CONSULTANT: ‘PAY THAT OFF AS SOON AS POSSIBLE’ OR RISK HIGHER DEBT
By Steven Tavares
An actuarial expert told the San Leandro City Council the best way to handle its rising obligations to employee pensions is to pay now or roll the dice in hopes of continued recovery by equity funds largely tied to the performance of its yearly financial returns.
John Bartel, a noted consultant on the sometimes arcane accounting rules used by CalPERS, advised the council Monday night during a special budget work session, its funding for a segment of public safety pensions, known as a side fund, run the possibility of costing the city in the long run and should be dealt with in the short-term.
He said since the city’s side fund sits in a decidedly volatile risk pool it is best to lower its exposure. “It would be the most cost-effective thing to do,” he said. San Leandro is expected to pay $2.48 million into the public safety side fund in the next fiscal year. That figure is projected to steadily rise over the next decade to over $3.6 million in 2023. “To the extent that you have a fixed debt, do what you should to get that debt down,” said Bartel, who encouraged, “Pay that off as soon as possible.”
The city, according to Bartel, has four options when it comes to lowering its risk: borrow at a lower rate than the seven and three-fourths discount rate from CalPERS, borrow from another fund and pay it back at a lower numbers of years, steer one-time monies to pay off debt or don’t do anything differently and hope for the economy and equity funds to continue their current recovery of a sterling 13.3 percent.
“I’m not one who bets a lot, but I wouldn’t bet on 13 percent growth over the next five years,” said Bartel. Even if such a continued and consistent rise in investment returns for CalPERS were to occur it would actually be greatly tempered by the decision last year to allow for smoothing of future earnings over a longer period of time, he said. Without the budgetary tool, the burden on local and state government would likely be even more problematic than they currently stand.
In many ways, the rise and demise of public employee pension returns mirrors the booms and bust in the overall economy over the past 15 years. One of the specific factors making San Leandro’s obligations greater than they could have been is due to decisions by past councils to keep its contributions to CalPERS low during the dot.com boom of a decade ago. Vice Mayor Ursula Reed lamented the fact, but Bartel consoled her, saying San Leandro was not the only municipality that chose the same route during the good times only to pay for it now.
San Leandro’s age as a city has also led to a naturally occurring problem. Even though it is funding fewer pension than 15 years ago, the number of those receiving payments has risen from 314 to 476 in 2009. Bartel called the figure a high ratio of retirees any larger than any of his other client cities. The average payout is $22,000, but responding to a question from Councilwoman Diana Souza, Bartel said he believes a substantial number of those retirees are also paid by other employers lessening the city’s obligation, but because data provided by CalPERS does not breakdown each figure by jurisdiction, he could not say for sure.
For a city searching seemingly searching for relevance in the East Bay, one of Bartel’s opinions on San Leandro’s higher number of pension obligations may provide some sting. He said one factor in the increase may be due to the city being viewed by employees as not a “destination” job to work towards, but instead a “training” ground for workers to climb to better options later in their careers.
The work session had the possibility of becoming a political hot potato, instead, the testimony and council comments were quite underwhelming and uncontroversial. Although, at times, San Leandro Mayor Stephen Cassidy appeared frustrated in his questioning of Bartel, there was no mention of his commitment to have city employees pay more for the cost of their pension and cryptically bring the city “pension sustainability” as he has said in the past.
The inclusion of the budget work session on employee pensions in April is a bit puzzling since any changes to the union contracts signed late last year do not expire until the end of 2012. In that deal, city employees agreed to pay higher premiums for health care and potentially a fifth consecutive year without a wage increase.
Finance Director Tracy Vesely said a proposed budget will be presented during the May 16 council meeting with approval as early as June 6. Although many neighboring cities expect multi-million dollar deficits, San Leandro expects a balanced budget for the 2012 fiscal year.