Marin’s 11 cities and towns urgently need to develop a 10-year plan on how to cope with the rising cost of employee pensions and health care obligations, according to a new report by the Marin County Council of Mayors and Councilmembers.
“We have few levers we can pull to fund these costs; therefore, we have to get out and plan as soon as possible,” said Mill Valley City Councilman John McCauley, who co-wrote the report together with Larkspur City Councilman Larry Chu.
The report makes one concrete recommendation about how Marin cities and towns can reduce their other post-employment benefits (OPEBs), the largest being health care costs.
“We support curtailment of this benefit for future employees when legally allowed,” the report states, “and for agencies using the California Public Employees’ Retirement System (CalPERS) medical benefit plan only to fund at the legally allowed minimum under the Public Employees’ Medical & Hospital Care Act.”
“Nobody is trying to vilify public employees or their benefits,” Chu said. “There is no discussion about taking benefits away that have already been earned. It’s like dieting; you either have to eat less or exercise more. We either have to find more ways of raising revenue or we have to reduce the expenses.”
The report also recommends that municipalities provide more transparency about the cost of their employee benefits.
“We support specific disclosure of payroll and benefit costs,” the report states, “so that citizens can see how their tax dollars are spent.”
With the exception of San Rafael, all Marin municipalities participate in CalPERS, the state-run pension plan. San Rafael participates with a number of other Marin entities in a plan run by the Marin County Employees’ Retirement Association (MCERA).
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 MCERA. In addition, the municipalities participating in CalPERS have a collective OPEB liability of $67.8 million, and San Rafael has a $33.7 million OPEB liability.
This is the second report that the Marin County Council of Mayors and Councilmembers (MCCMC) has issued on the impact of pension obligations on local municipalities. The first report, written by Chu and issued in 2011, concluded, “Absent significant changes to the status quo, local agencies could be left severely distressed, if not insolvent, long before the pensions systems become fully funded.”
MCCMC commissioned this new report in response to changes in policies by the retirement systems that are shifting a greater financial burden onto municipalities. CalPERS has began lowering the assumed annual rate of return for investments to 7 percent, shortened the time that municipalities have to fund their pensions, increased mortality assumptions and moved to a more conservative investment mix.
As a result, Marin‘s cities and towns face significant growth in their future payments to CalPERS. Between fiscal year 2018-19 and fiscal year 2024-25, cities’ dollar contributions will increase by more than 50 percent, according to a statewide study projecting pension costs commissioned by the League of California Cities.
The MCCMC report predicts that rising pension costs will require cities over the next seven years to nearly double the percentage of their general fund dollars that they pay to CalPERS.
The MCCMC report notes that under current established state law, known as the “California rule,” municipalities cannot switch existing employees from a pension system with defined, or guaranteed benefits, to a defined contribution 401(k) style plan, with contingent benefits.
As a result, the reports states, “There are only a few theoretical ways that cities can address the challenge of underfunded pension and other post-employment benefits (OPEBs).”
The alternatives it presents are: raise taxes and fees; reduce benefits or the number of employees; use existing reserves or borrow to pay higher contributions; or reduce services provided to residents.
“The report further emphasizes the need for the State Supreme Court to allow prospective pension changes by eliminating the so-called California rule,” wrote Jody Morales, founder of Marin’s Citizens for Sustainable Pension Plans, in an email. “Without the ability for adjustments, particularly during recessions, the pension debt hole gets deeper.”
Paul Premo, a board member of Marin ‘s Coalition of Sensible Taxpayers, wrote in an email, “The California courts are considering possible relaxing of the claimed ‘fixed in concrete’ pension benefit formulas that were lavishly increased in the early 2000s — retroactively to initial employment date — that are a large part of the problem.”
Senate Bill 400 in 1999, sponsored by CalPERS and several employee and retiree groups, enhanced pension benefits on the basis that retirees had not benefited from high stock market returns generated in the 1990s. Between 1995 and 2000, the Nasdaq index rose five-fold; then in 2000 the dot-com bubble burst.
McCauley said there is little room to reduce operating costs at most Marin municipalities, and he suspects a limited tolerance for additional taxes. He said one of the best strategies is for towns and cities to sock away as much money as possible to cover pension and health care obligations before the next economic downturn arrives.
Mill Valley has $38 million in pension liability and $23 million in OPEB obligations, sizable liabilities for a city of its size. But McCauley, who is serving his second term on the council, says the city has made some key changes in recent years. In 2016, the city eliminated OPEB for new employees, and it has put $1.2 million in a pension reserve fund and set aside nearly $10 million to cover OPEB obligations.
Another strategy the report says should be evaluated, which might seem counterintuitive, is borrowing.
“A cost savings can be achieved when the bond interest rate is lower than the pension fund discount rate,” the report states. The discount rate is the assumed rate of return.
Speaking of Larkspur’s pension obligations, Chu said, “One of the ways we can reduce our cost is to refinance our pension obligations. Right now, the discount rate is approaching 7 percent and if we can get a pension obligation bond for somewhere around 3 percent, that could save more than $10 million over the course of 20 years.”
