More Mill Valley taxpayer dollars will soon be funneled into the city’s retiree benefit fund.
The City Council on Monday adopted a conservative 6.5 percent investment assumption, a figure that will help calculate how much money the city sets aside each year for retiree health benefits.
“Choosing a conservative rate of return results in a higher expected liability,” requiring more current funding, said Councilman John McCauley.
It costs Mill Valley taxpayers about $611,300 a year now to pay for the health benefits for its 58 retirees.
A city staff report on retiree health costs indicated that as of June 2014, the city faced an unfunded liability of about $15.9 million for “other post employment benefits,” or health care.
The tab is in addition to the city’s estimated annual pension cost of $3.3 million, which includes its $737,450 debt service on pension obligation bonds, and its unfunded pension liability of about $23.4 million, which includes its six California Public Employees’ Retirement System plans.
The unfunded liability prompted the council to create a subcommittee appointed by Mayor Ken Wachtel to devise a strategy to pay for retiree health costs. The adopted plan will increase the annual contribution to the retiree funds.
McCauley, who serves on the subcommittee, said that a conservative investment return assumption requiring the city to pay more today “secures the ability of the city to meet its promise to its employees.”
The county pension system, for example, assumes a more liberal 7.25 percent investment return, requiring agencies to pay less today for the benefits they have promised workers. The city has been investing in a mix of stocks and bonds through ICMA-RC, a nonprofit retirement plan firm, to pay for the retiree benefit liability. Mill Valley has about $7 million in its retiree health investment account.
Having decided to use a return rate of 6.5 percent, city officials now must decide which investment plan meets that expectation, said Finance Director Eric Erickson.
Pension critics, who have long advocated a rate closer to 5 percent, said Mill Valley is taking a step in the right direction.
“They are on track to get this big bill paid off,” said Dick Tait, member of Citizens for Sustainable Pension Plans. “It’s more realistic in terms of the current investment environment than if an entity assumes a rate that’s too high.”
Likewise, founding member Jody Morales said Councilman McCauley is to thank.
“With his extensive background in finance, he has a clear grasp on the urgency to realistically approach the pension debt dilemma, one step at a time,” she said.
Mayor Wachtel said with the subcommittee being a mix of staff and council members, it is a better system for governance.
“It wasn’t a big change other than we are the ones doing the reviewing,” he said. “We only get a certain amount of money every two years. We have to decide what we’re going to use our money for, and paying our OPEB (other post-employment benefits) on a current basis is a priority to us.”
The City Council tentatively plans to discuss possible adjustments to its 2014-16 budget and work plan in August.