The Morning Report
San Diego news and info
you need to take on the day.
San Diego’s county and city pension funds are losing ground in their pursuit of a fully funded plan, but 10 other local government pension plans are just as bad or worse off.
The Valley Center Municipal Water District, Otay Water District, city of El Cajon’s safety plan, the city of San Marcos and six other local pension plans are only 60 to 70 percent funded. That means the agencies lack 30 to 40 percent of the money ultimately needed to fulfill retirement promises for current and former employees, data from the California Public Employees’ Retirement System shows.
That gap between assets and liabilities is called the unfunded liability. Combined, the 10 worst-funded public pension plans in the county with more than 50 members are missing nearly $581 million as of fiscal year 2015, and that’s just a fraction of the region’s long-term problem.
As Voice of San Diego reported in January, San Diego’s county and city pension systems managed locally are now underfunded by $6.7 billion despite various reforms enacted in recent years.
Around 60 local government agencies are part of the state’s public employee pension system, also known as CalPERS. That doesn’t include schools, which are pooled separately.
Agencies are told how much to contribute annually, and state pension officials invest the money in hopes it will earn enough over time to pay for retirement checks guaranteed to employees until they die.
The Great Recession caused huge asset losses in the state pension fund that haven’t been recovered, and investment earnings since then haven’t been hitting the mark. CalPERS leaders recently voted to lower annual earnings expectations from 7.5 percent to 7 percent over the next three years. The drop aims to make the fund more sustainable and inches a bit closer to market realities, though not by much. The move will greatly increase contribution costs for local government agencies. Longer life expectancies are also putting a strain on the system.
The CalPERS system as a whole was 101 percent funded in 2007 – it had more money to pay out retirees than they had accrued in benefits. Just 10 years later, it is now just 68 percent funded.
Yet there are six local pension plans in the CalPERS system with 50 employees or more that are funded below that level, data shows.
At the bottom of the heap is Valley Center Municipal Water District, funded at just 61.3 percent.
CalPERS records show the North County water agency’s total pension liabilities exceed $49 million, but with only $30 million in assets, the agency is short nearly $19 million. That’s higher than the unfunded liability the water agency faced three years prior.
Otay Water District is the second-worst funded pension plan in the county. With $115.7 million in liabilities and only $74 million in assets, Otay has a funded ratio of just 64 percent.
Coming in third is the City of El Cajon’s safety employee pension plan. With nearly $283.5 million in liabilities and less than $186 million in assets, it has a funded ratio of 65.6 percent.
In comparison, CalPERS’ schools pension pool was 77.5 percent funded as of fiscal year 2015. The city of San Diego’s local pension fund is currently 70 percent funded, and the county pension fund is 71.5 percent funded, according to newer figures reported for last fiscal year.
Given CalPERS continually lagging investment results — earning just 0.61 percent last year — pension funding ratios for local governments may drop further when 2016 agency data is released.
Gary Arant, 28-year general manager for Valley Center Municipal Water District, said having the lowest pension funding level in the region is concerning but, “It’s not my top concern. Our priority is safe, reliable water service” for 26,000 residents living across 64,000 acres.
In an interview, Arant said part of why their pension plan is coming up shorter than others has to do with the fact the district joined CalPERS not very long ago, in June 2001, replacing a 401(k)-style retirement system that “wasn’t amassing enough money.”
“At some point people need to retire. I can’t have an 80-year-old guy out there trying to dig a hole,” Arant said.
But other decisions have also strained the district’s $65 million annual budget and increased pension costs.
The 62-person workforce has received raises totaling 13.5 percent since July 2012, records show. In 2008, Valley Center sweetened retirement benefits from 2 percent of pay for each year worked at 55 years old to 2.7 percent, but also stopped paying the employee share of the pension contribution at the same time.
In 2005, the agency took advantage of CalPERS’ 30-year “fresh start” offer, which lessened payments.
Jim Pugh, Valley Center’s director of finance, said annual contributions to CalPERS are expected to rise from $1.9 million this year to $2.4 million in fiscal year 2019. The annual payment was less than $1.4 million in fiscal year 2007.
To keep up, Arant said it’s likely employees will be asked to contribute more towards their pensions when contract negotiations open again in two years.
So how does the agency plan to deal with its nearly $19 million unfunded liability?
“I’m certainly not going to consider hiking (water) rates to pay down the liability with PERS,” Arant said, adding that he’d be more concerned, “If we were still part of a private plan and funded that low.”
“We are a public agency. We aren’t going to go out of business. It’s not like we are out here on the point by ourselves,” he said.
Peter Kiernan, an attorney with Schiff Harden who specializes in public pensions and previously worked as special counsel for the city and state of New York, said even though the region’s pension funds are not currently in “desperate condition,” stakeholders should be concerned.
“Ultimately it is taxpayers or ratepayers that will make up the difference. Someone is going to pay that bill,” Kiernan said. Employers like Valley Center “probably need to increase their contributions… Money they would otherwise use for something else, so that makes for hard decisions.”
Steve Malanga, senior fellow at the Manhattan Institute for Policy Research, also said there is cause for concern.
“In particular, those funds that are below 70 percent funded are in danger of falling much further behind if we get a sharp market decline in coming years,” Malanga said in an email. “They are in danger of going below the 50 percent mark, which is a point at which many pension experts believe it’s impossible for a pension system to recover because so much money is missing and the system is taking on new debt every day that employees come to work.”
If public pensions were treated like pensions in the private sector, some local agencies would have to take extra steps to boost funding above 80 percent.
The federal Pension Protection Act of 2006 classified certain large private pensions with less than 80 percent funding “endangered,” or in the yellow zone, and deemed some of those with less than 65 percent funding “critical,” or in the red zone.
Using those funding levels, Valley Center Municipal Water District and Otay Water District would fall in the red zone. All 10 of the county’s worst-funded agencies would have been in the red zone in fiscal year 2012, CalPERS records show.
Even at 80 percent though, Kiernan said people assume that’s good enough.
“It’s an urban myth,” Kiernan said. “That just isn’t true.” Postponing extra payments further into the future can also cause intergenerational equity problems, which is just “bad public policy,” he said.
“In the end, there really isn’t any solution other than to put more money in, unless you can legally change the benefits that pensioners are going to get, and that’s hard to do.”