The city of Sacramento faces a daunting enough challenge to control pension costs without overpaying retirees. But because of an embarrassing foul-up, that happened for years. The mistake must be fixed, but unfortunately it is hurting pensioners.
As The Sacramento Bee’s Marissa Lang revealed on Sunday, the problem is with the city’s old retirement system – in place before the city joined the California Public Employees’ Retirement System – which still covers about 1,100 retired city employees.
Since at least 2005, about 5 percent of them have been underpaid and nearly 18 percent have been overpaid. Most significantly, payments to 200 early retirees weren’t reduced at age 62 to account for Social Security benefits.
The city says that partly because of staff turnover, the error wasn’t caught until a routine 2013 audit. An outside auditor issued a report in June 2014, then recalculated individual payments. In the past three years, a total of $2.8 million has been overpaid and $247,000 underpaid.
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Letters notified affected retirees that their checks had been wrong and would be corrected starting July. 1. As you might imagine, many were shocked since they have built those amounts into their household budgets.
They were given a choice: If they agreed not to sue the city, the city would not demand that overpayments be returned, and it would give out a lump sum for three years’ worth of underpayments, plus 6.5 percent interest.
While most signed the agreement, about 10 percent have yet to settle. They account for about $283,000 in overpayments and $26,000 in underpayments. Lawsuits could add to the city’s bill for rectifying this mistake.
This episode just goes to show how a mistake can balloon into sizable money. There’s a $60 million gap between the projected payouts and expected revenue for the old retirement system. Add in CalPERS, and the total unfunded liability increases to $675 million, compared with $161 million in 2004-05.
It’s going to be tough to whittle down that debt. Paying out more than retirees are owed only made it worse.