City struggles with pension liability
After steep climb over 3 years, Petaluma behind in paying off unfunded retirement costs
Published: Wednesday, January 10, 2007 at 3:00 a.m.
Last Modified: Tuesday, January 9, 2007 at 6:45 p.m.
Petaluma lags behind other California cities in its ability to pay employees’ promised retirement benefits, having amassed a $24.5 million unfunded liability that grew from $9 million three years earlier.
The 58 percent increase revealed in the latest financial statements from California’s Public Employees Retirement System is more evidence of the spiking retirement costs that have plagued Petaluma and other California cities.
Petaluma, like most cities, contracts with CalPERS for its pension plans. A combination of stock earnings, employee contributions and city payments fund the two-pronged plans — one for police and firefighters and one for everybody else.
In 1999 and 2000, the stock market performed so well that the pension accounts were overfunded. Recently, though, it’s been a different story.
A 2001 downtown in the economy left cities like Petaluma with diminished returns with which to pay the promised retirement costs. That meant local governments had to make up the balance from their general funds.
Cities and CalPERS talk about that liability in terms of percentages — how much of the promised retirement payments are funded.
In Petaluma, the funded percentage for “miscellaneous” employees went from 103 percent to 88 percent from 2002 to 2005, the latest year figures are available.
For police and firefighters, who can retire at an earlier age than other workers with a higher percentage of their final pay as a pension, the funded percentage went from 85.3 percent in 2002 to 79.4 percent in 2005.
So how does that compare to other cities? According to CalPERS figures, while Petaluma has funded 88 percent of its “miscellaneous” workers’ pensions as of 2005, the average of other cities in the CalPERS system was 91.9 percent.
For police and fire, Petaluma’s 79.4 percent was less than the average of 87.6 percent.
In real dollars, the unfunded liability in Petaluma grew from approximately $9 million at the end of the 2001-2002 fiscal year to $24.5 million as of June 2005.
The cost of enhanced benefits for public employees has come under fire from Gov. Arnold Schwarzenegger and others in recent years. The governor last week announced the formation of a commission to study how cities, counties and state governments can deal with the unfunded liability they owe on pension packages promised to public employees when the stock market was soaring at the turn of the century.
Comparing funding percentages is the only fair way to examine a city’s pension situation with others, CalPERS spokesman Ed Fong said. Each city is different — in the number of employees and retirees it has, in the details of its retirement benefits, in its budget situation, he said.
While having a fully funded pension plan is ideal, it’s not common, he said.
“Over the long term, you want to be at 100 percent, but it’s very rare because of all the variables,” he said.
For cities, “A 90 percent funding level is considered very good,” Fong said. Petaluma’s pension plan for miscellaneous workers “is very close to it.”
Pamala Robbins, the city’s human resources manager, said most cities with plans funded at 80 percent or better are in good shape.
“I’m going to say it’s a good number,” she said. “I don’t think the experts even agree on what an appropriate level of funding should be.”
And while it’s too soon to call it a trend, said Robbins, retirement costs for Petaluma employees may be settling down.
As a CalPERS contractor, the city relies on the state agency to estimate the percentage of city funds that should be reserved for the pension plan each year. That number is written as a percentage of total payroll that must be set aside for retirement costs.
In 2005, alarmed by spiking pension costs, cities got CalPERS to agree to “rate smoothing” that protects local governments against a rising contribution rate.
“With rate smoothing, cities were looking for stability in their rates,” Robbins said. Costs were amortized over a longer period of time, and as a result, Petaluma is experiencing a decline in its share of pension contributions that it is expected to continue.
For example, the “high” for Petaluma’s contributions was 34.9 percent for public safety and 12.53 percent for other workers in 2005-2006.
But estimates from CalPERS show those percentages declining, to 28.5 percent for public safety and 11.5 percent for miscellaneous in the 2008-2009 fiscal year.
“The stability in the rate tells you that the rate smoothing model is working,” Robbins said.
In addition, although the unfunded portion of the pension plan rose 58 percent over three years, over the final year of that period the increase was only 4 percent — about $1 million from 2004 to 2005.
Furthermore, that funded percentage of 79.4 for public safety pensions, although lower than the state average, climbed 1 percent from a low of 78.3 the year before.
“The funded status has increased,” Robbins said. How-ever, “it is not a trend yet.”
Former council member Bryant Moynihan, a constant critic of the city’s spending policies, has assailed the compensation given to employees and said the city was overgenerous in awarding pensions and other benefits.
Last year, the city negotiated contracts with all nine of its bargaining units, including police and fire, which received raises officials said would bring Petaluma into line with nearby competing cities.
But Moynihan said “the community could not afford those contracts,” pointing to the growing unfunded liability.
Fong presented a different view.
“It’s easy to glom on an unfunded liability and start talking about it as if it is a debt, as if somebody has to write a check tomorrow,” he said. “It’s an ongoing entity. At any given point, you’re looking to see if you’re on target with what you need to pay.”
As the economy improves, “we are rebounding, but it takes time,” Fong said.
Each fall, a new report from CalPERS lays out the city’s financial picture — how much the city must pay, how much is gained from stock returns and what unfunded liability remains.
In the next several weeks, possibly in February, the city is expected to hear from its auditors how it is doing, Councilmember Mike Harris said. He agreed that stabilizing rates help reduce the city’s volatility.
“As a city, you can budget several years out and know what you need to do with your planning,” he said.
Harris said he applauds Schwarzenegger for tackling the pension issue. The governor’s commission, with appointees from the legislature as well, is supposed to report its recommendations in a year.
“It’s not an issue people like to talk about, but it’s an important one that can come back to bite you if you aren’t pro-active in addressing it,” Harris said.
(Contact Corey Young at email@example.com)
All rights reserved. This copyrighted material may not be re-published without permission. Links are encouraged.
Comments are currently unavailable on this article
You'll find a number of new technology features available from this site. With personalized news sent straight to your mobile device.
post your stuff
Petaluma360.com is here for you to post your comments, photos, news and events with the community. Post it now!
Have something to say? Join the conversation!
Upload your photos of community events, holidays, pets, cute kids, breaking news and more, and vote for your favorites!
Submit your area events to encourage others in your community to attend.