By JOSH FRIEDMAN
Over the past 15 years, the city of San Luis Obispo’s unfunded pension liabilities have gone from $0 to nearly $150 million and rising. And with SLO’s annual payment to the California Public Employee Retirement System (CalPERS) set to more than double over the span of a decade, city officials are now scrambling to fill a projected $8.9 million budget gap over the next three years.
Late last month, outgoing city manager Katie Lichtig handed the baton to Derek Johnson, whom she selected to be her successor. The change in management comes at a turbulent time for the city with SLO’s unfunded pension liabilities spiking approximately $22 million over the past year and CalPERS ordering local agencies to make larger contributions to their retirement plans.
As of June 2015, San Luis Obispo had $126 million of unfunded liabilities in its retirement plans. The most recent figures released by CalPERS show, as of June 2016, the city has more than $148 million in unfunded liabilities.
Additionally, the city has a side fund it must pay down, which recently stood at nearly $25 million.
Now SLO is faced with the projection that its annual payment to CalPERS will rise from $7.8 million in 2014-2015 to $19 million in 2024-2025, according to city management. San Luis Obispo officials are presenting this problem to the public at an informational forum Thursday evening, in which they will offer potential solutions that include charging residents more for city services, cost-cutting measures and employee concessions.
Over the course of Lichtig’s tenure, San Luis Obispo was playing catch-up from a decision by the city a decade prior to forego making pension payments when SLO had no debt in its retirement plans. The downturn in the stock market during the Great Recession exacerbated the problem, as did multiple years thereafter of CalPERS obtaining poor investment returns. Rising employee salaries have also factored into booming pension costs.
Between 2001 and 2011, SLO’s unfunded liabilities shot up from $0 to $107 million. While the city’s unfunded liabilities hit $148 million in June 2016, a move made by CalPERS several months later will impact city coffers even more.
Last December, the CalPERS board lowered its investment forecasts, which will result in a reduction of the retirement system’s discount rate from 7.5 percent to 7.0 percent over a three-year span. The changes will begin taking effect for San Luis Obispo in 2018-2019.
Earlier this year, city staff stated the CalPERS move left SLO with a projected budget shortfall of $2.7 million in 2018-2019 and a shortfall of $5-6 million in 2021-2022.
In order to deal with the budget gaps, the city is creating a “Fiscal Health Response Plan.” The city revealed in a press release ahead of Thursday’s forum that it is considering operational cost reductions; new ways of doing business; exploring new revenue options like charging money for services that are currently free; and asking employees to contribute more to their retirement plans.
“Because we are legally required to meet the CalPERS costs, we must find ways to offset those increases,” Johnson said in a statement. “For example, we could identify cross-department efficiencies, or begin to charge for some city services that are currently free or reduced and discuss potential changes in compensation with our valued employees.”
San Luis Obispo employees are currently paying an average of 21 percent of their annual pension costs, according to city figures. However, the median pension for city retirees is $3,700 a month, or $44,000 a year, and SLO has more than 30 retirees receiving annual pensions larger than $100,000.
There are currently 553 San Luis Obispo retirees receiving pensions. Over the last 10 years, SLO’s police officers have retired at a median age of 56, while city firefighters have retired at a median age of 57, and all other employees at a median age of 58.
One statistic city officials have been reluctant to discuss is the funding ratio of San Luis Obispo’s pension plans. The funded ratio of SLO’s two primary retirement plans have dipped to 59.5 percent and 61.5 percent, as of June 2016.
Steven Frates, the head of the Center for Government Analysis and the author of a 2005 report on San Luis Obispo’s finances, previously said a ratio below 80 percent is not good and anything below 70 percent is of acute concern. Several years ago, Frates said SLO’s rising pension costs would leave the city with a conundrum of choosing between cutting services and raising fees if San Luis Obispo did not restructure employee salaries and benefits.
For several years, Lichtig refrained from suggesting the city would cut services or raise fees to deal with rising pension costs. But now city management and the council are considering both options as they create their fiscal response plan.
On Nov. 7 and Dec. 12, the council will discuss the fiscal response plan that staff is currently crafting. The council may adopt the plan in April 2018 and integrate it into the city’s 2018-2019 budget.