Events of the last few weeks have created anxiety among city leaders all over the United States. The cities of Santa Barbara, Solvang, and Santa Maria have announced major layoffs, and all revenue projections in municipal budgets are no longer valid. It’s no different in Lompoc as our city government wrestles with another fly in the soup.
Unless you are a government employee in California, you may not even know what CalPERS is. All of you who work contribute to your Social Security Insurance retirement fund by way of payroll taxes, but in California state and local government employees don’t.
Many decades ago, California decided that public employees of certain work groups would not contribute to SSI and instead be part of a state-run system; thus, the California Public Employees Retirement fund (CalPERS) was born.
Just like SSI, CalPERS benefits are guaranteed for each participant and not subject to market fluctuations such as the one we are currently experiencing. The CalPERS board of directors is made up of people both elected to the position (by membership groups) as well as appointed, and they determine how much each local government owes each year.
As the investment strategy of CalPERS began producing increasingly poor results and retired employees’ life spans increased, the costs to local governments like Lompoc increased dramatically. About three years ago Lompoc’s unfunded liability to CalPERS was about $70 million. Today the deficit is well over $93 million and growing at a rapid pace.
According to The Washington Post, “Robert C. O’Brien, the national security adviser, weighed in Wednesday [March 8] on the controversy surrounding the California Public Employees’ Retirement System. Some of the CalPERS investment policies are incredibly concerning [they are heavily invested in China]. O’Brien pointed out that Chinese companies’ books can’t be verified—and they are notorious for cooking their books—so the risks to investors can’t be known.”
Until a few short years ago, each government agency contributed almost all the money to the fund for employees, and as they were granted substantial increases in their retirement benefits by politicians eager to court their vote, the burden became unsustainable—so something had to change.
Employee groups (unions) clearly understood that if something wasn’t done to help reduce the debt that local governments could go broke, file for bankruptcy, and/or reduce their benefits. So, in cooperation with their employers, they drastically changed the contribution and benefit formulas for new employees.
In the city of Lompoc the CalPERS deficit is divided between two large work groups, the enterprise and general funds. Enterprise fund contributions are paid for by the fees collected for trash collection, water, wastewater, and electrical utilities; those fees are controlled by the City Council majority.
The general fund, including the police and fire departments and parks and recreation, are funded by taxes, which only voters can approve.
On Aug. 22 of last year, Councilman Dirk Starbuck, who was proposing an additional temporary sales tax, asked this question: “Is it true that whatever the new tax generates will be needed to add to the existing payments to CalPERS?”
The staff answered: “You’re right ... the new numbers for the minimum payment are $3 million and it’s creeping up to $3.6 million; it will probably take two to three years before the amount we’re getting from the new tax will be equal what we have to pay CalPERS. The minimum payment will be equal to what the tax generates shortly.”
Municipal government finance documents are very confusing. I have searched both the 2019-21 biennial budget and the comprehensive annual financial report and could not find any reference to how much the general fund contributes to CalPERS.
It took a while, but I found out that the general fund owns a 60 percent share of the $93 million debt. Still, tracking down the annual cost of that debt remained a mystery.
I trust what the staff says, but I also like to verify what I think I heard; so, I asked someone very familiar with how municipal budgets are put together to help me do it. He couldn’t find the numbers in the documents either, so he asked for clarification from the city staff.
The answer he got was that the amount for the 2019-20 fiscal year was nearly $9.1 million, and the amount for the 2020-21 fiscal year is more than $9.9 million; that’s substantially different than the amount quoted in the Aug. 22, 2019, City Council meeting.
So, since there is such a drastic difference in the numbers being used, the question remains: “How much does the general fund owe each year?” And, since this debt is to fund retired members and not day-to-day operations, shouldn’t it be a separate line item in the budget?
You would think that before anything is used from the new tax to pay for CalPERS that decision makers would want to know what the unfunded liability is for the general fund portion of this debt. I think that the council members who will be deciding this issue need to nail those numbers down before they do anything.
Then in order to honor the commitment they made to voters in the ballot statement in March, they should allocate half the new revenue to public service improvements and half to paying down the CalPERS debt.
To be fair, the entire general fund budget is being hit hard by recent actions to shut down major segments of the economy; normal sales tax and transient occupancy (hotel) tax revenues to the city are sharply reduced right now by an as-yet-unknown amount that will probably exceed $250,000 per month ($3 million a year).
When the current state of quarantine is finally relaxed, many of the now closed businesses may not reopen, and it will take months, perhaps years, for the hospitality and other industries to recover.
I can imagine that the city manager and his staff are burning the midnight oil trying to figure out how to pay the bills. Considering that CalPERS retirement benefits must be paid before anything else, this could lead to a significant reduction in services.
Ron Fink writes to the Sun from Lompoc. Send your thoughts, comments, and opinionated letters to [email protected].
