Encinitas’ unfunded pension liability pegged at $39 million

Encinitas’ unfunded pension liability pegged at $39 million
A graph showing how pension reform passed by Encinitas and the state will affect retiree benefits for the city’s miscellaneous employees, the largest of its four employment groups. The top line is for hires before 2012. The middle line, Encinitas’ reform, is new hires who aren’t already part of the state’s pension system. And the bottom line, a new California law, is for new employees who haven’t enrolled in the state’s pension system. Courtesy image

ENCINITAS — The city is on the hook for $39 million in unfunded pension liability, according to a new analysis ordered by the city and presented at a March council meeting. 

The $39 million figure is an estimate of how much Encinitas will have to pay to cover its pension obligations over the long term.

This week, Mayor Teresa Barth said that the city’s unfunded pension liability is a topic that demands regular council attention. But she cautioned against “doom and gloom,” noting that Encinitas doesn’t have to pay the bill tomorrow.

“This is overly simplistic, but I tend to think of the topic like a home mortgage…to be paid off in the long run with careful planning,” Barth said.

She also said that many cities are in peril because of pension costs, but said that Encinitas is in better shape. This is in part because the city’s burden for medical costs isn’t as great as most California cities. And the city is in a better position to contribute more toward pensions if need be, because Encinitas’ revenue hasn’t declined as much as other cities during the economic downturn, Barth said.

“I fully recognize that there are a lot of cities in trouble right now,” Barth said. “We’re not one of them.”

Barth said that pensions would likely be an issue discussed during budget workshops in the next few months; the topic isn’t on a future council agenda.

Encinitas has 237 full-time employees, and they’re divided into four categories. Of them, lifeguards’ unfunded liability clocks in at $300,000, the San Dieguito Water District totals $4.2 million, firefighters are at $12.6 million, and a miscellaneous category, a group that includes 152 employees, represented $21.9 million.

City Manager Gus Vina said that he ordered the analysis on pensions after councilmembers asked how much the city’s unfunded liabilities added up to.

Vina said he expects the unfunded pension liability to fall over the long term thanks to the city passing pension reform last year. As a result of city action, retirement benefits were reduced, particularly those who retire before the age of 63.

“We’re on an improved trajectory,” Vina said.

Further, the state recently passed a similar law called AB 340 that went into effect at the beginning of the year for most cities. For Encinitas, the law went a step further than the city’s pension reform by cutting retiree benefits slightly more.

With both state and city reform, the city now has three tiers for its pensions.

To illustrate the differences, consider a 30-year-employee earning $70,000 who plans to retire at 60. If hired before 2012, this employee would draw a $56,700 pension each year.

But new city hires under the same circumstances who are already a part of the state’s pension system would draw a $39,600 pension. If they aren’t already enrolled in the state’s pension system, new hires would get a pension of $35,640.

Another reason Vina said unfunded pension liability would decrease in the future: All employees will be required to pay more toward their pensions.

In the past, Encinitas paid half of the employees’ 9 percent contribution to the state’s pension system. When that contract expired, Encinitas renegotiated so that all employees will have to pick up their full share.

Vina noted that the city isn’t borrowing money to cover unfunded pension costs.

This year, revenues in Encinitas are $52.5 million and expenditures are $49.9 million. More than four-fifth of the city’s revenue comes from sales and property taxes.

The city’s pension costs have increased during the past five years. The city contributed $2.9 million in 2008, $3 million in 2009, $3.2 million in 2010, $3.3 million in 2011 and $4 million in 2012.

Last year, 13 employees retired.

Vina said that the city plans to pay off its pension liability in about 21 years; however, that’s a moving target. Unfunded pension liability fluctuates depending on investment returns.

Encinitas is part of CALPERS (California Public Employees’ Retirement System). CALPERS investments must grow by an average of 7.5 percent for the system to stay in the black. But CALPERS’ investments came in much lower than that during the recession, dramatically driving up cities’ unfunded pension liability.

However, with the economy improving, CALPERS posted a 13.3 percent rate of return in 2012.

Some, including Ed Wagner from the Encinitas Taxpayers Association, argue that CALPERS’ expected rate of return is too high given the volatility of the market.

Wagner, a chartered financial analyst who manages stock market money for mutual and pension funds, said that Encinitas should consider the possibility of a 4 or 5 percent rate of return since poor investment returns may continue in the future. Using what he believes are conservative return assumptions, he estimates Encinitas’ pension liability could be as high as $74 million to $85 million.

Wagner said the analysis given to council in March was a welcome development. But he’d like to see another expert analyze Encinitas’ pensions to show, “just how large the hole is” if strong investment returns don’t happen.

“Encinitas deserves an honest look at its pensions,” Wagner said.

To bring down pension costs, Wagner recommended a hiring freeze as a short-term step. Long term, he said that the city should develop a financial plan to pay off unfunded liability under a range of investment return scenarios, and possibly switch to a 401(k) plan for new employees.

According to a San Diego Taxpayers Association report issued in February, out of 17 cities ranked for unfunded pension liability per household, 10 cities ranked higher than Encinitas.

However, the report used a different accounting method than the analysis that was presented to the city.

The analysis presented to the city didn’t specify where Encinitas ranked in the region.

John Bartel, who presented the overall picture of the city’s pension situation at the March council meeting, credited Encinitas’ pension reform last year with improving the city’s budget outlook.

Bartel said the city shouldn’t immediately sound the alarm over its unfunded pension liability, but rather look at it as a long-term obligation.

“What I am suggesting is that you ought to have a plan for paying it off over a reasonable period of time,” Bartel said at the meeting. He’s a professional actuary who has analyzed more than 70 cities’ pensions.

If CALPERS investments perform poorly and Encinitas fails to cut its unfunded pension liability, there could come a time in a decade or two when payments ramp up, Bartel said.

“It’s like paying the minimum on your credit card,” Bartel said.

Although his presentation was largely to educate council, he also presented several recommendations. Namely, he said that over the next decade or two the city should look at reigning in expenditures and using money saved to pay down the unfunded pension liability. It’s all about finding a balance because the city has to maintain a healthy level of services and build new infrastructure.

He noted that pension reform is challenging in light of the fact that pensions promised to employees are a “vested right” under California and federal law. That’s why pension reform generally targets new employees.

“The California Supreme Court has, by and large, said when you hire an employee they must be entitled to the benefit formula that they have when you hire them for the rest of their career, unless you give them something of equal or greater value,” Bartel said.

Consequently, the savings from pension reform will be felt down the road, he said.


Filed Under: News


RSSComments (9)

Leave a Reply | Trackback URL

  1. better off says:

    Barth must go. She is just like Jerome Stocks except she doesn’t tell it to your face. She hides the real costs and avoids real discussion of the ways to fix the problem.

    She will talk nice to you and then tell others to stab you in the back.

  2. Credibility Gap says:

    Readers, do yourselves a favor and read the other links to pension issues above. The articles, “Don’t Disregard Pension Issues,” and “Encinitas is Bound to be Our Own Little Greek Tragedy” were written by a qualified investment banker, who has looked at the City’s data over years.

    I have no idea where Barth and Vina are getting the figures that they show in this chart. They even hired their own consultant who told them that this issue is much worse than is shown here. Why is it that they always hire consultants, change their findings, then send Encinitas citizens the bill??

    Gus is doing everything possible to coast to full retirement in 2 years, and Barth is trying to show that she is doing something for citizens–NOT!

  3. Greg Lefevre says:

    Two of the three headlines on the front page of the Coast’s April 12th print edition are warning signs of what drives cities off the rails: unfunded liabililities and real estate speculation.
    Be careful. Ms. Barth’s comments on Encinitas’ projected liability are naivete bordering on negligence. And if the Pacific View site were truly worth it, a deal would have been done by now.

  4. Ed Wagner says:

    The mortgage analogy is not just simplistic; it is flat wrong. Under a traditional mortgage, you pay down your debt over a fixed period of time. That is exactly what the city should be doing, but is not. As the Bartel consultant explained, making the CalPERS minimum required payment is like making the minimum payment on a credit card – only worse.

    If we really want to use the mortgage analogy, it’s like being delinquent on your mortgage by 1x – 2x your total annual income, and then hoping that gambling winnings will help you catch up as well as pay for your future payments.

    By any measure, pensions are the city’s biggest financial problem by far. It would be highly irresponsible not to have an agenda item that includes a comprehensive pension analysis, including lower investment return scenarios, with recommendations on options to begin paying down the unfunded liabilities.

    The $39 million still uses optimistic investment returns. Using more conservative returns, it’s more like $75 – $85 million, plus $9 million in unfunded health care liabilities. And all that is just for past employee service — every day we go forward, we incur new liabilities.

    The longer we wait to take action, the worse the math gets. We should not be going about business and budgets as usual.

    • worse than that says:

      Don’t forget all the deferred road maintenance that the city continues to hide. That should come in about $50 million.

  5. Who Do YOU Believe? says:

    So who do you beleive? Gus Vina, who is already paid $250,000 and is 3 years away from a full pension, or an investment banker who does this for a living?

    By the way, we snagged Gus Vina after he was given a vote of no confidence by the City of Sacramento for his work there as City Manager.

    • Occupier says:

      Oh, yes. Let’s definitely take the word of the investment banker. That’s worked out very well for the past decade.

  6. No PR Person says:

    We need to have the City employees and Council members do the right thing. The idea of hiring a PR firm to help Gus make it through to his retirement is horrible.

  7. eatingdogfood says:

    If The Democrats Didn’t Give ” Sweetheart Deals ” To Your Public Service Union.
    Goon Employees To Get Reelected; You Would Have Plenty Of Money and The.
    Taxpayer would have Some Spare Change in His Pockets! Democratic Hustler
    Politicians + Corrupt Union Goons = BANKRUPTCY BABY! Time To Bring.
    RICO Conspiracy Charges Against The Hustler Corrupt Democrats and the.
    Criminal Unions!

Leave a Reply

If you want a picture to show with your comment, go get a Gravatar.