Two Marin County council members compared the state’s public employee pension obligations to a hungry cheetah on the loose during a discussion in San Rafael this week sponsored by Citizens for Sustainable Pension Plans.
Mill Valley City Councilman John McCauley and Larkspur City Councilman Larry Chu, who co-wrote a new report on the rising cost of employee pensions and health care obligations for the Marin County Council of Mayors and Councilmembers, expressed little optimism Wednesday that state legislators will take any additional steps to address the problem any time soon.
“I can tell you there is zero appetite right now in California to do anything about this,” McCauley said. “They thought PEPRA solved the problem, and PEPRA was just a very small thing. What is going to happen eventually is some cities are going to fail and when some cities fail, then we will see change.”
The California Public Employees’ Pension Reform Act (PEPRA), which took effect in January 2013, changed the way California Public Employees’ Retirement System (CalPERS) retirement and health benefits are applied, and placed compensation limits on members, but McCauley and Chu said it did not solve the problem.
Chu said, “If some of these communities that are not in a good financial position end up needing to default or they go bankrupt, we believe that Sacramento will have to do something.”
Given that scenario, McCauley and Chu said Marin municipalities need to take steps now so they aren’t one of the jurisdictions that fails.
“It’s like two guys running away from a cheetah,” Chu said. “You don’t want to be the slow guy.”
In their report, Chu and McCauley recommend Marin’s 11 cities and towns immediately develop a plan to cope with their pension and health care obligations over the next 10 years. And McCauley said Wednesday night that the plan should assume the country will experience a recession during that period.
According to the report, the municipalities participating in CalPERS have a cumulative net pension liability of $179 million to CalPERS. San Rafael has a $120.6 million pension liability to Marin County Employees’ Retirement Association (MCERA). In addition, the municipalities participating in CalPERS have a liability of $67.8 million in other post-employment benefits (OPEBs), health care being chief among them. San Rafael has a $33.7 million OPEB liability.
In their report, Chu and McCauley also urge Marin municipalities to consider reducing or eliminating their OPEBs. Legal precedent in California, the so-called “California rule,” prohibits government agencies in California from cutting retirement benefits without providing employees with comparable pension compensation, but no such rule applies to retiree health care benefits.
McCauley also recommended that Marin municipalities provide constituents with more information about the real cost of providing retiree benefits.
He said that in fiscal 2006-07, the average California city spent 8.3% of its general fund on CalPERS pension costs. By fiscal 2017-18, the figure had increased to 11.2% and it is projected to rise to 15.8% by fiscal 2024-25.
“I’d like to hear something concrete about the solutions rather than a restatement of the problem,” said attendee Steve McClure. “Everybody knows the problem: there is not enough money and there are too many benefits.”
Chu said one concrete step Larkspur is taking on his recommendation is borrowing money through a pension obligation bond so it can lock in a lower reimbursement rate than what CalPERS is currently charging. Marin municipalities currently have to pay their pension obligations to CalPERS at a rate of 7% per year, which is the assumed rate of return of the pension fund.
“We’re in a good position right now where interest rates are low,” Chu said. “We can pay off our current pension obligations for the next 20 years by financing it at 2.7% on average, rather than to pay CalPERS 7%.”
McCauley, however, said, “I’m not so crazy about pension obligation bonds. I’m not going to take a loan out on my house and put it in the stock market, and that is kind of what this is.”
But he added, “Rates are very low right now so if you were ever going to do it now would be the time.”
Audience member Ken Broad said, “I don’t think our municipal leaders should be engaging in arbitrage.”
Another audience member, Clayton Smith, said, “My suggestion is a moratorium on any future pay raises for government workers, that we cap these salaries and benefits right now even if we have to have an initiative on the ballot.”
San Rafael Councilman John Gamblin, who participated in the discussion, said, “Nobody’s talking about consolidation due to the politics.”
As an example of the need for consolidation, Gamblin said in 2017 Marin County, which has about 256,000 residents, had 19 fire agencies with 44 chief level officers being paid a total of about $13 million. He said Alameda and Contra Costa counties, which both have well over a million residents each, have half the number of fire agencies.
McCauley said that if the California rule were to be overturned, he would like to see Marin municipalities convert their defined benefit plans into defined contribution 401(k)-style plans as corporate America did during the 1980s. He said the average monthly Social Security payment in January 2019 was $1,461 per month while the pension of an average government worker in Marin would be three times that.
Rollie Katz, executive director of the Marin Association of Public Employees, who also attended the meeting, said people can’t afford to live on Social Security plus whatever they’re able to save.
“There seems to be an assumption that we need to bring people down rather than bring people up,” Katz said. “For the last 30 to 40 years the middle class in this country has been hollowed out. They became middle class because of labor unions, the New Deal, Social Security and real pensions.”
