California cities may see their annual pension costs rise under a proposal from the state’s retirement system, threatening to foist added financial pressure on local governments already struggling to pay for all the benefits promised to public employees.
The California Public Employees’ Retirement System is weighing a staff recommendation that would shorten the amortization period for new pension liabilities from 30 years to 20. That would boost the system’s funded ratio, require localities to pay off the debt sooner and allow the pension to recover faster from market downturns, according to a staff report. If approved by a Calpers committee Tuesday, the full board would vote on the changes Wednesday.
The ramped up schedule, while positive for the solvency of the pension system, would make market losses felt more swiftly by local governments and require them to pay more into the retirement fund in at least the first few years.
While many cities would welcome paying off the debt more quickly to rack up less interest, others that are already struggling with high fixed costs would find it difficult to meet the stepped-up pace, said Dane Hutchings, lobbyist for the League of California Cities. And in the event of poor market performance, municipal contributions to make up the difference would be even higher than projected, compounding the burden.
Such an outcome, when combined with other pressure facing cities, could push a few into bankruptcy, Hutchings said. “It would be their death knell” for some, he said.
Hutchings is asking Calpers to allow cities that are fiscally distressed to have the option of sticking to the 30-year policy. California municipalities are already absorbing the effect of the board’s decision in December 2016 to lower the assumed rate of return to 7% from 7.50% by fiscal 2020, which will also require them to increase their contributions to cover the gap.
The system’s 3,000 cities, counties, school districts and other public agencies have also seen costs rise from several factors, including investment losses and perks granted in boom times. A report this month by the League of California Cities found that under current assumptions, cities in fiscal 2025 would pay Calpers more than 50% the amount expected to pay in fiscal 2019.
Calpers, the nation’s largest public pension, has about 68% of assets needed to cover its liabilities. The move to a lower amortization period that’s more in line with industry standards would be effective in June 2019. A survey of 164 public pensions by the National Conference on Public Employee Retirement Systems, a trade association, showed that the average amortization period in 2017 was 23.8 years.
Calpers’s review comes as the system is likely to experience more market volatility in 2018 than it had over the past couple of years, Chief Investment Officer Ted Eliopoulos told the board Monday. Meanwhile, the fund’s 20-year return is lagging at 6.7 percent, according to a Calpers’s estimate.
—With assistance from John Gittelsohn.
— Read Let Clients Figure the Retirement Funding Catastrophe Out for Themselves on ThinkAdvisor.