South Lake Tahoe facing massive rise in pension payment
May 19, 2017
Last December the board of California's state public pension system, CalPERS, voted to lower expectations for future annual returns — a move that will put a strain on the budgets of municipalities across the state, including South Lake Tahoe.
With this forecast, CalPERS' investment returns will cover less of the cost of retiree's pension plans, forcing local governments to pay more. The agency currently manages the investments of an estimated 1.8 million current and future retirees.
CalPERS has obligations that exceed $500 billion, but assets that total roughly $300 billion. As a result, member agencies were notified this January of significant increases in annual employer pension payments over the next five years. According to City Manager Nancy Kerry, South Lake Tahoe's payment will increase from $4.7 million a year to $9.7 million by 2022.
Over the next five years, CalPERS is expected to collect $4.5 billion from public agency members — an unprecedented increase for the pension system — and one that will impact staffing and services offered by towns and cities across California
At the May 16 City Council meeting, Kerry presented a thorough explanation to council on the CalPERS crisis.
"It began by over-reacting to a minute in time," said Kerry, pointing to the 1999 labeling of CalPERS as "super funded."
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As a result, the state of California improved benefits retroactively and offered early retirement, which put pressure on other California public agencies to adopt this new standard.
"Over-reacting to the 'super funded' status had an immediate impact on the system as CalPERS was very quickly underfunded, which worsened due to the Great Recession, poor investment returns and the lack of political will among labor groups and legislators to address the solvency of CalPERs early on," reads a report prepared by city staff.
"They have a math problem," added Kerry.
In short, CalPERS has lower investment returns coupled with earlier retirements and longer life expectancies.
"Although CalPERS is forecasting a doubling of pension, the city is prepared. I'm pleased to report that," Kerry told City Council this past Tuesday.
Kerry noted that since the Great Recession the city has taken a conservative approach in its finances by reducing health insurance costs through a high-deductible basic plan and refinancing debts.
The city has sufficient general fund reserves to cover its increased pension payments through 2022 if City Council authorizes the use of the reserves and an adjustment to the 25-percent hold policy. City staff is recommending a fixed reserve amount of $9 million.
At present, the general fund reserves over the next five fiscal years are forecasted at $15.9 million, $15.9 million, $14.1 million, $11.6 million and $8.5 million.
City Council directed Kerry to prepare another report with a proposed modified reserve policy for the councilmembers to consider.
"When we've been criticized for sitting on those reserves, it's because we knew it was going to be much worse than what [experts] were saying," said Kerry of the increased CalPERS contribution.
However, the city of South Lake Tahoe is also in the midst of a lawsuit with police and firefighter retirees over reduced coverage in health care and gearing up to renegotiate salaries with city employees — both factors that have not been included in the five-year forecast.
"The impacts of this will affect our community members, our employees and retirees. They might not necessarily have all the services they expected … we all have to come into this game together," concluded Kerry.