The legislative representative to the League of California Cities urged the CalPERS Investment Committee Monday to think “out of the box” in finding a way to exceed its 7% investment return projections, saying that cities won’t be able to pay their monthly contributions to the pension plan if returns are that low.
Dane Hutchings cited a CalPERS September 2017 report, which showed that 180 of the 449 cities and towns that participate in CalPERS had an individual funding ratio of between 60% and 70%. Sounding a warning alarm, Hutchings said a significant number of those communities could fall between the 50% and 60% funded when new CalPERS data come out in August.
The 50% level of funding is considered the beginning of a death spiral for a pension plan. Once the level of funding hits that low, it unclear if it is possible for the plan to be financially viable again.
The CalPERS report found that the bulk of communities, 248, were in the 70% to 80% funding ratio. Twenty cities or towns achieved 80% funding or above. One community was listed as currently in the 50% to 60% funding ratio. The specific cities and towns were not mentioned in the CalPERS report.
“Cities want to make it clear that our foundation is rocky at best,” Hutchings said. “It’s crunch time, and quite frankly, we simply cannot stand another market slowdown or substandard returns.”
CalPERS is in the midst of a three-year plan to lower yearly expected investments to 7% from 7.5% because of diminished return expectations. However, as returns expectations drop, CalPERS’s unfunded liability increases, therefore it must increase contributions from employers whose employees are in the pension plan, meaning the state, cities, towns, special districts, and school systems that make up CalPERS must pay more.
Overall, CalPERS is only 64% funded, but the largest pension plan in the US sets contributions for each of its member agencies, each with its own funding ratio, such as the 449 cities and towns.
Hutchings told CIO in a separate interview that many cities and towns will be in dire financial condition because of increased contributions to CalPERS. In some cases, contributions by cities and towns are increasing by 20% or more over the next few years.,
“Bankruptcy is a real threat,” Hutchings said.
CalPERS officials did not respond to Hutchings, who spoke during a portion of the meeting in which public comment is allowed.
In January, the league released a report that showed that by 2024, California cities anticipate that they will spend an average of 15.8% of their general fund budgets on pensions. That number is up from an average of 8.3% currently, the report said.
CalPERS is set to lower the rate of return to 7% by July 1, 2019, but its consultants and investment staff say even that number is unrealistic over the next decade. They estimate a 6.2% annualized rate of return over the next 10 years. They say the 7% rate of return is realistic long-term because return expectations will increase over the next 10 years.