The city council of Santa Monica, California, has approved a significant increase in its annual payment to the California Public Employees Retirement System (CalPERS) to $45 million, from just over $1 million, to help pay down the city’s unfunded pension liability.
“The city has consistently taken steps to mitigate increases in its pension costs using a combination of pay downs of its unfunded liability, employee cost-sharing, and prepayments that result in discounted costs,” said a city council staff report recommending the increase in payment.
As the fiscal year nears its end, and with the threat of significant cost increases ahead, the city council reviewed current balances in its reserves and identified more than $35 million in general fund reserves, and more than $8.6 million in other operating funds’ reserves that could be used to increase the annual payment from a little under $1.3 million to $45 million.
In recent years, a combination of changes in the assumptions used to determine plan participant demographics, the methodology used to incorporate market fluctuations into annual contributions, and low investment returns have significantly increased unfunded liabilities. Pension costs make up approximately 7% of the city’s overall budget, and 10% of the operating budget, according to the staff report.
“Paying down the unfunded liability at an accelerated level leads to decreased future liabilities, and therefore results in savings in required payments now and in the future,” said the report. “Investing funds in the CalPERS portfolio can also yield a higher return than staff would expect in the city’s portfolio, which is limited by restrictions mandated by state law.”
According to the staff report, the estimated annual retirement cost savings to Santa Monica from the payments will be at least $3.8 million. It also said the payment would bring the total unfunded liability paydown through June 30 to $76.3 million, and decrease the unfunded liability amount by an additional 11%.
Another reason to make the additional payment was because the recent decision by CalPERS to lower the rate of return assumptions on its investment portfolio is expected to increase the city’s employer contribution rates by 50% within five years. According to the report, that increase that makes up $13 million of the general fund’s projected $19 million shortfall in fiscal year 2021-22.
Santa Monica’s fiscal policies allow for annual payments above the annual required contribution to CalPERS that accelerate the paying down of the city’s unfunded pension liability. The payments are for a minimum of $1 million in the general fund, and an equal amount in all other funds. The policy also provides for additional payments if funds are available.
“The greatest challenge to Santa Monica’s long-term fiscal sustainability is the long-term unfunded pension obligations for city staff under the California Public Employees Retirement System (CalPERS),” said the staff report.