California cities struggling with recent hikes in their pension fees will see another one in 2021 because of a decision CalPERS made on Tuesday to speed up the rate of their debt payments.
The change will save cities money over time, but it could squeeze local government budgets over the next few years because it requires them to shore up investment losses on a 20-year schedule instead of 30 years.
The difference probably would be a few hundred thousand dollars a year for small cities and counties, according to a CalPERS presentation describing the change.
Executives at the California Public Employees’ Retirement System have advocated for faster debt payments over the past several months, arguing the speedier schedule decreases risk and saves money.
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A parade of city government officials in November, however, asked the CalPERS Board of Administration to stick to the current schedule. They said they were having trouble swallowing successive CalPERS rate hikes since 2013 that they said jeopardized their ability to fund public services.
“Each new approach only adds to the costs of cities and therefore to the taxpayers,” Hayward City Councilwoman Sara Lamnin told the CalPERS board in November.
The remarks from Lamnin and dozens of other city government leaders appeared to make an impression on the CalPERS board that month. Members of the board sounded reluctant to speed up the debt payments when they first looked at the proposal three months ago.
“I understand that we need to get here, but I also understand that we need to not put our fund at risk,” CalPERS board member Theresa Taylor said in November. “If we put our employers in a position where they have to terminate (because they can’t afford CalPERS), then you’re putting our fund at risk.”
This week, members of the CalPERS board reversed course and opted for the faster debt payments. They described their decision as a move to stabilize the $345 billion pension fund. The change is set to take effect in 2019, with the first payments on the new schedule due in 2021.
“By making this change we can’t be accused of accounting gimmicks and hiding our obligations,” said Margaret Brown, a newly elected CalPERS board member.
CalPERS is considered underfunded because it has about 70 percent of the assets it would need to pay all of the benefits it owes to its 1.9 million retirees and public workers.
“That is not a great position to be in, and all it takes is another movement or two and we find ourselves in a position where we cannot recover,” CalPERS board member Bill Slaton said.
Other large pension plans in California tend to pay off their debts on 15- to 20-year schedules, according to CalPERS. Accelerating the debt payments to a 20-year plan saves about $700,000 in interest on a $1 million loss, according to CalPERS’ November presentation.
Some local government leaders endorsed CalPERS’s decision to accelerate debt payments. Newport Beach Finance Director Dan Matusiewicz, for instance, likened CalPERS 30-year debt schedule to swelling federal deficits. “In the long run, it really hurts folks,” he said.
But others again repeated their worries about funding public services. “When you have a city that is already on the brink, applying a 20-year amortization policy will put them over the edge,” said Dane Hutchings, a lobbyist for the League of California Cities.