Pension Costs to Climb Almost 75 Percent at Santa Monica City Hall, Think Tank Estimates

By Niki Cervantes
Staff Writer

January 29, 2018 -- Total pension costs at Santa Monica City Hall will climb almost 75 percent by the 2024-2025 fiscal year, as the City continues to shoulder a huge unfunded liability -- or pension obligations it failed to fully fund -- and ongoing annual payments, according to a new analysis by a Sacramento-based think tank.

The report by the California Policy Center, based on data from the California Public Employee Retirement System (CalPERS), forecasts total pensions payment from City coffers to CalPERS will reach about $94 million seven years from now, compared to the $54 million the City paid in the 2017-2018 year.

Last year was a special case, though. In June, the City Council voted to cobble together a record $45 million to whittle down the then-$378 million in unfunded employee pensions ("City Council Approves Record Payment Toward Santa Monica's Unfunded Employee Pensions," June 15, 2017).

The City’s total unfunded liability has since reached $461 million, due in part to CalPERS investments which did not perform as well as predicted, the City said.

As with Santa Monica, California’s local governments and other public-sector employers are looking down the barrel of hundreds of millions of dollars in pensions for which little funding is available.

The study by the California Policy Center, which is regarded in some quarters as having a conservative bent, looks at 427 cities and 36 counties in California whose employees are in CalPERS, and compares the total pension payments made for the 2017-2018 fiscal year and the pension costs it estimates will be due in 2024-2025.

The data includes so-called “normal” costs, or the amount employers need to pay into the pension fund for current workers who are vesting one more year of future benefits, and the “catch-up” costs, which are what CalPERS charges employers whose pension plan is underfunded, the report said.

In Santa Monica, the report said, the “normal” payment to CalPERS would have been $23.7 million, rising to about $35 million seven years down the road.

But “catch up” costs jump to almost $59 million or a 24 percent hike -- and more than the City paid for all pension costs combined in 2017-2018, the researchers said.

In some local governments, catch-up payments on the unfunded liability will grow six times or more beyond the “normal contribution,” they said.

But playing catch up is fiscally hazardous, the report said.

“When a normal contribution isn’t enough, and the plan becomes underfunded, the level of underfunding is compounded every year because there isn’t enough money in the fund earning interest,” it said. “The longer catch-up payments are deferred, the worse the situation gets.

“Where are any of California’s cities and counties going to find this kind of money,” the report asked.

Officials in Santa Monica are paying down the unfunded liability over a 30-year stretch.

Last fiscal year, the City applied $26.7 million toward the unfunded liability, or 53 percent of its total $50.2 million pension payment to CalPERS, Council Member Sue Himmelrich said citing the staff record..

The staff report said that an updated estimate from CalPERS found “the combination of the additional pay down and a better than anticipated experience level resulting from City employees retiring later is contributing to a 1/3 decrease in the projected growth of pension costs over the next five years.”

She noted the City's unfunded pension liability is primarily controlled by CalPERS.

“Going forward, we have very limited options, but the fruits of those options will not be realized for 20-30 years, since so much of our liability was establish prior to 2011,” said Himmelrich, who is also member of the City’s Audit Subcommittee.

But some members of a citizen’s ad hoc subcommittee, which was set up in reaction to the rising chorus of complaints about the City’s spending practices, is worried about stringing the paydown along for so many decades.

Dominic Gomez, one of the members of the Compensation Study Advisory Committee, is asking for a freeze on hiring or wages to rein in spending and help with the unfunded liability going forward.

Spending in most of the City’s $1.5 billion biennial budget is tied to employee costs.

A freeze to slow down employee-related costs gained no traction from the five-member Audit Subcommittee, though, which is the citizen panel’s overseer and includes three City Council members.

Laurence Eubank, who also serves on the ad hoc committee, said treating the unfunded liability like a mortgage is unfair to future generations.

“What are we doing to our children, and our children’s children?” he said. “We’ve pushing this off on them. We won’t even be around.”