SLO pension liabilities soar amid management change

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.

Katie Lichtig

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.

Derek Johnson

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.

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5 Comments about “SLO pension liabilities soar amid management change”

  1. Tom Petty says:

    Try a 30 % across the Board Cut for ALL Agencies and Employees. Don’t like it, move to Arkansas.

    (12) 12 Total Votes – 12 up – 0 down
  2. insidelookingout says:

    Don’t you have to just love this statement, “begin to charge for some city services that are currently free.” Do they really think that we are that stupid? Maybe they should look at their budget and see where these so called free services are funded from? I’ll save them the time and let them know that it’s from the taxes that we pay. And that may be where the problem lies as they consider our tax payments to be free money. Amazing how these folks who claim to be the brightest and because of that are paid these outrageous salaries and now we learn unfunded benefit packages have got the city into this predicament. This time I think that instead of going to the public for answers they need to look at themselves in the mirror and figure out out to internally clean the mess up that they have made before they eventually come out to burden us with even higher taxes and fees to cover what they have done.

    (29) 29 Total Votes – 29 up – 0 down
    1. insidelookingout says:

      I would venture to say that their first move will be to go into the reserve/restricted funds like the sewer fund. Then because of the shortfall in those funds the sewer bills will be increased. I’d almost put money on that one and even give a couple of points-almost a sure thing.

      (15) 17 Total Votes – 16 up – 1 down
  3. slosum says:

    Boldguy is absolutely right. But unlike those in the real world, the city will ignore the obvious solutions and continue to force us to bail them out…. all the while spending their time on ridiculous crap like changing Columbus Day to Indigenous Persons Day and inviting every sick bum into our “Welcoming City”. Their world is filled with good feelings and a total lack of common sense, responsibility and commitment to the people who pay their bills.

    (10) 10 Total Votes – 10 up – 0 down
  4. Boldguy says:

    Cities all over the State are scrambling from the effect of Cal Pers lowering of the retirement system’s discount rate from 7.5 percent to 7.0, when the actual returns are much much lower than that! If Cal Pers did a actuarial of true returns on investment, instead of pie in the sky hoped for projected returns, many cities(Google, City of Loyalton Cal Pers ) would be seeking bankruptcy!!!
    Public employees can only take so much before it comes around and bites them, why are they retiring in their mid fifties when the public, which pays the bills, is required to wait until their mid sixties?
    Nobody is even looking at the fairness quotient:(
    Raise the retirement age for Public Employee’s to 65, put them back into the Social Security System, get rid of Cal Pers entirely, then supplement their retirement with a either a 403(b) or 457 plan.
    This will eventually have to happen, but probably not until Bankruptcy of the system, due to lack of will of politicians and intractability of Public Employees!!!

    (43) 47 Total Votes – 45 up – 2 down

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