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News Analysis: Side fund liability totals $14.7M for city, county

City Hall

According to the California Public Employees’ Retirement System (CalPERS) Side Fund Report, San Benito County owed $3.9 million for public safety unfunded retirement liabilities and the City of Hollister owed $10.8 million for all employee groups as of June 2012.
Throughout California, 1,000 public agencies (counties, cities, and special districts) owed CalPERS a total of more than $1 billion for unfunded retirement liabilities excluding the applied “interest rate” of approximately 7.5%. When your city and county owe that much money – debts that were typically carried off the books for years – you should know what it’s all about; here is the side fund story:
As explained in “Orland: The Straight Scoop” blog by Bob Bishop, “CalPERS redefined their ‘menu’ of Retirement Plans in 1999 when the economy was flourishing, assuming that their investments would average a minimum return of 7.75 % annually. At that time, [many public agencies] chose generous retirement plans for their employees. The specific retirement plans selected by each were dependent upon negotiations between employee unions and the agency.”
“Subsequently, the bursting of the High Tech and Housing bubbles resulted in a CalPERS investment shortfall. There were a few years when CalPERS’ Return on Investment (ROI) hovered around 1-2%. Retirees were also living longer and retiring earlier than expected at higher-than-anticipated retirement pay.”
“Around 2003, CalPERS established side funds (loans) for several hundred California agencies to cover the difference between each agency’s CalPERS assets and liabilities. CalPERS charged 7.75% annual interest on these loans – the same interest they expected to average on their investment portfolio. Side funds can be compared to a revolving charge account with money moving in and out on a periodic basis to cover a shortfall in pension obligations.”
Over the years, the interest rate charged on this account by CalPERS has varied slightly, but the fact remains that the side fund balance represents a loan – an unfunded liability that must be paid with interest – and all those numbers can move based on investment returns, retirement costs, and other factors. The county’s problem is that the side fund debt, $72 per capita, is not their only significant retirement debt; they also owe many millions in unfunded post employment benefits (OPEB) for retiree healthcare.
Including interest, Hollister’s payments to the side funds are approximately $1 million annually, and the debt ratio of the loan – $310 per capita – is the fourth highest among the 51 side fund cities with populations between 25,000 and 45,000. The 51 cities average $115 in per capita debt. City dwellers owe both the city and county proportional portions of the shortfall, $382 per capita total, or $13.3 million in unpaid retirement obligations and interest as of June of last year.
The Hollister City Council has discussed taking action to reduce the side fund debt and crippling interest payments, but where will they find that kind of money? Unfortunately, when you have significant debt and interest payments, you rarely control your own financial future.
Marty Richman also writes a weekly column for the Free Lance.