Local cities’ pension payment plans draw optimism and doubts

It’s a start. But is it enough?

Some observers endorse plans by local cities to open the fiscal valves in an effort to bring down growing unfunded liabilities for public employees’ pensions. Others say those plans might be insufficient.

Local cities are paying above and beyond required payments to the California Public Employees’ Retirement System, or CalPERS. Newport Beach is tacking about $9 million a year to its payments, Costa Mesa about $500,000 a year and Fountain Valley and Huntington Beach about $1 million. Huntington also will pay additional contributions from a pension rate stabilization trust, and Newport is considering doing the same.

Without taking action, Newport Beach’s projected unfunded pension liability for the new fiscal year, which starts this weekend, would balloon to $353 million, compared with $46 million 10 years ago. Costa Mesa’s unfunded liability is projected at $246 million for fiscal 2017-18, up from an estimated $46 million 10 years ago. In Huntington Beach, the latest number is $363 million, compared with $79 million a decade ago.

Devin Dwyer, who served on the Huntington Beach City Council from 2008 to 2012, said that city’s prepayment plan is a good idea but is not the answer.

“It won’t make a big enough dent,” he said.

Dwyer believes pension plans should be replaced with 401-k programs, which have defined employee contributions. New hires would be brought in under the 401-k system, and existing employees would transfer to the plan, with their promised pensions covered through the years already worked.

Dwyer said state legislators are the only ones who can enforce that transition, so cities need to band together to put pressure on them.

“I am not real optimistic,” Dwyer added.

Former Newport Beach Mayor Rush Hill, who was on the City Council from 2010 to 2014, said Newport is on the right path. He said pensions make for an important, volatile issue that needs constant focus.

Government often doesn’t react until there’s a crisis, he said, and aside from recent pension reform bills proposed by state Sen. John Moorlach — a Costa Mesa Republican whom Hill, a former staff member for Ronald Reagan, praised as Reagan-esque — legislators seem unwilling to touch the issue.

“I would say the only group that’s hard to convince there’s a problem is the California Legislature,” Hill said.

Newport Beach has the resources to make the hefty additional payments, Hill said. But if monumental reform ends up relieving the system of some of its burden, Newport could essentially end up subsidizing that with its large shares. There’s also a risk of paying too much too fast and losing that investment if the market crashes.

“You have to reach a sweet spot,” he said.

According to CalPERS, about 62% of its income is the result of earnings from investing employer and employee contributions in stocks, bonds and real estate. If investment returns fall, as happened with the financial crisis of 2008, local governments have to pay more toward pensions to make up the difference.

In 2008, CalPERS investments lost 3%. Losses swelled to 24% in 2009, according to the Los Angeles Times.

Fred Seguin — who retired from the Costa Mesa Fire & Rescue Department after a 30-year run that included stints as acting chief, deputy chief and battalion chief — said he thinks CalPERS is fundamentally “still a good system and strongly funded.”

“I would say, as we all look back in hindsight, if we didn’t have that market crash, none of us would be talking about it now,” he said.

In Seguin’s mind, the Great Recession opened some eyes and inspired CalPERS to make less-aggressive investments. Another positive development in the aftermath of the crash, he said, was the passage of the California Public Employees’ Pension Reform Act of 2013, or PEPRA. That law essentially lowered new hires’ future retirement benefits by capping how much of their compensation can be factored into calculating their pensions.

Seguin, whose pension is about $156,000 a year, said he thinks Costa Mesa is taking appropriate steps to reduce its unfunded pension liability.

In addition to budgeting $500,000 per year for added payments to CalPERS, the city is annually prepaying CalPERS for employee bargaining groups and using the savings from a prepay discount — more than $250,000 per year — to make additional payments.

“It’s at least a step in the right direction,” Seguin said.

Hill said Newport has always been open with its unions about the mathematical realities of pensions. He remembers meeting at former Councilman Keith Curry’s house seven years ago with employee representatives to talk about it.

“We sat around the kitchen table with pastries and coffee and said, ‘Here’s the deal. Here’s the reality,’ ” Hill said. “And the union heads acknowledged they wanted to be part of the solution, not part of the problem.”

Newport lifeguard Battalion Chief Brent Jacobsen was at that breakfast meeting. Around that time, the city approached his unit with potential layoffs. Instead, the permanent lifeguards group — about a dozen year-round, full-time guards — offered to start contributing to their pensions to preserve jobs.

City public safety employees currently pay 9% of their salaries toward retirement, but in the 1980s, the city started making that contribution on their behalf in place of raises, Jacobsen said. By taking that commitment back, the lifeguards essentially took a 9% pay cut.

Starting this month, they will pay 13.6% toward their retirements.

Jacobsen said that if he and other public safety employees had known the market crash would gut the retirement system, they wouldn’t have sought to be included in the “3% at 50” plan, a pension formula that resulted from a 1999 state law. It allows some public safety employees to retire as early as age 50 with a pension rate set at 3% of their final year’s salary multiplied by how many years they were on the job.

When they signed on in the early to mid-2000s, the system was doing well, Jacobsen said.

“No one ever thought that PERS would go where it went,” he said.

Jacobsen, who is vice president of the Newport Beach Lifeguard Management Assn., said he plans to retire in the next four or five years but is eligible to leave now. More than half of the permanent lifeguards are, he said. If CalPERS were to fail, he would be out of luck.

He said he respects the Newport Beach City Council for getting ahead of the issue as best it can and trusts the strategies of top city leaders.

Rob Gagne, president of the Costa Mesa Firefighters Assn., said firefighters and other public employees “have a long history of being partners to find solutions to keep our city fiscally sound.”

“During the economic downturn, Costa Mesa firefighters shared in the cost savings burden — freezing wages and cutting personnel to help our city balance its budget,” he wrote in an email.

Some Costa Mesa officials, such as Councilman Jim Righeimer, have said retired public employees should take a cut in their pension benefits to help address unfunded liabilities.

Gagne rejected that notion. Firefighters, he said, “do not receive Social Security, so our retirement system is our only source of retirement income.”

“Cutting retired first-responder benefits and their families’ benefits, after they have already been living on a fixed income, is wrong,” he said.

Dwyer, the former Huntington councilman, believes the city ultimately will have to start cutting costs, like limiting the number of firefighters per truck.

Chad Stewart, president of the Huntington Beach Firefighter’s Assn., said the group is aware of the pressures heaped on governments and workers because of the pension issue. He said local firefighters have worked with city leaders to implement cost-saving measures. About 25% of the workforce will be on the lower-tier PEPRA pension plan by 2018, Stewart said.

“As our population has grown and our emergency calls for service have exponentially increased each year — with nearly 21,000 calls in 2016 — our staffing levels have stayed stagnant and we are constantly finding ways to do more with less for the people of our city,” Stewart said.

In Laguna Beach, the unfunded pension liability as of fiscal 2014-15, the most recent year for which data is available, was $53 million. The amount increased $6 million in five years.

Laguna resident John Thomas said pensions are “like a slow-motion train wreck.”

“You know it’s happening,” he said. “The question is, ‘What is the solution?’ ”

Without a significant improvement in safe investment returns, Thomas, a real estate broker and budget analyst, said cities have the following options: raise taxes or otherwise gain more revenue; cut services so more money goes to pensions; or get the rules changed statewide.

“If Laguna changes their rules and other cities don’t, then Laguna will have a tougher time hiring and retaining good people because they will be tempted to … work in cities with the old [pension] rules,” Thomas said.

When it comes to public employee pensions, perspective is important, Thomas said.

“We talk about the cost of the pension obligation, but no one talks about the value of a pension to an employee,” he said.

“When those guys walk out the door, they don’t get a gold watch,” Thomas said. “Someone handed them something worth 2 or 3 million dollars.”

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