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Menlo Park has an estimated $54.5 million in unfunded pension liability for city employees, including public safety staff, and must pay $5.1 million this fiscal year in pension costs, which are expected to rise in the years to come.
On Nov. 13, the Menlo Park City Council discussed, without taking action, a range of options to keep the city financially healthy while facing the uncertainty created by changing policies within the California Public Employees Retirement System, or CalPERS.
Cost increases ahead
CalPERS has made a number of policy changes in the last several years that are increasing pension costs for cities across the state, Doug Pryor, vice president of Bartel Associates, explained to the council. He emphasized that Menlo Park is not alone in facing these challenges.
“I don’t know if it’s good or bad news, but you’re not that different from what most agencies are facing,” Pryor told the council. “The good news is, you have company. The bad news is the whole state has this problem that they’re dealing with.”
According to Dan Jacobson, the city’s finance and budget manager, some factors that have a major impact on CalPERS’ costs to cities are outside of the city’s control, like the retirement system’s investment strategy, what the market returns are each year, what benefits are paid to current and future retirees, and certain actuarial assumptions the retirement system makes.
Over the last decade, the retirement system has generally earned returns that are lower than predicted, Pryor said. When the agency’s assumptions are wrong, the burden falls on cities to pay for the difference, which is considered an “unfunded pension liability.” To increase the accuracy of its projections, the CalPERS board in December 2016 voted to reduce its assumed rate of return from 7.5 percent to 7 percent in phases by the 2024-25 fiscal year.
Further reductions in that assumed rate of return may lie ahead. Pryor reported it is likely that the system will lower the assumed rate of return to 6 percent over the next 20 years or so. The retirement system is also requiring cities to pay off their unfunded liabilities within 30 years.
CalPERS is taking steps to decrease the risk in its investments with a “risk mitigation” plan.
Menlo Park has taken some proactive steps to limit its pension liabilities and costs. It has a practice of dedicating 25 percent of its general fund surpluses toward a “strategic pension reserve,” which now has about $4.6 million in it. To further reduce costs, the city maintains a cost-sharing program to split the pension costs with employees, and offers multiple tiers for pension benefits, meaning it can reduce pension costs for employees who transfer to the city from other agencies.
Options?
Among the city’s options are to make supplemental payments to CalPERS, create what’s called a “Section 115” trust dedicated to paying pension costs, develop a plan for the city’s existing strategic pension reserve, or consider a pension obligation bond.
One consideration that may deter Menlo Park from acting independently from other cities, Mayor Peter Ohtaki said, is that offering less generous pension benefits puts the city at a disadvantage when it comes to hiring staff. He said he’d prefer to see the city pursue legislative advocacy with other cities, which would level the “playing field” across cities. He said he does not favor the notion of an obligation bond to fund pension costs, which Redwood City had considered. He added that he wants to look at the question of how to address the city’s pension needs as part of the city’s overall budget.
The city’s latest budget update, also released Nov. 13, was promising: Assistant City Manager Nick Pegueros reported that the city has $5.18 million in net revenue in the general fund from the 2017-18 fiscal year. However, Ohtaki noted, there are a number of other capital projects on the horizon that are likely to require major city funding moving forward, like the bike and pedestrian Caltrain crossing at Middle Avenue or the Belle Haven Library upgrade.
Ultimately, the council directed staff to work with the city’s Finance and Audit Committee to come up with recommendations for how to address the unfunded liability problem, and how to spend the city’s dedicated strategic pension reserve.
In the meantime, the city should continue to put funding into the strategic pension reserve as it has in the past, Ohtaki said.
Defined benefit pensions for public employees should be banned as governments are plainly incapable of handling them in a fiscally responsible manner.
I agree with Joseph. MP should go to a defined contribution plan, just like private industry. Where is it written that public servants should get whopping guaranteed pensions? And the myth of “no one will come to work in Menlo Park” if we don’t keep up with what Palo Alto pays their people is just that; a myth. Public servant jobs now seem to pay better than private sector, with better benefits, better job guarantees and better pension and retirement programs. We need to end this nonsense. And we need to have the guts to end it when times are good, as the bad economic times tend to force our hands and make more desperate decisions.
Who in the Menlo Park civic government structure has the guts to stand up and make this happen?
Certainly, when there are LINES of applicants for some positions, we need to cut the pensions/costs on those positions.
Dozens, or even hundreds of qualified applicants for a couple openings – and we offer lifetime security like they won the lotto?
Inexplicable.
Actually, there’s an easy explanation. It’s called unions and unions influencing politics. It’s not right, but very explainable.
Menlo Park could operate more efficiently and reduce the number of employees, especially now when there are so many vacancies.
Joseph and Inon the current net pension liability for Menlo Park is $54 million assuming a 7.5% return on their investments. But under the rules CalPERS has come up with to leave their system they make any agency pay a termination fee based upon a 3% assumed rate of return which increases the net pension liability to $207 million (about 5 times the current liability) for the city of Menlo Park. So if CalPERS needs that much money they must not be very confident in their current assumed rate of return.
My numbers are taken directly from the CalPERS actuarial reports for the city which are posted on line.
How can the city hire qualified people for positions if they don’t offer comparable packages that other cities offer. Seems to me that years ago when all the tech companies were on the rise those employers were paying top dollar for working for them. Those that took those whopping salaries should have thought about their plans upon retiring. City government employees at that time made far less in yearly salaries but took care to plan for their retirement because of the incentives offered by cities or state agencies. I don’t see how those who chose to go for incentives to secure a better pension should be singled out as being over paid. Like a basketball player who signs a huge contract during his prime years because it’s offered is not at fault for taking the money.. Those who receive a good pension because it’s offered are not at fault for taking those benefits because they were offered.
” Those who receive a good pension because it’s offered are not at fault for taking those benefits because they were offered.”
You’re right. Those that offered it are at fault. They offered a benefit that is financially unsustainable. If something doesn’t change with the pension system for public employees in this state we are looking a state bankruptcy or huge tax increases to cover the shortfall. Having lived here most of my 60 years, my money’s on the latter.
Given the “California Rule” the ONLY way to end the thievery (and YES it’s THIEVERY) is to outsource EVERYONE.
Think it can’t work …………. Google Sandy Springs, Georgia, and see just how well such a structure IS working. Yes, the Police ARE “employees” of the City, I believe the ONLY ones excepting the top 1 or 2 city-managers, but even the Police ONLY get DC retirement benefits. NOBODY get a DB pension….. NOBODY !
Do what private industry and many nonprofits have done, end the pension program and go to a strictly 401 plan.
“Do what private industry and many nonprofits have done, end the pension program and go to a strictly 401 plan.”
That would be a great idea if the public workers unions didn’t own the politicians that are SUPPOSED to negotiate for us, the tax payers. They’re in the pockets of the unions so they DON’T. It would be nice to have someone on our side of the negotiating table for a change. Problem is public workers unions give the politicians a lot more money than we, the tax payers, do.