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Increased pensions devour most of property tax jump
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There’s good news in the proposed $45.4 million City of Manteca general fund budget for the fiscal year starting July 1: Property taxes — the No. 1 source of revenue to fund day-to-day municipal services — is expected to increase by $1,013,160.

The bad news: The general fund’s share of increased pension costs will devour more than 90 percent of the increase in property tax revenue or $969,970.

It illustrates how the city’s unfunded liability estimated at $108 million for all employees covered by the general fund as well as enterprise accounts such as solid waste, water, and wastewater treatment poses a long-term concern. Had the discount rate the California Public Employees Retirement System (CalPERs) has announced it expect to impose on cities in fiscal year starting on July 1. 2020 been used for the upcoming budget it would have consumed all of the gain in property taxes and then some.

When all of the city employees covered by the general fund and enterprise accounts are lumped together Manteca in the upcoming budget will be paying $12.4 million into CalPERS. That’s 18 percent of $1.9 million more than in the current budget year. It is the third straight year of significant increases in what the city must pay CalPERS. The current budget year obligation of $10.5 million was an increase of $1.7 million over the 2017-2018 budget.

The discount rate — that reflects projected earnings on CalPERs investments to reduce payment liability — has been steadily dropping each year. Whenever that rate goes down the city’s costs go up. The discount rate this year was pegged at 7.357% while the rate for the fiscal year starting July 1 is 7.25 percent. As things stand now, CalPERS plans to set the discount rate at 7.00 percent for the fiscal year that starts July 1, 2020. That is double the decrease the city is now dealing with. If everything held constant and no new employees were hired that qualify for pensions or a city retiree doesn’t die, the city’s overall CalPERs payment could go up close to $16 million annually two years from now.

During a December 2017 council meeting when strategies were discussed to reduce long-term pension liability, staff indicated Manteca has a $112.2 million shortfall in unfunded accrued liability (UAL). It represents the amount of retirement owed to employees in future years that exceeds the current CalPERS assets.  That was up from $89 million in 2016 when the CalPERS discount rate was lowered from 7.5 percent to 7.375 percent.  

The reason for the increase in city liability is simple. The less CalPERS expects to earn on investments the more local jurisdictions such as Manteca as well as the state will have to contribute to cover pensions.

How pension funds

got into their current

financial condition

Over a decade ago CalPERS was “super funded” at 106 percent of its outstanding pension liability. The Investment returns went from 13.2 percent in 2013 up to a peak of 18.4 percent in 2014 and plummeted to 2.4 percent in 2015 and bottomed out at 0.60 percent in 2016 before rebounding to 11.2 percent in 2017.

A combination of factors sent CalPERS into a tailspin. 

There were multiple years when investments paid significantly less that was projected.

CalPERS failed to respond quickly enough to investment losses made worse by a rolling 30-year amortization and asset smoothing.

There are more retirees that are living longer.

Agencies adopted enhanced benefit employees that used all future and prior service without charging the increased cost to employees.

Virtually every city in the state faces the same challenges Manteca does.

To contact Dennis Wyatt, email