Petaluma ‘looked under every rock’ for pension crisis solution
Petaluma will continue to be swamped by a growing unfunded pension liability for at least the next decade, city officials said Monday.
Like a family with high credit card debt, the city is looking at creative solutions to ease the budgetary burden.
As with many cities around the state, Petaluma faces a pension crisis created more than 20 years ago by doling out plush employee benefits backed by under performing investments. At a time when the California Public Employee Retirement System was flush with cash, municipalities offered workers plum benefits in order to retain and attract employees away from the private sector that included a burgeoning technology industry.
But as those employees start to retire - and live longer - and CalPERS investments fail to undergird the system, cities like Petaluma are on the hook for an increasing share of the burden, city officials said.
Despite negotiating less expensive benefits with current employees and other pension reforms Petaluma has undertaken, current retiree benefits will continue to eat into the city’s budget, leaving less money for street maintenance, public safety and other city functions, Assistant City Manager Brian Cochran said at a more than 2-hour workshop on Petaluma’s pension crisis.
“CalPERS and public pensions in general seem to generate regular news headlines as many of us may read from time to time and often in conjunction with municipal budgets and fiscal challenges,” Cochran said at the workshop, part of Petaluma’s yearlong fiscal sustainability effort. “There’s no escaping the fact that the pension line item is a significant cost of our budget overall.”
Cory Garberolio, Petaluma’s finance director, said that the city’s PERS expense is $9 million this year, and is expected to increase by $800,000 each year until 2032. The increase is despite measures the city has taken to reduce annual pension costs by $1 million per year, she said.
“The city has taken all legally allowable steps to address the rising PERS cost,” she said. “Over the past decade, we have done many things to address the rising cost.”
Those measures include implementing a lower tier of benefits for current employees in 2010, negotiating with employees to contribute a larger share of their pension costs, and a one-time city contribution of $7.5 million to pay down the unfunded liability in 2018. The city also kept benefits modest compared with other cities and froze salaries between 2009 and 2016, Garberolio said.
But those belt-tightening measures also have come with a cost, city officials said. Employees have left Petaluma for better pay and benefits in neighboring cities, resulting in increased onboarding costs for new hires. The fire department, for example, has nine vacancies and each new hire costs about $100,000 to bring on board, Garberolio said. The department also incurs significant overtime expenses when vacancies are unfilled.
“We’ve lost at least two or three (firefighters) that I can think of in the past year to other agencies for, I’m assuming, more pay or better benefits or whatever the case may be,” Councilman Gabe Kearney said. “So that’s a significant cost we’re incurring as a city because we froze salaries and did not keep competitive with cities when it comes to staff recruitment.”
Petaluma does have options to deal with its unfunded pension liability. Doug Pryor, vice president of consulting firm Bartel Associates, said the city could issue pension obligation bonds.
“You issue a bond. You borrow at very low rates. You invest those funds with CalPERS. They earn higher returns than your debt service and you end up ahead of the deal,” he said. “There’s no guarantee whether or not you come out ahead on that. ... It’s basically a bit of a gamble.”
The city could also make larger one-time payments to help reduce the overall cost or set aside money in a trust fund for paying CalPERS, Pryor said. In the case of a so-called 115 pension trust, the city would be able to decide how to invest the money.
“The agency controls how the money is invested,” he said. “You also control when, if and how the money is transferred to CalPERS.”
After listening to the options, though, a majority of council members said they preferred to continue the current method of annual payments to CalPERS.
“The other options either suffer from having a risk-reward ratio that is not attractive or requires upfront payments of funds that the city simply lacks,” Councilman Mike Healy said. “I think the message to the community is that we’ve looked under every rock and there’s nothing there.”
Mayor Teresa Barrett also preferred continuing on the current course. She said paying down the liability faster would undercut other city services.
“If we do use any money that does exist, like an inter-fund loan, that’s money that can’t be used for something else,” she said. “We have to really look at the priorities in our community and that’s part of this whole process. Do we want to pay down future debt, or do we want to do something with more tangible results now?”
Councilman Dave King said the city is going to have to meet its pension obligations no matter how much it eats into the city’s budget.
“Our obligations are something that we are contractually obligated to pay,” he said. “The cost of paying those obligations is going to continue to go up. We’re going to have to pay them regardless of what our ultimate revenue is. It’s not something we can walk away from or negotiate.”
(Contact Matt Brown at firstname.lastname@example.org.)