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News Jun 14, 2017
Mayor Terry Tornek lauded the establishment of a “pattern of saving,” likening the act to having a child open a savings account. - Photo by Terry Miller / Beacon Media News
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Mayor Terry Tornek lauded the establishment of a “pattern of saving,” likening the act to having a child open a savings account.
– Photo by Terry Miller / Beacon Media News
By Gus Herrera
On Monday, the Pasadena City Council prudently exercised forward-thinking by taking steps to ensure that the city will be able to fulfill commitments to its employees’ pensions and other post-employment benefits (OPEB).
Following lengthy discussions regarding this year’s budget, it became apparent that “certain factors, most significantly future increased pension contributions to CALPERS … are expected to put considerable strain on the city’s general fund over the next several years,” according to staff’s report.
CALPERS, shorthand for California Public Employees Retirement System, manages two funds for Pasadena employees – one for safety personnel (i.e. fire and police departments) and another for all other personnel, categorized as “miscellaneous.”
CALPERS has seen its fair share of controversy due to the inconsistency of its rate of return on investments. The roller coaster of a system has taken several cities along for volatile rides, seeing cycles of gains followed by significant losses that have left some municipalities bankrupt.
Although economic cycles are quite natural, CALPERS’ “gains have not offset the significant losses over time,” according to city staff.
Council was highly critical of CALPERS, especially Vice-Mayor John Kennedy who characterized the system as being mismanaged and having the “potential of … negatively impacting [the city’s] financial situation going forward.”
Council Member Margaret McAustin also didn’t hold back any punches, arguing that CALPERS has “not fulfilled [its] fiduciary obligations” and is “subject to corruption and fraud.”
“One would think they would be able to do better on their investments … we as a city are suffering, all the cities are suffering … the board has mismanaged our investments and our employees’ investments,” she said.
CALPERS headquarters in Sacramento. The program and its board have come under considerable scrutiny all throughout the state. – Courtesy Photo
But CALPERS is not the only looming problem, they city’s OPEB commitments, which are liabilities due toward the medical insurance of retirees, are also “rising.”
The city utilizes a “pay-as-you-go” approach to fund OPEB, paying $1.5 million per year toward an approximate $54 million total that is growing.
According to staff’s report, this approach “does nothing to reduce” the overall debt and in order to so would require yearly payments of $6 million.
Combine the CALPERS and OBEP conundrums with serious capital/infrastructure needs – staff’s report cites $300 million in unfunded projects, in addition to “dozens of current projects that are underfunded” – and council was left with little choice but to take pre-emptive action.
Council approved four steps:
- Staff will be tasked with revising the fund balance policy – capping the general fund emergency contingency reserve at 15 percent of appropriations and creating a general fund operating reserve with 5 percent of appropriations.
- Establish a Section 115 Trust that will pre-fund the city’s pensions and OPEB.
- Allocation of $1 million of unassigned general fund money towards the workers compensation fund.
- Allocation of $1 million of unassigned general fund money towards the general liability fund.
The above fiscal strategy was approved without opposition and staff will return to council in the near future with more details. The city will also work with an actuary to set up and determine the appropriate funding level for the Section 115 Trust.
According to staff’s report, “it is expected that ideally the trust would need $75 [to] $100 million to provide optimal pension rate stabilization for the general fund.”
Council was particularly satisfied with the establishment of the trust due to the fact that it affords the city flexibility, as the funds invested can be withdrawn at any time.
“I think this is good strategy … I appreciate the effort to pre-fund and be in charge of the fund … I think it’s prudent,” said McAustin.
Council Member Victor Gordo had his reservations about “tying [the] hands” of future councils with a trust, but was ultimately “supportive of [the] Section 115 Trust” because the “funds remain liquid.”
According to Mayor Terry Tornek, the city is expected to adopt a budget for the fiscal year next week.
