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Small city puts spotlight on big CalPERS exit cost

“I think what’s going to come out of this more than anything is public recognition of this problem, so that it can get some attention,” he said. “It’s a huge problem. It’s bankrupting cities all over the country.”

September 2, 2014 |  CalPensions | By  Ed Mendel

A small but affluent Orange County city, with a current staff of only a half dozen employees, would have to pay about $3.6 million to leave CalPERS, the giant state pension system estimated two years ago.

Villa Park officials say the city, population 5,800, is unlikely to leave CalPERS because of the big exit cost. But last week the city council directed staff to prepare a “notice of intent” to terminate the pension plan for consideration at a meeting Sept. 23.

The notice would trigger an updated CalPERS estimate of the “unfunded termination liability” ($3.6 million as of June 30, 2012) needed to pay pensions promised 30 city employees: seven active, 13 retired and ten transferred or separated.

Both Mayor Rick Barnett and Councilwoman Deborah Pauly talked about doing a public service by airing the large cost for terminating the pensions of a small city staff that does not include police and firefighters, services provided through the county.

“I almost feel like just handing this to a reporter and saying, ‘Look at this. This for a city the size of Villa Park, the size of staff of Villa Park. Take this and multiply it for another city and see where we really are.’ I mean, Geez Louise, remarkable,” said Pauly.

Villa Park, with a median household income of $153,000, is not one of the cities hit hard by a pension squeeze. Retirement costs are 15 to 20 percent of the general fund in Los Angeles, San Diego and San Jose, taking money from other services.

The Villa Park general fund budget spends $2.7 million this year and has a $1.3 million reserve. The CalPERS employer rate for Villa Park is 22.7 percent of pay, far below some police and firefighter rates of 50 percent of pay or more.

Pauly said the current Villa Park employer payment to CalPERS is about $110,000 this year, little changed since 2009-10 as employee contributions increased from 1 percent of pay to 6 percent of pay, covering much of the increased cost.

Mayor Barnett, a bankruptcy attorney, said he also has pushed the pension issue with the county authority that provides firefighter services. At the council last week, he gave a 10-minute criticism of pensions (1:42 on video) making these and other points:

  • Pensions are a fiscally irresponsible blank check. Most revenue comes from unpredictable investments, and costs are increasingly unpredictable as technology improves longevity. The private sector is phasing out pensions to avoid debt and risk.
  • Pension systems conceal massive debt to avoid political pressure for change. Investment earnings forecasts (7.5 percent annually for CalPERS) are too optimistic. Debt calculations and installment payments and are manipulated.

Barnett suggested that the termination notice contain “whereas” clauses stating that pensions are an unsustainable and unjustified taxpayer burden, a breach of fiduciary duty to city residents and the result of unconstrained public employee union lobbying.

“I think what’s going to come out of this more than anything is public recognition of this problem, so that it can get some attention,” he said. “It’s a huge problem. It’s bankrupting cities all over the country.”

Later in the council discussion Barnett compared pensions to a “Ponzi scheme,” where money needed to pay earlier investors comes from new investors. Leaving CalPERS would close the Villa Park pension plan to new members.

Gov. Brown made the Ponzi comparison when the California Public Employees Retirement System said employer costs could be increased by his proposed federal-style hybrid plan, combining a small pension with a 401(k)-style individual investment plan.

“When I read the PERS analysis they say if you close the system of defined benefit (pensions) and don’t let any more people in, then the system would become shaky — well, that tells you you’ve got a Ponzi scheme,” Brown told a legislative hearing in December 2011.

Brown disagreed with the CalPERS analysis, saying the pension plan would not need to be closed. But the Legislature rejected the hybrid when most of the other parts of the governor’s 12-point pension reform were approved two years ago.

The notice of intent to terminate being considered by Villa Park would begin a process that, if carried out, gives CalPERS some rare but brief power under current state law.

State court decisions are widely believed to mean that the pension offered on the date of hire can’t be cut unless offset by a new benefit of comparable value. Even retroactive pension increases made after decades on the job can’t be cut.

Read the full story, goto this Link

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at Posted 2 Sep 14


2 Responses to Small city puts spotlight on big CalPERS exit cost

  1. Larry Briggs
    Larry Briggs September 3, 2014 at 12:06 PM

    Excellent article Ben. The current retirement shortfall in the fire department is about $4,000,000.00. It's something to consider when we talk about getting "our own fire department".

  2. Branson Hunter
    Branson Hunter September 3, 2014 at 3:39 PM

    Who is talking about getting "our own fire department". It is becoming more difficult to justify the city not helping to fund a fire department facing bankruptcy in a couple of years.


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