I asked City Manager Oliver Chi to comment on this assertion. As I understand his response, it is that the city expects that 7 percent probably is a bit of a high estimate but that CalPERS is expected to further lower its estimate of what it can earn to about 6 percent, which Monrovia believes is realistic.
But that's my understanding. Here is Chi's response in full (the bold face type is his):
The matter of public pensions / unfunded pension liabilities is certainly a politically charged topic with individuals and groups on both sides of the debate. In very broad generalities, there are some who believe that public pensions are too generous and that pension benefits need to be reduced, while others maintain that there is no problem with the existing pension system as it stands. Both sides engaged in the issue have published their own studies to further articulate and illustrate their point, and the 4% rate of return that Mr. Schirtzinger cites is relatively consistent with studies published by the Stanford Institute for Economic Policy, which is now utilizing a 3.250% rate of return to calculate pension related liabilities on a market basis. Additionally, there are other entities that have published studies which assert that CalPERS can and will earn a higher rate of return than that identified on a market basis, and that the actuarial calculation of projected future pension costs is the appropriate way to outline future liabilities.
With all of that being said, the fact remains that under the current system, CalPERS pension costs and future pension liabilities are calculated based on an actuarial basis. And one of the primary drivers of projected pension liabilities is the assumed discount rate, or rate of investment return, included in the analysis. Over the years, CalPERS has very appropriately been reducing their assumed rate of return, and the discount rate reductions have included the following:
- 2004 – reduced assumed rate of return from 8.25% down to 7.75%
- 2012 – reduced assumed rate of return from 7.75% down to 7.5%
- 2016 – reduced assumed rate of return from 7.5% down to 7.0%
Moving ahead, based on conversations I’ve had with individuals involved in the CalPERS policy making process, it seems that CalPERS will in the next few years further reduce their assumed rate of return to somewhere around 6.0%, which I believe is a realistic and appropriate decision. Also for your reference, the actual audited financials for CalPERS illustrate that their actual earned investment rate or return (as of June 30, 2016) during the past several years is as follows:
- CalPERS actual audited investment return performance through June 30, 2016, has been:
- Last 3 years – 6.9%
- Last 5 years – 6.8%
- Last 10 years – 5.1%
- Last 20 years – 7.0%
- Since inception (1988) – 8.3%
As we have analyzed all of these associated factors here at the City, we continue to believe that our overall CalPERS Response (CPR) Plan makes sense and is a responsible way of addressing the City’s future unfunded pension liability. Currently, our actuarially determined unfunded liability and other pension liabilities total around $112.4 million. And the cost for servicing that debt load is scheduled to increase from its current level of $6.1 million / year to $11 million / year in FY 2025/26. Additionally, the cost for paying down those pension liabilities will be assessed a roughly 7% interest rate factor.
By refinancing all of our existing unfunded pension liabilities in the current market rate environment, we reduce our annual payments by $4.3 million / year and save the City $43.2 million during the course of the next 30 year period. This is primarily due to the fact that current market rates indicate the possibility for us to refinance our debt load at an interest rate of around 4% - 4.5%, and over a 30 year borrowing term, so long a CalPERS can earn an investment return greater than our borrowing costs, the refinancing will work in the City’s favor.
Additionally, once we do refinance all of our pension liabilities, the City’s overall CalPERS pension account will effectively be 100% fully funded. The City recognizes that as we move ahead, it is likely that CalPERS will, at some point, accrue new pension liabilities due to future investment return losses and actuarial assumption adjustments. While the chances of growing a large future pension liability will decrease as CalPERS reduces its assumed investment rate of return, realistically, future liabilities will almost certainly accrue.
In an effort to resolve that particular issue, the City has also established a UAL Funding Policy, which draws on lessons from the best performing public pension funds in the world. In particular, the New York pension fund – which offers pension benefits similar to those in California – is currently 95% funded. The way they have achieved this high funding level is by aggressively paying down any new unfunded liabilities that develop. Our adopted UAL Funding Policy in Monrovia draws upon that experience and requires that the City explicitly disclose on an annual basis any increase / decrease in pension liabilities. Further, the policy requires that the City develop a payoff plan for any new accrued pension liabilities that develop annually.
The refinancing of our pension debt and our UAL Funding Policy – combined with our employees agreeing to shoulder a larger portion of our pension costs, a modest increase in our Transient Occupancy Tax (TOT) rate, and establishing new Community Facility Districts on new development to pay for increased service delivery expenses – puts Monrovia on a solid financial footing moving forward into the future.
However, as we discussed at our City Council meeting last Tuesday, November 7, 2017, the scale and impact of the pending CalPERS unfunded pension liability cost increases will require a wholesale reassessment of how government works in California. The costs are not sustainable, which is why Monrovia acted to address the issues now through adoption of our overall CPR Plan. However, as the financial markets change and private financing interest rates increase, other agencies who are not proactively working to manage the situation now will be forced to consider significant cuts in services or the establishment of additional revenues to fund burgeoning pension debt costs.
- Brad Haugaard
