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Pension costs may crush city budgets

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POSTED February 25, 2017 1:14 a.m.

Pension payments for the City of Manteca’s municipal workforce is project to go up $13.6 million through 2025 eclipsing projected salary increases by 81 percent.
The somber news was delivered to the Manteca City Council during the mid-year budget review on Friday afternoon during a workshop at the Manteca Transit Center.
The increase in city payments to the California Public Employment Retirement System fund will go from $11.6 million in 2018 to $25.2 million in 2025. To give you an idea of the magnitude of that 117 percent increase in CalPERS payment the 2025 city bill is $10 million shy of the entire general fund budget of $35 million that is now in place to run the city during the current fiscal year.
Mayor Steve DeBrum has pushed hard for the city to put more emphasis on the impact of the unfunded PERS liability will have on Manteca. In past years it has been given just a passing mention in budget reviews and municipal budget workshops.
Manteca is not alone. Virtually every city, school district, and county in California as well as the state itself is facing massive increases in CalPERS contributions as the system deals with unfunded liability.
CalPERS now has a $139 billion shortfall with assets on hand to cover only 68 percent of their retirement obligations.  It covers 62 cents of every dollar in actual pensions that are paid out with returns from investments, 25 cents from employer contributions, and 13 cents from workers paying into the retirement plan.
The pension fund’s board in December voted to lower the anticipated rate of returns from investments from 7.5 percent to 7.0 percent. At it is ratcheted down — 7.375 percent in 2018-2019, 7.25 percent in 2019-2020, and 7 percent in 2020-2021 — it will send the city’s required contributions higher.
“Everyone knows they really should have dropped it down to 6 percent,” Councilman Richard Silverman noted as he pointed out CalPERS investments yielded just over 2 percent last year and not the projected 7.5 percent.
The CalPERS board has basically said as much as members have commented the projected rate of return may have to be reduced further to either 6.5 percent or 6 percent.
Silverman said there are cities in California that are in “serious trouble” trying to figure how they will be able to pay new rates based on just the 7.35 percent return for 2018-2019 let alone the ultimate 7 percent target without cutting municipal services.
“Manteca is not one of them,” Silverman added.
But while Manteca may be fine for the next two fiscal years, DeBrum as well as Finance Director Susan Mallory have warned that may not be the case farther down the road hence the impacts being projected out to 2025.
The $13.6 million jump over the next eight years may just be the tipped of the ice berg.
Manteca’s unfunded CalPERS liability is expected to go from $89.4 million to $95 million.
Retirement is just one of the cost factors that contributed to employee benefits constituting 26 percent of the general fund budget. The city faces increasing health care costs for existing and retired municipal workers.
Post-employment benefits for workers already retired are coming in at $1 million this year, up $50,000 from last year. The costs are primarily attributed to negotiated retirement healthcare plans.
Overall 77 percent of the general fund budget or $26.8 million goes to salaries and benefits.
The current fiscal year payroll for all city employees — including sewer, water, golf, and solid waste employees working in those enterprise fund municipal divisions that are supported by users fees and not taxes — comes to $32.7 million and CalPERS payments to $11.6 million. The payroll is projected to reach $40.2 million in 2025 while the CalPERS payments will hit $25.2 million.
Employees contribute to the retirement fund as well. Their share this year is $1.6 million. Based on the current contract it will be almost $2.1 million in 2025.

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