As a rising tide of retirement costs threaten the health of city budgets throughout the Peninsula, officials seeking a model of fiscal responsibility should look to the San Mateo County Board of Supervisors, according to a recent grand jury report.
The county Civil Grand Jury issued Tuesday, July 17, a report detailing the economic danger posed by unfunded pension costs and calling for local city officials to ramp up their efforts to pay down their debt.
Recognizing the tough budget choices facing the cities, the report claims officials should seize the rare chance presented by a booming economy to allocate a greater portion of the increased tax income to cut their costs from the California Public Employees’ Retirement System, or CalPERS.
“While the grand jury understands the desire on the part of cities to expand services in these times of economic growth and increasing property tax revenues, it is difficult to think of a more important issue for cities to focus on than the looming pension crisis,” said the report.
Illustrating the risk posed by the retirement costs, cities throughout San Mateo County funded 70 percent of their liabilities, a marginal improvement than the 68 percent funded across CalPERS, but still 10 percent shy of the industry threshold for considering a plan’s solvency at risk.
Furthering the cause for concern is funded percentages dropping by nearly 6 percent over the past three fiscal years, while the 20 cities and towns comprising San Mateo County spent $102 million on their pension plans last year, amounting to about 13 percent of their general fund spending.
Trends in the wrong direction could continue, according to the report, as uncertainty surrounding CalPERS cost projections and fund management policies swirl. To that end, pension costs are projected to double by the 2024-25 fiscal year.
Driving the projected increased cost is reduced return on investment for CalPERS, requiring cities to ramp up their payments to offset the difference.
The increased costs threaten the ability of cities to maintain current service levels, while also potentially harming bond ratings and reducing the capacity to continue offering competitive salaries to existing workers or afford pensions for retirees, according to the report.
Voters are unlikely to support tax measures designed to pay down pensions, according to the report, so officials will need to be realistic about the options available.
Officials can cut services, staff and salaries and negotiate more favorable contracts with workers, which are often difficult or unpopular steps to take. Or officials can craft and stick to a financial plan designed to allocate more money toward addressing their unfunded liabilities as soon as possible.
One recommendation found in the report is setting aside additional tax income generated by a healthy economy in a reserve and using that fund to reduce pension costs.
“In the current good financial times, most of the cities have experienced rising revenues and should be able to set their general fund budgets to yield a surplus of revenues over expenses and put the difference into a general fund reserve to be applied in their discretion against future unanticipated or one-time expenses. A portion of such reserves could be used to manage or smooth payments to CalPERS,” according to the report.
The report also recommended officials look to their colleagues at the county for guidance, as the county Board of Supervisors and the San Mateo County Employees’ Retirement Association, or SamCERA, have proven particularly adept at trimming unfunded obligations.
The county’s pension plan is 84 percent funded, due to supervisors’ commitment to paying more than the amount required toward the bill. Should the board stay its course, the county could eliminate its unfunded liability by 2023, and in the process save about $300 million in interest.
“The County Board of Supervisors and SamCERA have had to make hard choices in order to provide sustainable retiree pension plans. These have included large supplemental payments into the pension plan by the county and more conservative plan assumptions by SamCERA,” Richard Edminster, Civil Grand Jury foreperson, said in a prepared statement. “We’re not out of the woods yet in terms of paying off the county pension plan’s unfunded liability, but things appear to be heading in the right direction.”
While the jury cannot direct officials to adopt any specific policy for addressing the issue, the report directs each city to host a meeting with its community and develop a plan for addressing its unfunded liabilities. Each city in San Mateo County is requested to respond to the report.
“Now is the time for cities to engage their residents on the issue and with the residents’ support, take the difficult actions necessary to secure a bright future for their communities,” according to the report.
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