San Luis Obispo is hoping to wipe out its massive unfunded pension obligations by spending millions to pay down its costs over the next two decades.
The pension spending was a significant focus of the city’s $400 million two-year budget for 2019-21, which was approved by the City Council last week.
The city currently is saddled with about $150 million in unfunded pension liability, said City Manager Derek Johnson. Unfunded pension liability refers to the amount of money the city needs to cover pension costs for its retired and current city employees.
SLO has laid out an aggressive plan to pay down its liability over a 20-year versus a 30-year period.
How the CalPERS system works
Along with other public agencies, SLO pays into the statewide CalPERS fund, which invests money used to pay retired workers. SLO had more than 550 who average about $3,700 per month in benefits, according to 2016 data. SLO employees don’t participate in Social Security.
CalPERS calculates the funding it needs from cities for its investments to adequately cover pension costs based on a number of factors.
Those factors include: the city’s total number of retirees, planning for retirements of current employees with consideration of those close to retirement, the assumed rate of return on the CalPERS investment (currently 7 percent), life expectancy of retirees and the various tiers of retirement packages employees contracted for.
Some city employees earn 2 percent of their final pay times years of service, assuming a retirement age of 62, but under the same tiered plan (called PEPRA), police earn 2.7 percent of their final pay at the retirement age of 57.
City retirement packages have included packages as robust as 3 percent of final pay times years of service with retirement at 50 for police and fire employees.
“Budgeting to pay these costs will require an incredible amount of discipline over many years,” Johnson said. “I know future councils will want to spend money on a variety of different things, all of which would be worthy, but it will be important to maintain our prioritization on pension pay-down.”
What SLO is doing to reduce pension costs
The city has found various ways to generate $7.5 million annually to help cover costs related to the pension. The funding was generated through employee contributions and concessions on retirement packages, reducing some of the benefits previously enjoyed by city employees, and anticipated cannabis revenues of $1.2 million to $1.5 million annually, along with refinanced bonds and other efficiencies, Johnson said.
Meanwhile, the city also is planning to spend $32 million over the next 10 years, which will save $19 million in long-term interest payments, Johnson said.
“Basically, unfunded pension costs are most akin to a credit card bill,” said Brigitte Elke, the city’s finance director. “You can either just pay just the minimum or be a little more aggressive to avoid the interest.”
City officials said that SLO is not in any danger of going into debt, and its assets still far outweigh its costs, but it’s a matter of prioritizing its spending on pensions to avoid accumulating interest and having to shift even more resources to pensions in the future, instead of allocating money to services and infrastructure, among other city obligations.
Additionally, SLO plans to allocate $13.8 million by 2024 into a new 115 Trust Fund (a special type of fund used by government agencies that can protect the city against pension rate fluctuations) and “enables the city to earn the highest returns on funds dedicated to pension contributions,” Johnson said.
The strategies are critical to the future of SLO, which ranks 87th highest on a list of 485 California cities’ pension burdens, Johnson said.
Sales tax increase still on the table
Johnson said the pension allocations show the city’s dedication to tackling the problem at the same time it’s considering whether to float a sales tax measure on the 2020 ballot.
A new sales tax, perhaps up to a 1 cent increase, would help pay for infrastructure projects planned by the city, such as a new police station, bike pathways and potentially a Mission Plaza expansion and upgrade.
SLO Chamber Director of Government Affairs Molly Kern agreed the plan to pay down pension should take precedence over other wish-list spending options.
“(The Chamber is) incredibly supportive of your bold action to pay down these liabilities, to address escalating costs, and to thoughtfully plan for the future,” Kern said at the council meeting. “It can seem more rewarding and easier to spend money on items that offer instant gratification, and we want to commend you for resisting that temptation and instead putting in the hard, less visible work to invest in our community’s future.”
The pension challenges were created primarily by the Great Recession, which significantly decreased the value of the CalPERS’ fund, meaning the decline in investment return increased the amount cities need to contribute to their retirement-related costs.
Also, retired city employees are living longer than in past generations, Johnson said, which means cities have to pay pension benefits for longer periods of time.
“Because of changes we’ve made to our pension program, we have seen some of our staff leave the city for other jobs,” Johnson said.
As for cannabis taxes, the city’s three selected retail businesses haven’t yet been established. They are expected to open in the coming months after remaining administrative steps are completed and the businesses renovate their commercial spaces to prepare for operation.
SLO also is working to ensure unpermitted cannabis delivery businesses are meeting state compliance standards so that taxes are collected on those entities, Johnson said.
The two-year budget includes $200 million in the 2019-20 fiscal year and a $208 million in the 2020-21 fiscal year, according to a city news release.
“The Financial Plan prioritizes projects and programs to fulfill community-driven major city goals: housing, fiscal sustainability and responsibility, sustainable transportation, climate action and downtown vitality,” SLO officials said.