Increasing retirement plan rates will constrict Chico city funds, by Ashiah Scharaga, Enterprise-Record, 6/2/17
Chico >> Retirement contribution rates will dramatically increase for the city of Chico over the next few years, putting further pressure on the general fund, which pays for public safety, parks and roads.
It’s one of the uglies on the city’s horizon, according to Scott Dowell, city administrative services director. Chico’s annual pension contribution rate is projected to increase by $3.2 million in just five years.
“If we don’t start to plan for that now, it could obviously have huge consequences for us in the future,” Dowell said. In the worst case scenario the City Council could face tough decisions like whether to borrow money, reduce staffing levels or cut services in order to keep the budget balanced.
City staff is researching options for the council to minimize any impacts, Dowell said. The council will discuss this topic at an upcoming meeting, the date still to be decided.
The pension system used by Chico’s employees, California Public Employees Retirement System, is the largest public defined-benefit fund in the country. It serves more than 1.8 million people in the retirement system and provides benefits for 1.4 million people and their families in its health program.
Councilor Randall Stone, a financial planner and business owner, said the CalPERS’ current assumed rate of return of 7.5 percent is already “extraordinarily difficult to maintain.” As it drops to 7 percent over the next three years, cities using CalPERS will have to cover more and more of their employees’ retirement plans.
This year, the general fund brought in around $49 million, most of that through sales tax, property tax, utility taxes and the transient occupancy taxes paid at hotels. Half of that goes to Chico police salaries and benefits, and about a quarter to those of Chico’s firefighters.
Stone said the concern is that “it’s only a matter of time” before the pension system will pay out more in benefits than it is bringing in, and it will fail, he said. If that discount rate falls further, cities across the state will be in danger of declaring bankruptcy because they will not be able to make CalPERS pension payments.
The city’s unfunded liability fee in the upcoming budget is $6,547,673. While it is manageable this year, Dowell said, the projections are shocking.
For public safety employees, CalPERS costs for the city are expected to leap from 43 percent this year to 66 percent by 2022. The trend for all other employees looks similar, increasing from 44 percent to 61 by 2022.
This means the city’s annual contribution will increase by about $370,000 next year, $803,000 the next and nearly $2 million by 2020. Stone said he sees an “economic debacle” if the city doesn’t act now.
“I think generally speaking, the community doesn’t understand what a time bomb this is,” Stone said. “You should be screaming with your hair on fire from the rooftops.”
Vice Mayor Reanette Fillmer brought the idea formally to the council for discussion with the intent of seeing how other cities are tackling this issue.
“The only thing we can do at this point is look at other options,” she said. “It’s just so expensive, it’s ridiculous.”
One option could be local government agency management of pensions and offering defined contribution plans like a 401(k).
Fillmer said she thinks that would be beneficial for new employees, because they can decide how much they want to contribute to their own plans, rather than the rate being set, and manage their own money.
Stone said one thing the city can do is to stop providing pay increases during negotiations to help employees absorb some of their CalPERS costs. Making a significant contribution to unfunded liabilities gives the city a buffer on any cost increases, as well.
The median household income in Butte County is around $43,000 a year, according to the U.S. Census. The median income for Chico employees, without benefits, is around $80,000.
“I can’t look those people in the eye and tell them we need more money to make the pension payments for people that are making significantly more than them,” Stone said, “with a benefit they could never ever come close to achieving.”
Stone said the overwhelming amount of pension plan costs are paid for by the city of Chico, not its employees. If the employer and employee were paying half each, or had closer rates, employees in general could better understand how expensive it is and the benefits they are getting, especially if asking for pay increases amidst already increasing pension contribution rates. Fillmer said she’s interested in finding more cost-effective routes.
“What the employees don’t get is they get a raise without getting a raise,” she said. “When costs for PERS go up, we’re paying that cost.” She said new employees have to be protected. In the long run, she believes the city will find a less-expensive alternative.
“It’s about reducing cost and long-term liability and getting the city into better financial state,” she said. “We’re just looking at different options to try to get the city back to well-being without retirement being such a heavy burden.”