2017-08-10 / Front Page

Looming liability: Pension costs remain long-term challenge for T.O.

SPECIAL REPORT
By Becca Whitnall


TRENDING IN THE WRONG DIRECTION—Of the $10.1 million expected to go to CalPERS in 2022-23, $7.3 million will fall under unfunded pension liability—the gap between what is owed to retirees and what Thousand Oaks and its employees have paid into the system. TRENDING IN THE WRONG DIRECTION—Of the $10.1 million expected to go to CalPERS in 2022-23, $7.3 million will fall under unfunded pension liability—the gap between what is owed to retirees and what Thousand Oaks and its employees have paid into the system. This story was updated 10:13 a.m. Aug. 11, 2017.

By 2023, if projections hold true, pensions alone will represent nearly 17 percent of the total cost of salaries and benefits for the City of Thousand Oaks. 

For the 2017-18 fiscal year, Thousand Oaks plans to pay about $6.5 million—or 4.4 percent of its total operating budget—into the California Public Employees’ Retirement System, or CalPERS, the state employees’ pension fund. That figure could climb as high as $10 million by fiscal year 2022-23.

Those numbers do not take into account the cost of health benefits for retirees, which are managed through a different system.

Before the City Council adopted its latest two-year spending plan in June, Finance Director John Adams listed pensions as one of the biggest fiscal challenges facing the city in coming years.

Taking steps now to prepare for that is key, Human Resources Director Gary Rogers told the Acorn in an interview.

“We do anticipate the pension cost to grow—we’re certainly aware of that and we’ll be planning for that,” he said. “There are a number of potential ways we can fund this.”

Much of the increase is the result of a 2016 decision by the CalPERS board to require local agencies to contribute more to the system, which has been struggling due to lower-than-expected investment returns and longer employee life spans.

Without the contribution hike, the system would not be sustainable, City Manager Andrew Powers said at a meeting with the Acorn.

“It was the right thing for CalPERS to do, as painful as it is for a lot of communities, especially those that have a heavier burden because they have police and fire employees,” Powers said.

As a result, every municipality in California is grappling with unfunded pension liability—the gap between what is owed to retirees and what cities and their employees have actually paid.

“Our pension is funded at 76.9 percent as of June 2015,” Rogers said. “A lot of agencies are in that ballpark, but that depends on the demographics, what those agencies have done to fund their plans and so many other factors.”

In the late 1990s, Thousand Oaks’ pension account was superfunded, meaning the city had more than enough money in Cal- PERS to cover the demand.

In 1999, for example, the account was 144.9 percent funded. Rogers said it could be two decades before city pensions are fully funded again.

Cost-saving measures

To counteract the rising cost of pensions and other employee benefits, Thousand Oaks has reduced its staff considerably in recent years.

“Going back to the recession, we made some strategic changes, and one of those was eliminating 100 positions, or 16 percent of the workforce,” Adams said. “That put us on this new course, and some of the expenditures significantly went down.”

The city also pays more than its minimum required CalPERS contribution whenever additional funds become available, the finance director said. That happens when employee positions go unfilled in city government and the money saved is used to reduce what the city owes.

Pension reform

Starting in 2014, all City of Thousand Oaks employees began paying 7 percent of their salaries to CalPERS, saving the city around $2 million a year. Before that, taxpayers picked up the tab.

In return for agreeing to contribute toward the cost of their pensions, the employees received other compensation adjustments, including raises.

Annual pension amounts are determined in part by length of service, age at retirement and date of hiring, among other factors.

As of June 30, 2015, the latest numbers the state provides, the city had 420 retired CalPERS members, Rogers said. Their average pension: $28,013.

Thousand Oaks employees who were hired before 2013— when the California Public Employees’ Pension Reform Act (PEPRA) took effect—are eligible to retire at 55 and receive an annual pension equal to 2 percent of their highest salary for each year worked.

For example, a city worker making $100,000 who retires after 30 years at age 55 could receive an annual pension of $60,000.

Employees who’ve worked at the city long enough can retire at a younger age, but the rate of pension payment is affected.

The 2013 pension reform act raised the retirement age and formula by which benefits are calculated.

City employees hired in 2013 or later—and who aren’t already grandfathered into the previous system because of prior public service—can retire at 62 and receive an annual pension of 2 percent of the average of their three highest annual salaries for each year worked.

City employees do not accrue Social Security benefits.

Slowly, Thousand Oaks is making strides.

“To give you some perspective, in 2009 in Thousand Oaks, the plan was at 61 percent funded status, so we are moving in the right direction,” Rogers said.

Though the city considers itself to be in good shape now, it’s looking forward 10 years or so, when it expects pension costs to peak.

That’s why Powers, Adams, Rogers and their colleagues bring concerns like the growing pension obligation to the City Council’s attention, they said.

“Well-managed cities are looking on the horizon out 10 or 15 years,” Powers said. “There are plenty of cities who are looking at ‘how can we stitch together the budget the next year and the following year,’ but we’re being honest and transparent about where we’re going to be having to make allocations over the next few years.”

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