Manteca’s elected leaders facing a daunting unfunded pension liability could get a better handle on future debt and bring stability to city finances down the road by making decisions that households facing long-term debt with home mortgages often do to reduce long-term costs.

 They include:

uOne time lump sum payments.

uA shorter period to pay what’s owed to reduce interest costs.

uPaying off “low hanging fruit” to reduce annual costs.

Manteca currently 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 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.

To put the current $112.2 million pension liability into perspective, the combined expenditures this fiscal year between enterprise funds and the general fund that have employee costs budgets is $81.3 million.

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

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. 

uThere were multiple years when investments paid significantly less than what was projected.

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

uThere are more retirees that are living longer.

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

Manteca City Manager Tim Ogden is presenting several strategies for the City Council to consider to get a better handle on overall pension costs when they meet Tuesday at 7 p.m. at the Civic Center, 1001 W. Center St.

The easiest in terms of least pain is to grab what Ogden calls “low hanging fruit” — liability shortfalls for the city employees covered under CalPERS Pension Reform Act (PEPRA) that went into effect in January of 2013 and recent hires that are covered by Tier 2 pension formulas.

By making a payment to cover the existing combined shortfalls in three employee categories of $84,500, the city will avoid paying an estimated $99,000 in interest.

Possible strategies

He also will lay out four other strategies that the council is expected to mull over and consider possibly adopting one or more at the Dec. 19 meeting.

uCreating a supplemental trust.

The city would create a separate legal trust to fund CalPERS benefits that can only be used to reimburse the city for payments to CalPERS or to make direct payments to CalPERS. The funds cannot be used for any other purpose. The trust would be tax exempt.

The investments in such a trust are less restrictive than city assets meaning they’d likely earn higher returns than other city funds. Even though they might be riskier than how city funds are restricted in terms of investment, they are likely to be less volatile investments than CalPERS that often makes political decisions not to invest in products or firms in specific countries even though they had much more solid high return histories such as guns and tobacco. In other words, investing is driven by the highest safe return within parameters of investing focused only on the best possible outcome and not taking into consideration political correctness issues.

uShorten amortization period.

The city could request CalPERS implement a shorter amortization period for the paying of Manteca’s pension liability shortfall. It would result in less interest being paid and a lower long term payment. Those higher short term payments, though, become required. It means the city can’t revert back to longer amortization in an economic downturn.

uTarget a specific amortization base.

It would take council action to pay the higher payment based off of the shorter amortization term. It would result in less interest paid over a shorter period of time and allows the ability to revert back to longer amortization in an economic downtown.

uOne-time payments.

This strategy would use a portion or all of one time money for lump sum payments. It could also dedicate specific revenue to go only toward pension payments. The strategy could also involve dedicating any budget residual for one time lump sum payments. The bottom line is anything that can be paid sooner will decrease the amount of interest the city will pay over time.

Ogden noted the city has a lot of pressing and competing demands for revenue when it increases. And while that could create tradeoffs if any of the strategies are implemented, it means the city would be able to ultimately meet its obligation by spending less money due to the avoidance of interest.

What city employees

pay toward retirement

The city is already several steps ahead of most agencies in the state. They have changed the benefit formulas where new hires have to work longer to earn full benefits. All employees pay 100 percent of the employee contribution as opposed to many other agencies that allow employees to pay less than the level set by CalPERS. In addition employee groups are paying part of the employer contribution as well.

Employees and the percent of their retirement contributions they are now paying that includes both 100 percent of the employee share and a part of the employer share based on their earnings for Tier 1 newer hires and Tier II hires are as follows:

uConfidential mid-managers: Tier 1, 13.75%; Tier 2, 12.75%

uExecutive management: Tier 1, 19% (22% for fire and police); Tier 2, 18%

uFire: Tier 1 and 2: 18%

uGeneral services: Tier 1 and 2, 6%

uManteca Police Employees Association: Tier 1, 19%; Tier 2, 18%

uManteca Police Officers Association: Tier 1 and 2, 18%

uMid-managers: Tier 1, 13.75%; Tier 2, 12.75%

uPublic safety mid-managers: Tier 1, 14.75%; Tier 2, 12.75%

uTechnical support: Tier 1, 8%; Tier 2, 7%

Of course, the city’s pension liability increases as wages increase given annual retirement benefits start based on a percentage of the three highest years of pay under city employment.

Projections of increased payroll costs presented at a budget workshop in February noted the cost of salaries and the net cost of employer contributions for the city as the employer over the next eight fiscal years.

uFiscal year 2018: $18.7 million payroll, $4.7 million pension cost

uFiscal year 2019: $19.2 million payroll, $5.4 million pension cost

uFiscal year 2020: $19.8 million payroll, $6.2 million pension cost

uFiscal year 2021: $20.4 million payroll, $7.1 million pension cost

uFiscal year 2022: $21 million payroll, $7.8 million pension cost

uFiscal year 2023: $21.6 million payroll, $7.9 million pension cost

uFiscal year 2024: $22.3 million payroll, $9.2 million pension cost

uFiscal year 2021: $23 million payroll, $10 million pension cost

To contact Dennis Wyatt, email dwyatt@mantecabulletin.com