finance Director, who assisted you in making those pension plans available to the employees walked with your big lifetime pensions. Up until around 2001-2002 the pension plans for employees was 2% for general employees at 60 years of age, and 2.5% for public safety employees at 55 years of age. Obviously your negotiated changes for which you benefitted have made a big game changer to the ratepayers. No wonder all the department heads retired as soon as that change was made. And, in addition, last I heard, department heads also got free lifetime medical insurance as if you didn’t get enough. And then you go to the City of Bell and donate your time. Bet you used that as a tax deduction!


tomsquawk

pull up the ladder, i’m up


info

It appears to me half the country thinks this type of spending is acceptable. In a sense, are we not ’employees’ of the federal government? We expect many services (i.e. protection, social programs, agriculture) from our government as we are american citizens. However, once the Federal Government decides to cut a program or service that impacts us individually – we cry foul! We americans act just like our local state/city/county employee unions that we hate, fighting for our benefits. We are doomed.


r0y

It’s all the ignorant people who still think “economists” like Paul Krugman actually know about that which they speak. It has frightened millions of us for a very long time; thankfully, such dreadful economic theories are being realized for the abject horrors that they are by more and more people everyday. Of course, this will just make the “true believers” double-down on their vitriolic defense of such failed theories, but that is the way of the world, it seems.


hijinks

YOu must be very intelligent. Krugman actually knows a good bit more than you, however, as comparing one of his sentences to one of yours would prove in every instance. Oh, I forgot, you’ve never read any Krugman, just the lunapublicans’ flames at an economist who’s been right more than most. BTW, eactly what “dreadful economic theories are being realized for the abject horrors that they are?” Surely you speak of that of the austerians, who’ve been wrong, wrong, wrong in everything they say yet are still taken seriously by the lunapublicans?


r0y

Hit a nerve, did I?


robert a

The only “nerve” you may have hit is the funnybone! It’s hard to grasp what your saying with all the bitter froth at the mouth hyperbole….but, yeah, i’l take the Nobel winner in Economics over the Glenn Beck dittohead. Carry on.


r0y

The Nobel winner? Yassar Arafat? Al Gore? Barrack Obama?


…all accomplished intellectuals, no doubt.


SLOBIRD

Info: They can dump the social programs and all the free loaders at both ends. There was a time your family would help you in time of need (not if you were on drugs or alcohol) and if family was not around and able to help you could go to your church. Now, you go to Planned Parenthood, CAPSLO, ACORN, and 15,000 other organizations feeding at the trough. If short term assistance you could go to Social Services and get assistance. Now, you get LONG TERM LIFER (just like government employees who feed off you) subsidy, housing, food stamps, free bus rides, free breakfast, lunch, and after school care at school, cell phones, computers, education, tires for your car, clothing, etc. Hell, why would you ever want to get off your arse and do anything constructive. All at the taxpayer’s expense!


rogerfreberg

I am surprised that in the city council election, I didn’t read anything by the candidates addressing this issue.


Did anyone take a position??


The short term thinking by all the previous councils has lead us to this situation. The problem is partly the mess we are in and partly what is going to be done about it? I think the city council should share with us their strategy… if they have one.


r0y

Talk to Don Hedricks. He was the ONLY one, and I mean ONLY ONE who had a staunch position against these leeches. Who better than a working man who’s been steam-rollered by the system to come in and clean house? NO? We should put in someone who’s worked this system? Yeah, that will work out well in the end.


kayaknut

“Lichtig did not indicate whether she expects reductions in city services or increases in fees to occur as a result of rising pension costs” of course no mention of cutting salaries and benefits, starting with her own.


Open up your wallets, any wonder why everything is going up, water rates, parking fines, permits, Expect new fees and taxes everywhere, someone has to pay for it, certainly not the city employees by reducing personal costs.


r0y

Detroit: Here we come!


(Is it too late to point out that cities in this position are 9 times out of 10 run by Democrats? And in California, “republican” = democrat, pre 1970)


OnTheOtherHand

What is the percentage of all cities in this state run by Democrats? I am not saying they aren’t guilty as charged, just that many Republicans are as bad.


r0y

the majority, I believe. The only lists I found were crime and poverty lists, and all were democrat-led. I looked for “bad” republican run ones, but didn’t find any (i.e. easier to find crime and poverty in Oakland than it is Newport Beach, etc). Still, you have a point. CA Republicans are essentially Democrats circa 1970.


BeenThereDoneThat

Wow another CA. city that spent in WILD abandon in the good years (like it always stays that way) and now is behind the eight ball. Wow call me surprised.