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El Cajon holds one of the highest pension obligation risks in the state, according to a new report from the California state auditor.
The state auditor assessed each city’s ability to pay its bills both in the short and long term, by measuring a set of 10 financial indicators, including the city’s cash position, debt burden, financial reserves, revenue trends and its ability to pay employee retirement benefits. Overall, the auditor found that El Cajon had a moderate risk of fiscal distress, but its pension obligations rank among the worst.
El Cajon had roughly $493 million in pension liabilities in the 2016-2017 fiscal year, which the state auditor analyzed. But that year there was a $174 million gap between the city’s pension assets and its pension liability.
City records show El Cajon’s unfunded pension debt has only gotten worse. In the 2018-2019 fiscal year, that gap grew to $190 million.
El Cajon is not alone. Government agencies all over San Diego County and beyond are battling ever-growing pension burdens, and their investments aren’t keeping up. But El Cajon’s relatively small size makes a $15 million jump in a single year more dire and the city’s operating budget is already stretched thin.
El Cajon reported less than $103 million in operating revenues and $101 million in expenses for 2017. For 2018, operating revenues topped $104 million, and expenses came in at $108 million, according to the city’s 2018 annual financial report. The city’s annual pension contribution cost nearly $12.5 million in 2017, and more than $14 million in 2018.
And the city’s smaller workforce is actually making some pension matters worse, said Graham Mitchell, El Cajon’s city manager.
“We offer the same pensions as everybody else,” Mitchell said. “It’s now become a factor of how many people worked here, at what point did they retire and how much staff you have now.”
During the recession, El Cajon, like many cities, significantly reduced its staff. But while other cities have since rebounded, El Cajon never really replaced many of those positions. That has left the city with perpetually fewer employees paying into its California Public Employees’ Retirement System pension plan, when compared with the retired employees collecting pensions.
The city has started meeting with consultants to consider better financing alternatives to supplement CalPERS. Mitchell said he expects to have something to present to the City Council in early 2020.
Years ago, El Cajon made changes to its pension plan to raise the amount city employees pay toward pension contributions, the San Diego Union-Tribune reported in 2010.
El Cajon has about $8 million in reserves that the City Council has been putting away, Mitchell said, which could help soften the blow of the pension liabilities. One potential solution could be putting extra money each year into a trust for pensions that gets invested, instead of a general reserve fund.
Another option could be a pension obligation bond, wherein the city takes out new debt to pay down its pension obligations. In order for the move to pencil out long term, though, the bond debt payments have to be lower than the earnings in the pension fund. That doesn’t always work.
The city’s liability also keeps getting worse because CalPERS’s return on investment is lagging, Mitchell said. CalPERS reported a 6.7 percent return in 2018-2019.
El Cajon’s public safety employee pension plan was the third worst-funded pension plan in the county, Voice of San Diego reported in 2017.
The city has struggled to retain police officers, Mitchell said. The pay for El Cajon police officers is about 16 percent lower than law enforcement in the rest of the county and in the past couple of years the police force has seen an 8 percent turnover rate. That dynamic has made it difficult to pay into the pension plan at the same rate pensions are being paid out of it.
The city recently approved raises for City Council members, the Union-Tribune reported. It also increased its public safety budget, in order to increase salaries over the next five years to be on par with the rest of the county and address its recruitment and retention issues.
Mitchell said despite the city’s large unfunded pension obligations, revenue forecasts showed that the city could afford these raises.
“We think we have the revenue to do it,” he said.
Increasing pay to help recruit and retain employees can increase pension contributions to help pay down the city’s pension debt, but more employees ultimately mean more pensions to pay, continuing the pension debt cycle.