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City Should Immediately Boost Annual Pension Payments, Report from Top Finance Official Recommends

Bob Kronovetrealty
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Santa Monica Convention and Visitors

By Jorge Casuso

April 23, 2019 -- Facing an unfunded pension liability of some $448 million that could "balloon," the City should immediately escalate the payments it currently makes using general fund money, according to a report issued Monday by Santa Monica's finance director.

The payments would be "over and above" the approximately $52 million annual contribution Santa Monica is required to make to CalPERS, California's Public Employee Retirement System.

In her report to the City Council, Finance Director Gigi Decavalles-Hughes said the City should pay $16.6 million, instead $2.6 million, in its upcoming 2019-21 Biennial Budget to help pay down the debt.

The money would come from "General Fund reserves and reallocations of existing budget," she said.

"Despite the steps the City has taken to date to manage its pension costs, like all cities in California, Santa Monica expects steep increases in pension costs that could severely impact services in the future if they are not managed," Decavalles-Hughes wrote.

"Moreover, if CalPERS is not able to meet its investment return targets in the years ahead, our City’s pension liability could balloon, undermining our long-term fiscal health," she said.

Under Decavalles-Hughes' proposal, the City would pay $9.3 million in the first year of the upcoming biennial budget, instead of the $1.3 million it has been paying.

In the second year, the City would pay $7.3 million, instead of $1.3 million.

The amount would then decrease to between $3 million and $4 million a year over the next seven years, Decavalles-Hughes said.

"In later years where the additional payments are lower than in the first few years and therefore require less than the identified dedicated funding amount, unused funds would be available to cover other one-time needs," she said.

The accelerated payments were one of the alternatives explored by staff and a Pension Advisory Committee (PAC) composed of residents and City employees that studied the issue, explored alternatives and made recommendations to the City Manager.

Other options the group analyzed were setting up an escrow-type account to set aside funds to pay the pension costs and issuing Pension Obligation Bonds (POBs) "to fund the unfunded liability by creating debt," according to the report.

"The PAC unanimously voted to recommend an accelerated plan to pay down the City’s current pension unfunded liability over 13 years, to conclude in 2032-33," Decavalles-Hughes said.

Not considered was any change to the current structure of employee
contributions to PERS, since that is "subject to labor negotiations with the City’s bargaining groups."

Also not considered was leaving CalPERS, which would "require the City to pay approximately $2 billion upon exit," according to the report.

The pension debt, City Manager Rick Cole has said, is largely due to a "catastrophic miscalculation" made by the governor and state lawmakers during he boom of the 1990s "based on rosy assumptions of future earnings."

"They authorized retroactive increases in pension benefits for some state workers," Cole wrote in an analysis of the pension debt. "The vast majority of local governments soon fell into line."

The Great Recession, he said, "clobbered that false sense of security" ("OPINION: Not Waiting for Sacramento to Tackle Pension Liability," Septeber 11, 2018).

Santa Monica has been making major strides in tackling its pension debt, Cole said.

In 2017, the City paid about $45 million for employee pensions, or eight percent of its operating and capital budget.

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