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Cash-Strapped City Faces Record Pension Deficit

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By Jorge Casuso

May 1, 2023 -- The City of Santa Monica is facing an unfunded pension liability of nearly half a billion dollars as it struggles to recover from the coronavirus shutdown and pay a $122.5 million settlement approved by the City Council last week.

After a brief, propitious drop, the City's unfunded pension liability skyrocketed last year to $497 million, its biggest deficit on record, according to financial statements released by the City.

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The deficit -- reduced from $481 million to $231 million by huge investment portfolio gains in the State pension system during the COVID pandemic in 2021 -- was more than erased when the market crashed last fall, financial records show.

"The CalPERS portfolio had a 21.3 percent rate of return in FY 2020-21 (the target rate was 7 percent), which dramatically lowered the unfunded liability," said City Finance Director Gigi Decavalles.

"The following year, FY 2021-22, the rate of return was a negative 6.1 percent, which resulted in an increase in the unfunded liability," Decavalles said.

Santa Monica's Unfunded Pension Liability
Santa Monica's Unfunded Pension Liability (Chart courtesy Marc Verville)

Santa Monica's record pension deficit -- which amounts to the equivalent of about $11,000 per household -- comes after the City had made accelerated payments totaling $88.1 million over the past decade.

About half -- a lump sum payment of $45 million -- was approved by the Council in June 2017 ("City Council Approves Record Payment Toward Santa Monica's Unfunded Employee Pensions," June 15, 2017).

"The City of Santa Monica has taken many steps to mitigate the growth of unfunded liability, including negotiating lower benefits for employees and paying down over $88 million," Decavalles said.

But those accelerated payments have been halted as the City recovers from the coronavirus shutdown that led to mass layoffs and sweeping cutbacks.

It also is paying a staggering $229,825,000 legal bill to settle sexual abuse cases filed by 229 plaintiffs who claim they were abused as children and teens by a former City employee ("Council Votes to Settle Remaining Sexual Abuse Cases for $122.5 Million," April 25, 2023).

Last month, the Council voted to suspend the accelerated payment program until FY 27-28, or later, "pending restoration of City services and maintenance budgets and reserves," Decavalles said.

"This action, she said, "allows approximately $2.5 million in General Fund funds to be allocated to restoring essential services addressing childcare, youth programs, library hours, and programs and positions that will further the City’s economic recovery."

With the City's accelerated payment program sidelined for at least the next four years, Santa Monica's pension deficit position will be largely dictated by the performance of CalPERS' investment portfolio.

"The CalPERS recent performance reflected an increased risk strategy in 2020 that added more debt to the investment portfolio in order to increase returns," said Marc Verville, vice chair of the Santa Monica Audit Subcommittee.

"That strategy amplified the market decline," Verville said. "And when interest rates increased significantly, both bonds and stocks tanked, which was not a scenario they were counting on."

Decavalles said CalPERS has taken steps to "mitigate increases in the unfunded liability" by lowering benefit levels and "changing the methodology by which member contributions are calculated."

In addition, "PERS has put in place a risk mitigation strategy whereby, in years when the portfolio significantly outperforms its targets, the CalPERS investment team adjusts the asset allocation of the portfolio to include lower risk assets," she said.

The move limits "the risk of the fund not meeting investment targets and increasing its unfunded liability in the future," Decavalles said.

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