Will SLO issue a pension obligation bond?

April 17, 2014

pension1By JOSH FRIEDMAN

Chances are growing that the city of San Luis Obispo will issue a pension obligation bond to gain control of its unfunded retirement plan liabilities, which have soared past $100 million.

The city currently has a total of about $123 million of unfunded liabilities in its California Public Employees Retirement System (CalPERS) pension plans, according to a recent city staff report. Unfunded liabilities accrue when city retirement plan payments combined with CalPERS investments total less than the projected amount of money owed to retirees.

Only one member of the city council supports paying down a sizable portion of the pension debt, and city staff has increasingly discussed floating a bond to address the problem. While some cities have used pension bonds to successfully pay down their debt, others have spiraled into bankruptcy after issuing them.

On Tuesday, the council met in a special afternoon session to discuss paying down its unfunded liabilities to CalPERS, as well as to a state legal insurance pool to which the city belongs. The council had previously budgeted $3 million toward paying down the pension and/or legal insurance debt. It opted Tuesday to use $2.065 million to fully pay off its legal liabilities and give the remaining $935,000 to CalPERS.

The council discussed tapping additional funds to make a larger payment to CalPERS, but only Councilman Dan Carpenter advocated paying down more of the debt. City staff recommended against allocating any money for paying down pension debt until CalPERs adopts a new methodology for calculating payments.

San Luis Obispo currently pays CalPERS about $10 million annually. The annual contribution has increased steadily for years, though, and continues to rise. The city is still playing catch-up from the downturn in the stock market during the recent recession, as well as from a council decision in the late 1990s to forego making pension payments when the city had no debt in its retirement plans.

On Tuesday, finance director Wayne Padilla presented the council with two alternatives to a business as usual approach to making CalPERS payments. One option was to make the $935,000 payment.

Padilla’s other alternative was to issue a pension obligation bond to pay down debt the city has in its retirement plan for public safety employees.

In 2007, San Luis Obispo joined other agencies in a pool of public safety retirement plans. At the time, the city had an unfunded liability in its public safety plan, so CalPERS created a standalone debt, known as a side fund, which the city has still not paid down. The San Luis Obispo side fund currently has $24.5 million of unfunded liabilities.

A pension obligation bond or bonds could fully retire the side fund liabilities but would create a new debt with interest that the city would likely pay off over three decades. The average pension obligation bond has an interest rate of 4 percent, according to Padilla’s staff report.

“At sometimes it may make sense to issue a pension obligation bond,” Padilla said Tuesday. “Issuing a pension obligation bond has never been anybody’s preference.”

Padilla’s report indicates that the city would spend $3.2 million more over the next 30 years, if it opts for a bond over making its usual CalPERS payments. If CalPERS changes its compensation formula, though, the bond would cost the city $12 million less over 30 years than the adjusted CalPERS payments would, according to Padilla’s report.

At an upcoming board meeting, CalPERS will consider changing its payment formula from one computed using percentages of agencies’ payrolls to one that consists of fixed annual contributions.

If CalPERS makes the change, the long-term debt, including interest, in the city’s side fund will increase by more than $15 million, according to the staff report.

CalPERS actuary Barbara Mann, however, said the formula change would make very little difference in the amount the city owes.

During Tuesday’s meeting, Carpenter said the city should do what it can to pay down the side fund.

“I would be in favor of putting as much in as possible now and let us ride out this favorable market,” Carpenter said.

Due to an increase in stock prices over the last year, CalPERS investment returns have spiked. When returns are high, extra payments to CalPERS generate more funding in retirement plans than they do when the market is down.

Additionally, contributions to CalPERS that exceed minimum payments reduce the amount of interest agencies pay over time.

Still, no council member other than Carpenter supported using city reserves to pay down unfunded pension liabilities.

Councilman John Ashbaugh said he would like the city to relieve itself of the shadow of its unfunded liabilities. Ashbaugh, though, made the motion to make the $935,000 payment to CalPERS, saying that he trusted it would provide the most bang for the buck.

The council voted 4-1, with Carpenter dissenting, to make the $935,000 payment toward the city’s public safety side fund.

Following the payment, the city’s side fund will have $23.6 million remaining in unfunded liabilities. An additional $32.9 million of unfunded liabilities exist in the city’s pool portion of its public safety plan. The unfunded liabilities in the retirement plan for all other employees total $65.6 million.

San Luis Obispo currently has approximately 20 retirees with pensions above $100,000. Each retiree receives a yearly 3.25 percent cost of living increase.

 


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SLOBIRD

doggin, sounds like you are very unhappy with your working environment with the City. There are always alternatives. I can understand your frustrations, but unfortunately there are management, mid-management, and worker bees levels in all organizations. The City, State, Federal government provide great opportunities for education advancement and I would suggest you look into these and use your energy wisely. Good luck!


doggin

Not at all, quite the opposite. I am fortunate to have worked and still work with some of the best folks in the industry over the years. I may not agree with the politics but who does all of the time.


SLOBIRD

Glad to hear it, doggin, because you are right as I know many of the worker bees of the City personally and they are hard working. The few bad apples make everyone look bad, human nature but the City has some great people working there. Our parks, streets, trees, water, wastewater, signals, signs, payroll, accounts payable, billings, etc. are the responsibility of the genuine works. We need more of you guys and less management. Thank you for your work!


flytrap

The 800 pound gorilla here is the basic question-what business experience does each of the members of the City Council have to make this critical decision? It is very sad that there is very little here except with Dan Carpenter. But these are the people that the majority of SLO residents elected, and therefore, expect to get poor results too, with bloated pension obligations and salaries. You get what you vote for-and don’t expect any better results. And to think that they are voting to give themselves pay raises-pretty sad!


wineguyjc

Twelve plus years ago the city bumped all employees pensions up from, for example 2% for each year of service at age 55 to 2.7% for each year of service at 55. This subtle change did this: If you had worked at the city for 30 years in 2001 your pension would have totaled 60% of your total highest year of pay. For example, if you made $100k a year, then your pension would have been $60k a year. After this unfunded bump, your pension would have been $81k or 81% of your total highest year pay. This is where the city out of total greed for former City management created a massive pension funding gap over night and they have hid this fact for over a decade. Every employee, plus council profited from this scam overnight.


Couple this with all the crooks and misfits working at the city: Cops importing drugs to the US, cops trafficking drugs, Utilities staff dumping hazardous waste on city property, utilities staff growing pot at whale rock reservoir, utilities staff scamming the public, utilities staff misappropriating city assets for personal gain, utilities staff conducting side business work on agency time, a public works employee / union leader misappropriating city property for personal gain, a city attorney routinely giving unsound legal advice costing the city millions annually in lawsuits and unnecessary litigation, a city manager well we don’t need to go there on that one it speaks for itself, then you have a true picture of why the city has financial issues.


Detroit has the answer, true pension reform turns back the clock, ratchet back the pensions for all these employees back to 2.0 at 65 which reflects federal employees pensions. Enough of rewarding misconduct. We need true accountability and true transparency. If the council wants to do the right thing, then stop pandering these crooks. Enough is enough, NO ON MEASURE Y.


achillesheal

I’m no banker, but it seems to me that paying off debt by issuing new debt isn’t exactly fiscally prudent. Imagine the guy coming home to his wife and saying, “good news hone, I paid off our credit cards today, the ones that we skipped payments on for all those years”. “It was easy, all I had to do was mortgage the house for 30 years”. Don’t worry our kids don’t need it.


isoslo

I may be wrong but my thinking is that if the pension obligation is born by the city then the pensions are at risk if the city goes bankrupt, But if we issue a bond and the pension obligation is paid in full then the city retirees are fully guaranteed their pension no matter what, now the taxpayers are on the hook for the bond. Seems like a self serving move by city employees.


hijinks

The city created much of this problem for itself through decades of inept management. Back in the early 2000s, when the stock market was booming, CalPers offered its agency subscribers, like the city, a “holiday” from paying into the system. This was understood to be temporary, and subscribing agencies were advised to set aside the money in case it was needed later, which it would be should the stock market crash. The then mayor, Allen Settle, also advised setting the money aside. But, no, our administrators advised the city council not to do this so they’d have the extra money to play around with. And the council majority back then went along with that. So now it’s chickens come home to roost. Very predictable. This is what we get for having city managers who are aligned with the business community’s constant greed for goodies from the city — that’s who they serve, not the people who live here — and that extra money saved from pension payments made a lot of downtown people very happy. A very sad story for the happiest place. Now we’re on to round 2 of this sad story. A second chance to make things right, and it appears they will not do it.


OnTheOtherHand

A modest suggestion or two for the City of SLO — and any other California government agencies facing similar pension funding problems. While you may not be able to legally avoid your current obligations, there are things that you can do to put an end to the bleeding so that you will have time and funds in the future to address the past problems.


You can give the boot to all the overpaid top officials that won’t accept a heavy pay cut. If the CEO of CAPSLO can get by on $160K/yr, why are you paying your City Administrator about 40% more for overseeing a smaller number of employees. You have legal counsel that gives advice costing the city big legal settlements — get rid of her too. I bet you could find an attorney who will give better advice for the same amount of money.


Insist that department heads institute strict policies about minimizing overtime and eliminating it for anyone close enough to retirement (2-3 yrs?) so that they can use it to pad the basis for their pension.


Stop knuckling under to strong union demands for pay and benefits based on “comparable pay in similar counties.” It just results in spiraling costs. If they want to get paid that kind of money, they need to give up something important like protection of incompetent, corrupt or malicious individuals within their unions.


fatboybcs

Overtime isn’t included for the retirement formulas in calpers


kayaknut

But vacation, sick, and administrative time off is, which is wrong. There are other terms used adding to a pensions payout and they keeping changing the terms names as people find out what they are doing.


doggin

As mentioned OT and “stand by time” income are not included in PERS. When you say comparable pay in different counties I can tell you typical maintenance workers are below scale here in SLO county compared to adjacent areas. When salary surveys are done employees are told to use like cities with like residency such as Avenal, Bako,Gonzales, Salinas or another economically distressed area where housing is far less then SLO county. Drive further you say. That’s fine also but much of the staff, police,fire,public works,water and wastewater at local municipalities are required to be “on call” and have a job required response time of under 30 minutes. Tuff beans you say, hey no problem. Next 40,000 tourists who roll thru town next weekend and shitcan the streets, public bathrooms, beaches and the rest can be cleaned up by the business owners who make bank off those many tourists. Problem is in 30 years in SLO Ive yet to EVER see a single one of “those” people walkin the beach or freeways cleaning up the happiest place in America. That is unless there’s something in it for them like free business advertisement, a kudos of some sort or a political handshake from one of SLO’s finest. Its never from the heart felt concern for this county.


SLOBIRD

wineguyjc, you are almost right except it is a little worst than you stated. You state: “… for example 2% for each year of service at age 55 to 2.7% for each year of service at 55.”


The original formula for general unit employees was 2% at 60 and twelve years ago was changed to 2.7% for each year of service at 55. The employees gained .7% more for each year of service starting at 55 instead of 60. Employees got to retire 5 years earlier.


The original formula for public safety (police and fire) was 2% at 55 and twelve years ago was changed to 3% for each year of service at 50. The public safety employees gained 1% more for each year of service at 50 instead of 55. Employees got to retire 5 years earlier.


This caused immerse debt for the City and benefitted management with their high salaries. Shortly after this change occurred, the City Manager, Finance Director, Human Resource Director, Fire Chief, Utilities Director, and anyone else that could made an exodus did and got these great pensions as they went out the door. This was under Ken Hampien’s watch and he was a big winner on this decision along with Bill Statler both with their $100,000 plus annual pension.


We the taxpayers will now have to make the payment.


SLOBIRD

The above response should have been for:


wineguyjcsays:

04/18/2014 at 7:47 am


Sorry!


Human Reason

What is only touched upon in this article is the $2.065 million to fully pay off its legal liabilities. This is directly attributed to Monica Irons and Christine Detricks mismanagement and bad legal advice. When will it end.


rogerfreberg

Uh oh!


Can anyone say “JUNK BOND??”


This is clearly a ban aid to cover past obligations with future revenue.. we need some changes in city hall and admin.