A Los Altos resident’s government-finance non-profit stirred uproar in Sacramento this week with its claim that California agencies have failed to plan for an enormous uptick in pension costs.
Dakin Sloss, 20, co-founded California Common Sense earlier this year, and the group has been releasing reports in collaboration with the Stanford Institute for Economic Policy Research.
Many California public agencies (including the cities of Los Altos and Los Altos Hills) participate in the California Public Employees’ Retirement System (CalPERS). Cities like Los Altos contribute money every year toward their employees’ future pension payments. They don’t pay on a 1:1 basis typically, anticipating that by investing their contributions they can cover part of the liability with interest revenue.
Last week, Sloss’ group claimed that even a remarkable recovery in the U.S. economy could not provide enough return on investment to pay all the pension benefits promised by Cal-PERS and the statewide K-12 and university educators’ pension funds.
“We’re in trouble, and there’s a lot of math there to show that. The consequences of that are going to likely be significant cuts to programs or significant tax increases,” Sloss said. “Even at a 9.5 percent return on investment, the probability of these three plans defaulting is 50 percent.”
Public pension funds like CalPERS have until now used defined contribution plans, in which employees receive a predetermined pension payout, regardless of how the market performs. By contrast, private employees typically use 401(k)-style retirement planning, risking their pensions directly in the market.
California Gov. Jerry Brown has an overhaul under way aiming to require higher pension contributions, raise the retirement age for new public employees to 67 and implement 401(k)-style retirement accounts. California Common Sense proposes that more drastic action – such as rescinding pension commitments already made to employees – would be necessary to prevent a default. But such a move would likely require legislative changes. And both CalPERS and union representatives claim that the Stanford report’s conclusions rely on faulty math and concatenating worst-case scenarios.
Los Altos Assistant City Manager J. Logan said the city council has been aggressively pursuing remedial measures to lower its liabilities, including renegotiating pension rates for its 130 employees. She said the rising cost of funding benefits – and the increasing percentage of the city’s total budget devoted to pensions – had inspired the scrutiny.
“I think we’re in line in doing what we can do at a local level without impacting services,” Logan said. “I don’t know the extent of the state dilemma … the think tank gets into a number of assumptions – the lowest rate of return, the lowest contributions. They’re (making calculations based) on a worst-case scenario.
“We don’t have any structural imbalances in our budget because we have minded our finances in a very proactive way,” she asserted. “We haven’t lived outside of our checkbook.”
Los Altos Hills may prove even more of an outlier in this statewide problem. Several years ago the town began setting aside extra money, exceeding legal requirements, to cover its anticipated liabilities.
“Town leaders and employees in the late ’90s and early 2000s did not ride the wave of enhanced pension formulas,” Finance Director Nick Pegueros explained. “The town has maintained one of the most conservative pension packages for employees in the county for the past decade. The gains and losses experienced by the CalPERS investment portfolio and the assumptions made by the CalPERS actuaries are out of the control of the town. Nonetheless, the city council has made prudent decisions to implement cost-control measures to the greatest extent legally permissible.”
Los Altos Hills elected to pre-pay its known pension liability, $637,320, in 2009. And last year it established a reserve for potential future costs to which it adds $70,000 a year. The town will, however, be affected by impacts on the regional services it contracts, including sheriff and fire services negotiated with Santa Clara County.
To view California Common Sense’s pension report, visit www.cacs.org/transparency_pensions.php. To read a response from CalPERS, visit www.calpersresponds.com.