The Marin County Council of Mayors and Councilmembers recently published an update to a 2011 study of the funding shortfall problems with pensions and other post-employment retiree healthcare benefits. The financial outlook for Marin cities is not good.
The League of California Cities commissioned a 2018 report with Bartel Associates, a leading actuarial firm that concluded: Rising pension costs will require cities over the next seven years to nearly double the percentage of their general fund dollars they pay to California Public Employees’ Retirement System.
For many cities, pension costs will dramatically increase to unsustainable levels. The impacts of increasing pension costs as a percentage of general fund spending will affect cities even more than the state. Employee costs, including police, fire and other municipal services, are a larger proportion of spending for cities.
In 1999, when the stock market was high, pension benefits were expanded retroactively. Assumptions about future investment returns were not subsequently met, resulting in a large shortfall in accumulated pension assets.
San Rafael participates in a plan run by the Marin County Employees’ Retirement Association (MCERA). All other Marin cities participate in CalPERS, the state’s pension plan. Marin cities have a cumulative net pension liability to CalPERS of $176.9 million and $120.6 million for San Rafael to MCERA.
CalPERS is lowering their assumed rate of investment return on plan assets, has moved to a more conservative investment policy and is raising the costs cities must pay CalPERS over a five-year ramp-up period. Pension costs will continue to increase significantly and these bills will crowd out our cities ability to pay for other expenditures and services to our citizens.
OPEB (other post-employment benefit) plans vary by city, but all offer some level of post-retirement health coverage. The cost of these benefits has ballooned and many cities have not put funds aside to pay for them. San Rafael has a $33.7 million unfunded liability, and other Marin cities owe $49.3 million.
Some Marin jurisdictions have negotiated with their respective labor groups to reign in OPEB benefits, and are now funding the costs over the employees’ working life. Other cities have allowed their OPEB liability to grow.
Absent state legislative or court action, cities cannot limit existing pensions or convert them to 401K-type defined contribution plans. Even with a further strong stock market recovery, increased costs are inevitable because both existing “bad” news and any future “good news” is amortized into pension costs over time.
In the long run, there are only a few difficult ways that cities can address the challenge of paying for increasing pension and OPEB costs. Cities have a limited ability to raise taxes and fees; they can reduce the number of employees; and/or they can reduce services provided to their residents.
This committee encourages all cities to immediately take these actions:
> Develop a long-range financial plan to measure cities exposure to increased pension and OPEB costs. Such a plan should consider the impact of a future recession and must consider hard choices about taxation, benefits, number of employees, and services provided.
> Be more transparent about benefit costs. City financial statements are aggregated by function (like fire, police or library) rather than by costs (like payroll, benefits and purchases). We support specific disclosure of payroll and benefit costs so that citizens can see how their tax dollars are spent.
> Make OPEB obligations more sustainable. Cities may have more control over their OPEB obligations. We support curtailment of this benefit for future employees when legally allowed and for agencies using the CalPERS medical benefit plan to offer the legally allowed minimum to future employees. We support all agencies fully funding the promise for current employees.
John McCauley is a member of the Mill Valley City Council. Larry Chu is a member of the Larkspur City Council.
