When factoring in upcoming changes in the state retirement system as well as a lingering liability on its books, the city of San Luis Obispo is approaching a total of $190 million in unfunded pension liabilities, an amount city leaders consider stable.
As of June 2016, the city of SLO has more than $148 million in unfunded liabilities in its two primary pension plans — the funds for public safety workers and “miscellaneous” employees, or everyone else. The city also has a side fund, which often goes unmentioned when unfunded liabilities are discussed. As of June 2016, San Luis Obispo has an unfunded liability of $22.59 million in its side fund.
Late last year, the California Public Employees Retirement System (CalPERS) lowered its investment forecasts, which will result in a reduction of the system’s discount rate from 7.5 percent to 7.0 percent over a three-year span. The changes will begin taking effect in San Luis Obispo in 2018-2019.
The June 2016 valuation takes into account the first lowering of the discount rate from 7.5 percent to 7.375 percent, City Manager Derek Johnson said in response to questions from CalCoastTimes. At 7 percent, the city has an unfunded liability of more than $165 million — an $88.3 million unfunded liability in its miscellaneous plan and a $77 million unfunded liability in its safety tier 1 plan — Johnson said.
SLO also has smaller, second tier pension plans for police officers and firefighters, though those funds have yet to accrue sizeable unfunded liabilities.
Nonetheless, when factoring in the side fund and the lowering of the discount rate to 7 percent, the city has approximately $188 million in unfunded liabilities.
In addition to being faced with mounting unfunded liabilities, San Luis Obispo also has decreasing funding ratios in its pension plans. The funded rations 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 SLO’s finances, previously said a ratio of below 80 percent is not good and anything below 70 percent is of acute concern.
Johnson disputes that analysis, saying in an email to CalCoastTimes that experts say SLO’s pension plans are stable.
“Experts have commented on the funding level to be in the “yellow” zone, which means that the unfunded liabilities need to be addressed but the fund is considered stable,” Johnson said.
SLO is expected to pay down its unfunded liabilities over a 30-year period, and it must make annual payments to CalPERS, which are skyrocketing. Following the lowering of the discount rate, city officials announced that SLO’s annual CalPERS payment will rise from $7.8 million in 2014-2015 to $19 million in 2024-2025.
Subsequently, the city revealed it has a projected $8.9 million budget gap over the next three years. City officials are now grappling with the budget gap and constructing a plan — which could involve charging residents more city services and employee concessions — in order to balance future budgets, which have plunged in the red due to pension liabilities.