CalPERS move leaves SLO with multi-million dollar shortfalls

March 1, 2017

Following the California Public Employee Retirement System’s (CalPERS) recent decision to lower its investment forecasts, the city of San Luis Obispo is facing skyrocketing pensions costs. As result, also because of slowing tax revenue growth, the city is facing a structural deficit, which includes a projected budget shortfall of more than $5 million in 2021-2022.

By that time, San Luis Obispo will likely be paying about $20 million a year for pension costs, nearly double what the city is currently contributing to CalPERS.

Last December, the CalPERS Board of Administration voted to lower the pension system’s discount rate from 7.5 percent to 7.0 percent over a three-year span. The changes will begin taking effect for San Luis Obispo in 2018-2019. The same year, the city is projected to start having budget shortfalls, according to SLO’s recently released five-year fiscal forecast.

When CalPERS lowers its discount rate, member agencies’ pension payments and unfunded liabilities increase due to the projected decrease in investment revenue. City estimates suggest the .5 percent decrease in the discount rate will result in about an $11.5 million increase in SLO’s unfunded liabilities.

As of June 2015, San Luis Obispo had $126 million in unfunded liabilities, which was more than the rest of the cities in SLO County combined.

Due to a CalPERS policy that agencies must pay down their unfunded liabilities over a 30-year period, San Luis Obispo was already faced with rising pension costs prior to the December decision to lower the discount rate. The yearly increases in the city’s CalPERS payments will now be compounded by the decision to lower the investment forecast.

The lowering of the discount rate alone will cause SLO’s CalPERS payment to rise by $3.2 million by 2021-2022 and by about $5 million by 2025, according to city projections. In all, the city’s annual pension payment is projected to rise by $8.3 million by 2021-2022.

SLO’s most recent actuarial report projected the city would owe CalPERS around $11.7 million in the current fiscal year. Thus, the city’s annual pension payment will grow to about $20 million by 2021-2022. The yearly pension payment is on pace to be well above $20 million by 2025.

In the years 1999-2000 through 2001-2002, San Luis Obispo paid CalPERS $0 annually.  At the time, the city had no unfunded pension liabilities, meaning the money in its retirement plans exceeded the amount of benefits owed.

By the end of 2011, SLO had accumulated $107.3 million in unfunded liabilities. In 2011-2012, the city paid CalPERS a total of $8.4 million.

As pension costs have shot up, so has city’s budget expenditures. In 2002, SLO’s general fund budget was approximately $35 million. General fund expenditures, the majority of which are staffing costs, are projected to rise to approximately $85 million by 2022, according to the five-year forecast.

However, the city’s revenue is not projected to keep pace with its expenditures. Growth in revenue from sales tax and from transient occupancy tax is slowing, which has forced the city to lower its revenue projections.

The spiking pensions costs combined with the slowing tax revenue growth has left the city with a projected shortfall of $2.7 million in 2018-2019. Current projections show the city will have a shortfall of $5 to $6 million in 2021-2022.

SLO general fund growth

In turn, the city has activated its “Fiscal Health Contingency Plan.” The plan includes limiting the hiring to essential personnel and restricting the city-funded travel and training that is afforded to employees. Likewise, the plan calls for deferring or dropping some capital improvement projects and other one-time projects.

The contingency plan does not call for staffing reductions, nor salary cuts.

Unlike most other cities in San Luis Obispo County, SLO has grown its staff over the last decade. A recent CalCoastNews report revealed SLO added nearly 50 full-time employees between 2006 and 2016. City employees also received pay increases.

While the city implements its fiscal contingency plan, staff will work on a long-term plan intended to balance the budget. It is unclear if the long-term plan will include cuts to staffing costs, but City Manager Katie Lichtig issued a statement saying all options will be considered.

“The five-year forecast shows that we have both near-term impacts and a long-term structural problem. That requires us to look at all options to achieve a structurally balanced budget, which will happen over the next year,” Lichtig said. “All measures will need to be carefully weighed against service impacts to make sure we continue our commitment of high quality service to the community.”

City staffers plan to present a fiscal action plan at the April 18 SLO City Council meeting.

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Gee I guess if healthcare is a right shouldn’t a pension be one too? And if your own savings are not enough to maintain the same retirement salary as you made while working then you should receive a government subsidy to make up the diffrence, regardless of if you worked in the public or private sector. Sounds good to me.

The “discount rate” has absolutely nothing to do with how the investments perform; or future pension liabilities. The “discount rate” is a “guess/expectation of returns”. If returns exceed the expectation, then the fund grows more robust; if returns lag, then more funding is in order/costs must be reduced. The investments and their returns are a function of the portfolio; and pension costs are easily discerned through actuarial tables (which are not highly variable). Ironically, lowering the expected rate of return (seemingly a prudent decision in these financial times) actually causes an increase in future liabilities (on paper). But as written earlier; it is actual returns that matter, not expectations.

Unions may request better benefits, but it is the politicians that agree to it. Contracts are a two-way street, and blaming only one side is either childish or mean-spirited. Our Constitution is a contract with the American people, and contracts are a fundamental part of our culture. Courts take a dim view of abrogated contracts.

The SLO Property Owners Association has been warning everyone about this for at least ten years, to no avail. City officials and staff have known for years the system as unsustainable. This isn’t a surprise at all. What is also not surprising is the city manager does not want to lay off anyone, although it is staff pensions, salaries and benefits that are the problem. We aren’t spending too much on infrastructure but guess what – capital projects are the first items on the chopping block.

Katie and all senior management staff need to go.

I have to assume that all the thumbs-down responses come from those that are bellied up to the trough.

Why not put a sunset on all government pensions, let’s say 20 years. This will provide the choice to retire once eligible and get little or work into their later 60’s, like the private sector and get much more to supplement their private investments. This will remove the unaffordable, unrealistic pensions that start in their mid 50’s and last for the rest of their lives.

Why is it so difficult for Government to understand that paying people (and their spouses) for the rest of their lives who no longer work is not sustainable?

As long as they are able to steal our money, nothing is unsustainable.

Why is so difficult for mundane citizens to understand that our modern notions of government are all based on theft? (taxation).

Why is it so difficult for us to understand that the pension system will only fail when WE, THE PEOPLE, are out of money? They’ll tax out income, our investment gains, gasoline, commerce, what we eat and drink and even after we die. They’ll charge us to park on the street built with out tax dollars. They’ll fine us for safely driving over the speed limit. They’ll extort all kinds of fees from us in order for us to get permission to use our own property—which is also taxed!

And they run out of money.

So they take more.

Who are the stupid ones here?

They don’t care about anything but getting as much as they can.

And you don’t? Please keep your sanctimony in check.

If your employer decided they didn’t wan tot pay the agreed amount in matching 401K payments-after you began working there-you would be OK with it? Or would you care about getting what you were promised?

The system is whacked that is for sure. The gov’t can get away with only contributing when the market doesn’t make the contribution for them. They could go back to the old way of putting in the matching retirement money from the fricking budget!! That is a novel idea.

But let’s get mad at the people who agreed to work under those conditions, not the idiots who set it up.

Don’t put a cap on retirement at 20 years because some people–who retire at the appropriate retirement age– actually may live longer than that and need the money in their old age.

How about we pay them all that we promised, but only starting at a real retirement age; 62-65 and not 50!!

They can draw all they want when they reach retirement – AGE– but not before. Take that second job at 51 and retire from the Public sector–but you don’t get to draw it until you are older. You still have one paycheck.

People would not retire as young for one. There’s less incentive–no double paycheck.

We would not need to back fill as many positions we do and government would grow slower–while maintaining the commitment we made to the employee when hired.

Quit hating on public sector employees. They don’t make the rules–our elected officials do.

Oh Contraire…their Unions negotiate the increases and the workers strike. Civil Servants used to receive pensions because their pay was lower than comparable private sector workers.

As government grew to its current massive proportions, their pay and benefits now dwarf much of the private sector – particularly in San Luis Obispo.

The actual solution is privatize their pensions, meaning purchase an annuity through an insurance company with the money that they and the employer have put into retirement throughout their working lives and annuitize the contract at retirement to turn it into an income stream.

The problem is the amount would be about 1/4 or 1/5 what they currently receive through their current system where they are basing the pay on years of service and age, not on actual dollars.

Your idea is probably a good one for the future but MrYan’s suggestion seems like a reasonable step in that direction for the present.

By the way, a decent, reliable pension should be available to all workers. It is not so much that government has grown as it has been the loss of union power that has created the situation where so many people have nothing but social security to fall back on as they retire. While the government pension plans are too generous and non-government unions contributed to their own fall with some stupid policies, the pendulum has swung too far and needs to be brought back to center.

We need to hire a special bureucratic committee to analyze the situation. Then we need to consult. And when we disagree, we need a special private investigator.

It sounds like you are proposing more government, who will eventually conclude that the taxes must be raised to pay these essential people whatever they need to live a long and lavish life>

No, the oversight is in place, it’s your district rep, whom I emailed numerous times in regard to our outrageously paid local elected officials. Their pay rate is disgusting. You’d think they have doctorites.