May 27 2012

An Elephant in the Room: Piedmont Pensions

Acting sooner rather than later may be key, according to BAFPC

Budget Advisory and Financial Planning Committee (BAFPC) discussions suggest a serious concern that hefty contributions to CalPERS, whether paid by the City or its employees, could potentially be buying Piedmont employees little more than an empty CalPERS promise.

The BAFPC meeting of Tuesday, May 22, included a detailed discussion of the City’s pension costs.  As the Committee looked carefully at CalPERS underfunding, the concept of being a leader among cities in finding a solution – and the danger of being left the “last man standing” in CalPERS pension pools – came up repeatedly.

The BAFPC analysis drilled down into Piedmont’s assigned pension fund pools:  its pool partners, its demographics, and its funding.  CalPERS is severely underfunded, to the point that the earnings required to “dig out of the hole” are so high they are likely to be unattainable.  Required employer and employee contributions, despite already being 44% of salary for police and fire, are still far below the level necessary to provide adequate funding of our employees’ pensions.  BAFPC analysis indicates current CalPERS contributions, plus a slight amount of principle, are going entirely to pay current retirees.  The overall CalPERS system, if looked at just in terms of active employees (rather than current retirees being paid) is 80% underfunded.

BAFPC discussion of these pension issues repeatedly came back around to the same conclusion:  moving quickly to address pension issues will give Piedmont  the best opportunity to structure a better outcome.  Cities that do nothing and become “the last man standing” in CalPERS pools may be left with few options.  The political risk of CalPERS changing its rules midstream – to the detriment of Piedmont – was viewed as a substantial danger.

Piedmont total retiree benefits add up to $38 million liability

A “back of the napkin” sketch of Piedmont’s current liabilities would be close to $38 million for 94 employees, as follows:

  • $20 million – underfunded CalPERS pensions
  • $  8 million – CalPERS “sidefund” liability*
  • $10 million – unfunded medical retiree benefits**

The BAFPC will be finalizing its recommendations on pensions and other areas of financial risk to the City at its next meeting on Tuesday, May 29, at 6 p.m. in the Police Department Emergency Operations Center.

*Piedmont’s Side Fund

This $8 million liability is currently being paid off at an imputed interest rate of 7.75%; annual payments for the side fund will end in approximately 10 years.  The side fund resulted from retroactive increases to pension benefits.  The full cost of increasing pensions, and doing so retroactively, was not anticipated when these decisions were made.  Rather than anticipating that pension costs would rise to as high as 44% of salary for safety (and higher in coming years), they were anticipated to peak at 34% and trend downward.

**Piedmont’s medical retiree benefit

The medial retiree benefit has recently been funded by the City to the extent of $2.5 million through a newly created Trust Fund.   The total liability is now estimated at $12 million based on an assumed earnings rate of 7% chosen by the Council and at the recommendation of staff.   This leaves $9.5 million unfunded.  Recently negotiated employee contracts have included a contribution of $100 per month by employees to this fund.  Police and Fire employee contracts are not yet negotiated. 

(Editor’s Note:  The total retiree medical liability is $16 million using the City consultant’s more conservative assumed earnings rate of 4%.  During the first 6 months of its existence, the new trust fund earned 11%.)


Previous articles:

Leave a Comment