City Council Approves Record Payment Toward Santa Monica's Unfunded Employee Pensions

By Niki Cervantes
Staff Writer

June 15, 2017 -- Digging deeply into its budget, the Santa Monica City Council Tuesday approved a one-time payment of a record $45 million to reduce a looming bill for unfunded City employee pension liabilities.

As with other California municipalities, the City is already making extra payments annually to whittle down its unfunded employee pension liability of nearly $378 million.

The total payment is usually dramatically less, however.

All previous payments to pay down the liability total $31.3 million, a report to the council said.

Tuesday’s unanimous vote comes as the City grapples with a possible recession, City spending that could soon out-run revenue and a future of shortfalls linked to rising personnel spending and pensions.

“The greatest challenge to Santa Monica’s long-term fiscal sustainability is the long-term unfunded pension obligations for city staff,” the report said.

By the 2021-2022 fiscal year, soaring pension costs will be responsible for $13 million of the General Fund’s projected $19 million shortfall, according to a council report from the City’s finance department ("Employee Costs Pose Major Fiscal Challenge for Santa Monica Officials," May 23, 2017).

To stitch the payment together, the council also agreed Tuesday to make forgivable loans to the Housing Authority and Pier Funds in the amounts of $200,589 and $235,458, respectively.

The General Fund –- the biggest part of the budget -- will also loan money to the Rent Control Fund for its $519,669 portion of the pay down ("Facing Deficit, Santa Monica Rent Board Raises Registration Fee," June 12, 2017).

Staff will negotiate a repayment plan at a proposed annual interest rate of 1.3 percent, reflecting the amount earned on the City’s portfolio.

The report said the pension issue stems from the California Public Employees Retirement System (CalPERS) decision to ratchet down its assumed rate of return on investments after years of missing its 7.5 percent target rate.

The rate of assumed return drops to 7 percent.

Local governments are trying to determine how to fill the gap. In Santa Monica’s case, the amount it contributes jumps by 50 percent within five years, the report said

The high price of public sector pensions came to light after a 2012 change in accounting practices required U.S. governments to begin including the unfunded portion of total employee liabilities on their balance sheets.

In California, the change revealed soaring public pension commitments that its governments made as early as 1999, when the Stock Market was booming and CalPERS returns were bountiful.

Experts say even after the market rebounded from the 2008 crash, CalPERS investment returns couldn’t stop rising pensions costs for state and local governments.

Santa Monica’s total pension assets are valued at $1,160,937,160, with a net unfunded liability of $386,760,127, the council report said.

It defines unfunded liability as the gap between the value of what has been paid into the pension fund to cover employees over time and the actual cost of those benefits in the future.

The $45 million payment brings to City’s total paydown of the debt to $76.3 million over the last few years.

Staff estimates that the $45 million payment would result in $3.8 million in on-going savings, $3 million of which would be in the General Fund.

The City’s fiscal policy requires minimum payments of $1 million in the General Fund and a commensurate amount in all other funds.

With the current fiscal year ending on June 30, the council voted to allocate $35,080,812 in General Fund reserves and $8,639,607 in other operating funds’ reserves.

Pension costs make up approximately 7 percent of the City’s overall budget and 10 percent of the operating budget, officials there say.