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Oxnard City Manager Alex Nguyen (File photo)
Thursday, February 28, 2019

By Chris Frost



Oxnard—The City of Oxnard Finance and Governance Committee explored solutions for the unfunded liability in the pension fund, Feb. 26, and offered direction about how to move forward with a plan for the full city council.

The conversation resulted because of requests made by Mayor Tim Flynn to have a “grown-updiscussion about the dire circumstances the city faces because of the fund. This could mean no raises for employees for the next 10 years and service cutbacks throughout the city.

Municipal Advisor Mike Myer, Vice President and NHA Advisor on fiscal policy financial matters and bond issues said the city currently has a $270 million unfunded liability with CalPERS (California Public Employees' Retirement System) which is a widespread issue throughout California.

“It’s pretty common to see a 50 percent increase in the unfunded liability over the last 4 to 6 years, so for the City of Oxnard, that’s been growth from $180 million four years ago until today,” he said. “In terms of annual payments, those have grown from $20 million in 2014 to $31 million this fiscal year and are projected to grow to $45 million by 2025.”

Oxnard does have a unique, voter-approved, tax override, Myer said, which provides a lot of support to the general fund and will continue to do so, but pension costs are rising quicker than projected override revenue.

“The city does have three primary plans with CalPERS, including a non-safety plan covering miscellaneous employees and three safety plans covering police and fire employees,” he said. “The city makes two types of payments to CalPERS, the first being normal costs, which is the annual cost for current employees, and then there is the payment to amortize that unfunded liability, also known as the UAL, which is the difference between what you currently have versus what you’ll eventually need. That is a large number, and you can’t pay it back all at once, so it gets amortized over a period of time.”

The debt has a unique repayment shape, Myer said, which escalates quickly and levels off between years 10 and 20 then drops off from there.

“In the 90s and early 2000s, CalPERS had strong investment returns of over 10 percent, so most plans across the state were super-funded, and there were no unfunded liabilities,” he said. “However, in the early 2000s through today, CalPERS has seen sluggish investment growth, I think the 20-year average is at 6.6 percent right now which is a little bit below their target rate.”

The target (discount) rate has been lowered several times, he said, which used to be 8.25 percent then dropped to 7.75 in 2003, 7.5 percent in 2013 and they are currently phasing the rate down to 7 percent.

“This next fall, when the newest reduction comes out, that reduction will be fully implemented down to 7 percent,” Myer said. “Anytime CalPERS doesn’t hit their investment target rate, or if it changes assumptions, you see an increase right away to an unfunded liability.”

In the last 10 years, he said the city’s unfunded liability (UAL) has tripled and has grown on the miscellaneous plan side from $40 million to $121 million, and on the safety plan, it has increased from $50 million to $150 million.

“On the safety side, pension costs have risen to 56 percent of payroll and on the miscellaneous plan, up to 25 percent of payroll costs,” he said. 

CalPERS released an actuarial report at the end of last year the included 30-year projections, he said, including normal costs and unfunded liability costs and the biggest impact will come to the unfunded liability costs.

“The overall costs were under $30 million last fiscal year and quickly grows to $45 million by 2025,” Myer said.

The city will have to deal with approximately $115 million worth of increases over the next decade.

“In 2018, the impact to the general fund is about $8 million and is growing by a few million every couple of years,” he said. “In 2020, we estimate the impact to the general fund to be $13.5 million, and by 2023 it will be $17.5 million, and by 2028 it will be up to $20 million.”

Myers proposed five strategies that other cities use to deal with the rising pension costs, which includes having the city paying the UAL payment early, in the first month of the fiscal year, instead of making monthly payments to the UAL which means CalPERS gives the city a 3.5 percent discount that saves the city $725,000, which is currently in practice.

Option two includes a “fresh start amortization” with CalPERS, he said, which takes the $270 million unfunded liability and creates a new payment structure with CalPERS.

“The issue with that is they only allow you to do that if you shorten the payment duration,” Myer said. “You do save on interest over the long haul, that saving is all 20-25 years out, and you increase your payments immediately.”

He pointed out that once you enter the fresh start program with CalPERS, you can’t go back.

“You are essentially locked into this new higher payment schedule,” he said.

The most popular option requires cash from the city’s reserves, Myer said, and one part of that option creates a separate trust not established by CalPERS and is dedicated to pension and OPEB (other post-employment benefits) and allows the city “more bang for the buck” on its reserves.

“You can invest that money into the market, and there are many different companies that administer these section 155 trusts, and you have various investment options,” he said. “You give CalPERS the money, they invest it, there’s one option in a fairly aggressive portfolio.”

Most clients like the flexibility this option offers and will (hopefully) generate more money than a city’s reserves, and it can use the money if needed during a tight budget year, and they need to dip into the reserves to make a pension payment.

“In a good year, you can pull money out and give CalPERS additional money if you wanted to pay down the UAL early, so flexibility is a key benefit,” he said.

The second option in this program is sending the money directly to CalPERS, he said, and pay the $270 million down.

“Within that repayment shape, there are multiple components of that $270 million, they all have different maturities, and you can pick which layer of that repayment shape gets removed,” he said. “They essentially give you credit at a 7 percent assumed earnings rate.”

For example, he said if Oxnard sends CalPERS $5 million, they don’t get just $5 million, they get $8 or $9 million because of assumed investment earnings over time.

A more common strategy between 2000 and 2011 created debt, he said, and caused bankruptcies in San Bernadino and Stockton because they had outstanding (POBs) Pension Obligation Bonds.

“The last option is cost-sharing with employees and increasing the share employees pay,” he said.

Councilwoman Gabriela Basua said not knowing where the city stands on the budget is a concern when it comes to giving direction to staff members.

“I don’t know where we are at the mid-year, and I know that’s something that staff needs to work on,” she said. “To give direction to staff; I think it’s important to give some overview of what we look like financially. Prepaying the UAL saves us some money.”

She discounted the fresh start program with CalPERS because of concern about the city meeting the payback obligation.

“The third option with section 115 is something I would like the staff to look into further, but I also understand it is going to cut into our reserves,” she said.

Basua did not like increasing employee shares into the pension cost but acknowledged that many cities do that.

“Speaking to our staff members, we are having a difficult time recruiting, keeping staff and I don’t know how well that is going to go with our employees,” she said. “Some of them feel like they are underpaid.”

Councilman Bert Perello said with bonding and reserves, the city has a policy of 18 percent and has a rating with Standard & Poors and if the city doesn’t get back to 18 percent or drops lower than its current level, when will the city’s bond rating drop?

Myer said the city made many strides to stabilize its credit rating and the rating agency changed the outlook to positive.

“A lot of that had to do with the litigation issues, and the reserves played a big part of that, as well,” he said. “The rating agency will come back this spring to rate the general fund, and the reserve levels are part of what they look at.”

Perello asked for specific advice, which he did not get, but Myer said the many cities use a combination of section 115 and pay downs using cash.

Mayor Tim Flynn said the city faces a dismal situation.

“In my perspective, economic development is the key to address this and the better the city does growing businesses, the better the income will be for the city,” he said. “Economic development is one of the lowest priorities in the city, and it should be a top priority.”

Flynn said the unfunded mandate is more than $270 million; there is also $36 million in medical benefits, the supplemental retirement system at $21 million for a total of $57 million.

“It doesn’t do anything for us until we get the big picture on forecasting,” he said. “The reality is, I don’t know, based on forecasting the general fund and paying the unfunded liability each year I don’t know what that comes out to. If the general fund grows by 2 or 3 percent, is all of that 2 or 3 percent going to be absorbed by paying these unfunded liabilities?”

He said the city would need to cut the general fund to meet the pension fund increases for the next 10 years.

“That means we are going to need to reduce the level of service to the public and that’s the bottom line,” Flynn said.

Flynn advocates setting up a Section 115 plan, looking into the fresh start program and continuing to paying up front and saving $725,000.

Cost sharing has to be part of the discussion, but the city needs to be competitive with other cities,” he said.

City Manager Alex Nguyen said the unfunded liability couldn’t be controlled by the City of Oxnard.

“I have to say that CalPERS has really screwed the pooch for so many cities across the state,” he said. “At some point, there is going to have to be intervention by Sacramento. I don’t know when that needs to happen, but it needs to happen. If they reduce their discount rate further, there will be cities lining up to file for bankruptcy, so at some point, something needs to give in Sacramento.”

With that said, Nguyen said the city doesn’t operate in a vacuum, and the city will probably recommend a mix of strategies.

“There is a forecast,” he said. “It’s in the budget, and we update it annually.”