Pension Liabilities Threaten Ventura’s Financial Health
VENTURA’S FINANCES – HEALTHY, OR NOT ?
At the Ventura City Council meeting on February 23, 2015, our Mayor will discuss The State of the City. It is to be expected that she will praise the accomplishments of the City, such as creation of a Water Commission to address water shortage issues and the City efforts to improve roads and basic infrastructure. The condition of City finances will also be a major subject, building on the Ventura County Star article, published on President’s Day, with the headline “City’s Financial Outlook Healthy”.
A candid discussion of the condition of City finances is to be welcomed, but it is not the rosy picture portrayed in the Star article. The Economic reality of the current public pension liabilities of the City of Ventura unfortunately is not receiving the attention it demands when determining our financial outlook, nor is the impact of escalating payments to CALPERS and the drain it will have on the General Fund and City services in the next 5 years getting noticed.
A. VENTURA UNFUNDED PENSION OBLIGATIONS TRIPLE
In the fall of each year CALPERS provides financial and actuarial reports for the SAFETY PLAN OF THE CITY OF SAN BUENAVENTURA (police and fire) and MISCELLANEOUS PLAN (all other employees). The latest report, dated October, 2014, provides a valuation of assets and liability as of June 30, 2014.
The combined City pension assets have a present value of $191,329,875. and we owe $353,756,578. There is no money to pay the $157,993, 381 shortfall. The official calculations are based upon an assumption, projected over the actuarial life of the union participants, that CALPERS, as our pension fund administrator, will achieve an investment return of 7.5%.
What this report does not discuss in direct terms is the 50% loss our City incurred during the 2008 depression, together with the other 1600 local government agencies funds that they manage. That money has not been replaced. What CALPERS wants to emphasize in their report is the 18% (not net of costs) return that they received ending June 30, 2013. This is a short term gain only.
For the investment forecast CALPERS uses a rate of 7.5%. However, when CALPERS illustrates their Hypothetical Termination Liability calculations on page 28 of the report, it uses a far different and lower discount/investment rate of 3.72% instead of the 7.5% rate of return. In that event we owe $488,961,724.
In reality, in early in 2014, CALPERS admitted that it is still underfunded by 50%. They report earnings of 18.5% last year, but a study has reported their actual earned average of 3.41% for five years, 5.36% for ten years, 6.97% for 15 years, and 8.38% for 20 years.
B. HISTORICAL PERSPECTIVE
In August 2008, the editors of this newsletter published an analysis of the unfunded pension obligations of Ventura titled IN THE SHADOW OF VALLEJO. We warned against the increase of the firefighters’ pension benefits by 33% (from 2% at age 55 to 3% at age and urged the Council not to make the increase, and to require all other employees to contribute at least 5% to 10% toward their pensions.
We provided extracts from a CALPERS report of the time.
|Funded Status–June 30, 2008||Police/Fire||Misc. Plan|
|Present value of projected benefits||$270,877,057||205,128,033|
|Entry Age Normal Accrued Liability||$233,938,241||$167,837,616|
|Actuarial Value of Assets||$177,314,177||$157,529,148|
“I do not know where we are going to get the money.”
The vote was 4 to 3 in favor. Voting against the increase were then Mayor Weir and Councilmen Andrews and Morehouse. Councilman Morehouse’s comments at the time were prophetic. “I do not know where we are going to get the money”.
In January 2011, VREG newsletter again visited the pension issues because the City Council was considering the renewal of the labor contracts with the employees in the City. The proposal was to require the employees to contribute 4.5% of the CALPERS pension costs. This VREG urged the Council to require greater contributions from the employees. The article was titled HMS TITANIC [Moving Deck Chairs to Avoid a Disaster].
The City Council vote was 5-2 in favor of the agreements (which included a requirement that employees contribute 4.5%). Councilman Andrews and Councilwoman Weir voted against approval. The decision of the other five—Brennan, Fulton, Monahan, Morehouse and Tracy—was in favor.
Councilwoman Christy Weir rejected the proposal and stating “Fiscally, the city needs more than this right now.” Council Member Neil Andrews concurred stating, “The agreements simply don’t go far enough.”
“The agreements simply don’t go far enough.”
C. AN ESCALATING PAYROLL CONTRIBUTION RATE THREATENS FINANCIAL HEALTH
Today the City of Ventura owes in excess of $157,993,381. It will only increase and the drain on the General Fund will likewise increase because the required employer contribution rate for police and fire for example must be paid yearly in addition to their pay and medical costs. Here are the mandated and projected rates from CALPERS.
FISCAL YEAR EMPLOYER CONTRIBUTION RATE (Police & Fire only)
2011/2012 35.190% 2012/2013 36.4%
2013/2014 40.6% 2014/2015 44.225%
2015/2016 45.598% 2016-2017 50.6%
2018-2019 52.5% 2019/2020 54.5%
The cities of Stockton and Vallejo were forced to file chapter 9 bankruptcy proceedings. The cities asked their creditors to take haircuts, but not CALPERS. The cities insisted that the public employee unions were exempt and entitled by law to100% on the dollar. The Federal Bankruptcy Court ruled otherwise in January, 2015.
CALPERS argued that the California Constitution guaranteed the union contracts and thereby pension benefits from cuts and/or that they enjoyed sovereign immunity and police powers as an arm of the state and/or that they have a lien on municipal assets. In January 2015, the Federal Bankruptcy Court effectively threw them out of court saying: It is doubtful that CALPERS even has standing. He writes “It does not bear financial risk from reductions by the City in its funding payments because state law requires CALPERS to pass along the reductions to pensioners in the form of reduced pensions”.
Judge Klein further stated: “CALPERS has bullied its way about in this case with an iron fist” and “that their arguments are constitutionally infirm in the face of the exclusive power of Congress to enact uniform laws on the subject of bankruptcy…”.
The impact of this decision is that CALPERS cannot stop cities from modifying pensions.
The direction that Ventura is heading is insolvency and the idea that employee pensions are guaranteed and protected is wrong. Unless the City Council take steps to force public employees to pay a greater portion of their retirement and stop increasing the annual percentage of the general budget toward retirement and benefits, Ventura will collapse.
R. Alviani K. Corse T. Cook B. Berry
J. Tingstrom R. McCord S. Doll
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