The Pleasanton City Council held a wide-ranging discussion Tuesday night about the city's growing pension costs, including strategies for trying to pay down some of the estimated $160 million in unfunded liabilities associated with city employee pensions.
That liability figure is expected to grow in the years ahead, as is the amount of money the city needs to contribute annually to the California Public Employees' Retirement System (CalPERS), leaving city leaders working to determine how to address the problem in the short-term as well as in the long-term.
"In order to sustain services at current levels, including operations, plan for new capital and set aside funds for the ongoing repair and replacement of existing assets, the city must take a proactive approach to address this matter in advance of the estimated impacts,” city finance director Tina Olson wrote in her pre-meeting report to the council.
Tuesday's public discussion at the Pleasanton Civic Center was informational in nature, centering on an hour-long presentation by John Bartel of actuarial consultant firm Bartel Associates.
Bartel highlighted pension data for the city — past, present and projected — to help paint as full a picture as possible for the council before talking about options available to utilize millions the city has set aside to help pay down its pension liabilities.
City officials plan to return to the council in the next month or two with recommendations to address the pension obligations.
There are many reasons the city of Pleasanton -- along with scores of other public employers throughout California, including the Pleasanton Unified School District -- are staring down higher retiree costs.
The four primary causes, according to Bartel, are CalPERS investment losses during and after the recession, enhanced retirement benefits given to employees, CalPERS’ contribution policy and demographic shifts.
Of particular note for Pleasanton is the shrinking ratio of active employees versus retirees, Bartel said.
Last year, there were more retirees receiving pension payments (621) than active city employees contributing to the fund (502), a ratio of 0.8. Those totals shifted drastically compared to just two decades earlier, when the city had almost four times as many active employees as retirees, he said.
The CalPERS board also recently lowered the assumed rate of return (also dubbed the "discount rate") on assets held by the CalPERS investment pool by a half-percent to 7%.
The California State Legislature also passed pension reform laws in 2012 to help address the problem, but those changes focus on long-term solutions, leaving difficulties for municipalities in the short-term, according to Olson. Among the changes was requiring workers to pay their employee share of pension contributions.
Combine those factors, and others, and Pleasanton city leaders are faced with $160 million in unfunded liabilities, plus the prospect of rising costs in the years ahead.
The city's annual pension contribution is estimated to increase from $14.2 million this fiscal year to over $21 million in 2021-22 and ultimately up to $28.5 million in 2026-27.
And those rising costs and obligations appear all but assured, with likely no relief to be provided by the legislature or the courts, according to Bartel.
Still, there looks to be a bright spot on the horizon, he added.
“We fully expect contributions to gradually decline; it’s going to be a long before they really decline and get back to the level that they’re currently at,” Bartel told the council. “This is confirmation in our projections that you will be paying your unfunded liability off. It will take a long time, but you will pay it off."
Knowing the pension problem was fast approaching, the council has worked to set aside about $22 million in recent years to prefund the city's pension liabilities.
The question now becomes: How to use that money to address the problem?
City officials recommend the council consider two options -- prepay pension liabilities directly to CaIPERS and/or establish a "supplemental pension trust fund.”
Both come with pros and cons.
Paying CalPERS directly now will reduce the city’s pension liability but the annual payments will still remain high and therefore impact the city’s ability to maintain municipal services at current levels, according to Olson.
The irrevocable trust would ease the budgetary pressures by paying a portion of the pension increases in annual payments from the fund, which could yield 4%-6% investment returns, Olson said. But, the trust fund would be a more volatile investment tool than the city’s current portfolio and it won’t reduce the net pension liabilities in the short-term, she added.
While those are their preferred alternatives, city officials could also consider issuing pension obligation bonds or borrowing money from existing city funds (like capital improvement or repair and replacement reserves) -- though city staff does not recommend either of those options.
Following the discussion Tuesday, the council voted to forward the matter to its Audit/Finance Committee to work with staff and the consultant on a proposed strategy to address the city's short- and long-term pension obligations.
That recommendation would return to council members for final consideration no sooner than Jan. 16, according to staff.