Manteca may make additional one-time payments on an annual basis to accelerate the paying down of city employee pension liabilities to reduce the principal and also cut the amount of future interest.
The strategy is being advanced by staff as a sound, fiscally responsive way to get control of 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 California Public Employee Retirement System assets. It is up from $89 million from last year when the CalPERS discount rate — what the pension system expects to earn on their investments — was lowered from 7.5 percent to 7.375 percent. Starting in 2019, the expected rate of return will be lowered again on an annual basis until it reaches 7 percent in 2021. That will increase Manteca’s unfunded liability by 40 percent to roughly $156 million based on current staffing.
It would involve targeting a shorter amortization period on a voluntary, non-binding basis to provide the city the greatest fiscal flexibility instead of asking for CalPERS to impose a binding reduced payment period. It is much like the strategy a homeowner would use to pay down a 30-year mortgage quicker and save significant interest by making additional principal payments each year.
As it stands now with current pension liabilities, paying down the unfunded liability placed at $112.2 million would result in an annual payment of :
$8,234,074 for 30 years.
$8,641,980 for 20 years.
$10,515,217 for 15 years.
Those payments would increase significantly as CalPERS lowers the expected rate of return as anticipated.
To reduce the overall outlay over 30 years as it sits at $112.2 million, staff has noted an additional $407,906 annual additional payment could slash up to 10 years off the unfunded pension liability payments. An additional annual payment of $2,281,143 would cut the current yearly amortized payment of $8.234,074 for 30 years in half. Keep in mind if CalPERS follows through with anticipated reductions in the rate of return the $8,234,074 annual payment will increase given it concedes they will not generate enough money off investments to make the pensions Manteca is committed to fun.
By reducing pension liability with one-time annual payments on top of the CalPERS ammonization rate even if all it does is negate or reduce future costs generated with lowering the rate of return, Manteca would be one of the few cities to have taken steps to stop kicking the proverbial can down the road. It would mean years from now the city would be under less financial pressure to meet pension obligations which would help avoid having to cut into municipal services.
The update on the city’s unfunded pension liability payoff strategies will be presented by Finance Director Jeri Tejeda when the council meets Tuesday at 7 p.m. at the Civic Center, 1001 W. Center St.
It will be presented as an update after the council last month directed staff to zero in on various options. It will be further explored with the council during the mid-year budget review in February. At that time a more complete overall view of where the city is at will be given before council is asked to commit additional funding to CalPERS. They also will discuss future annual commitments for one-time payments at that time as well.
How pension funds
got into their current
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 this year.
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 increase cost with employees.
Manteca is already ahead of most others after it took steps to lengthen the amount of service of new employees in terms of how long they must work to qualify for pensions and increase employee contributions.