Brea First: Unfunded Pension Liability

unfunded liabilityUnfunded pension liability was the topic at last night’s Brea First meeting. A very detailed description and analysis was presented by Pete Constant and Truong Bui from the Reason Foundation. When I say detailed, I’m mean deep into the numbers, tiered water rates, where did you get your PhD. sort of detailed.

To their credit, and thanks to a stream of astute and probing questions from the audience, the details provided a backdrop upon which some very down-to-earth discussion emerged. While understanding how we ended up in this hole isn’t without value, finding a way out is the real issue.

A brief history lesson.

In 1999 Council adopted an enhancement of the city’s defined benefit retirement program providing Public Safety personnel with a guaranteed 90% retirement at 30 years of service (Simonoff, Perry, Moore, Daucher yes; Vargas no). This greatly exacerbated Brea’s unfunded liability. Had Brea chosen a defined contribution plan instead we wouldn’t be having this conversation.

In 2000 Brea was overfunded to the tune of $15 million. I’ll let that sink in for a minute. We were ahead of the game by $15 million bucks! Expressed in 2016 dollars, that would be $17+ million – almost three times what we just deposited into our PARS account (Public Agency Retirement Services).

It was downhill from there.

pension liabilityIn 2001 and 2009, coinciding with the two recessions, funding rate for retirement had dropped from an enviable 133% in 2000 to 60% in 2009. Today’s unfunded pension liability, conservatively, is $85 million dollars and market value assets are only 74.9% of what is required.

The $85 million relies upon an overly generous assumed Rate of Return that CalPERS projects to be 7.5%. The average Rate of Return earned by CalPERS investments over the last 15 years is 5.2%. I’m not sure who they’re trying to fool, participants or themselves or both?

Staff has suggested to Council that maintaining an 80% funded level is sufficient. It is not.

That assumption puts all Brea services in jeopardy, including public safety. Further, the $6 million transferred from year end surplus into the PARS account is barely a drop in the bucket. The road to hell is paved with good intentions.

If you’ve ever tried to pay off a credit card relying on making minimum payments, you know exactly how ludicrous this is.

Where the state comes in.

The decades old dinosaur that is CalPERS operates using a very complex set of calculations to determine Rate of Return and Discount Rate. I’ll save you the rocket science, you can find the full reports here if you’re so inclined.

Suffice it to say that CalPERS is systemically malfunctioning and in dire need of a major overhaul. This is the other half of the problem/solution formula. Literally thousands of agencies state wide share in this multi-billion dollar unfunded liability. Public employee pensions are constitutionally guaranteed.

So, no matter what Brea decides to do to fulfill our local responsibility, funding our pension plan, we also have to bring pressure to bear on Sacramento to adopt the constitutional amendments that govern how public pensions are managed.

Joining forces.

I suppose it isn’t out of the question to think cities might band together to lobby Sacramento. Brea keeps a high priced lobbying firm on retainer, other cities must do the same. There is strength in numbers.

League of California CitiesOh, and as longstanding members of the League of California Cities I would think we could turn to them for assistance too. After all, that’s what they do… right, they advocate on behalf of member cities.

But wait, their employees pension plan is CalPERS. Is it possible there is a conflict of interest here?

Where does Brea start?

pension liabilityWe’re in a hole. A deep hole. We need to stop digging and find a way out.

Finding that way out must start with the Council. They need to create a plan to raise our pension funding level from 74.9% to 100%. Not over some protracted length of time. Now. Anything less than 100% adds to our unfunded liability.

Council must commit to a vigorous debt reduction plan, eliminating our unfunded liability.

It’s not as simple as tacking on another half a percent or so sales tax targeted only to pay off the debt. That’s illegal. And we’re not likely to stumble across some windfall and miraculously escape. It will take sacrifice.

City services will be seriously impacted. Public health and safety services will be effected as well. If you thought coping with the drought has been tough, you ain’t seen nothin’ yet.

pension liabilityOkay Council, the ball is in your court. It looks like Brea First is committed to holding you accountable… so am I.

Download PDFs of the Reason Foundation Brea Unfunded Pension Liability Presentation and Report by clicking on the blue links.

Moore On The Downtown Parking Structure.

Roy MooreYesterday, Roy Moore, weighed in on the downtown parking structure and unfunded pension liabilities… tying them together in a most sensible way. With permission, here is the heart of Roy’s message.

BreaNet, Issue #708

If I may, I would like to comment on the proposed parking structure to be built behind the Tower Building on Super Block A. In January 1999 the City Council approved construction of the buildings on Super Blocks A and B. At that time I argued for a parking structure.

We could have built it for five million dollars with Redevelopment money without disruption to existing businesses. The Tower Building would not have been empty for nine years. I still support such a parking structure. The Council has approved the concept but still is struggling with how to pay for it. It is apparent that tapping city reserves will be necessary.

I would submit that before this decision is made the City Council first formulate how to fund Brea’s unfunded liabilities. This most likely would have to look to these same reserves for a possible solution. This is no small problem. CalPERS currently reports that as of June 30, 2013 Brea’s unfunded liabilities are $108 million.

Although much has been done in recent years requiring city employees to contribute toward their maximum to cover their pensions it does not appear that this will totally solve the problem over the next 25 years.

Here is my recommendation for a possible solution.  Brea’s landfill is an asset that I believe will generate revenues until at least 2040. The determinant on when to close the landfill is the height of the “trash mountain”.

There are two reserve funds as a result of the landfill.

The Capital Mitigation Improvement Fund (560 Fund) currently has a balance of $5.16 million. This fund was created by the $10.5 million payment from the Orange County Waste Management for the eight year extension of the landfill. I believe there will be at least two more extensions.

The original amount has already been reduced by 50% to make improvements to Valencia Avenue (valid use of funds), pay two solar bond payments (supposed to be paid from electricity savings) and the Birch Street medians.

The second landfill fund is the Community and Economic Development Fund (140 Fund) which currently has a balance of $3.48 million and results from revenues received for out-of-county trash deposits in our landfill at $1.50/ton. This amounts to in excess of one million dollars a year.

I recommend placing a large percentage (at least 50%) of these two funds (current balances and future growth) into a special unfunded liabilities account to earn interest and be used to periodically pay down our unfunded liabilities.

So what does this leave to fund a new parking structure?

Assume a structure for parking only, no affordable housing and a not-to-exceed cost of $9.0 million: 560 Fund – $2.5 million, 140 Fund – $1.2 million, 110 Fund (General Fund) – $3.0 million, Redevelopment funds – $3.8 million.

This adds up to a healthy $10.5 million.

Note: the redevelopment funds may not be available and depends upon the State Legislature approval of Governor Brown’s trailer bill. Using long term financing could make up the shortage using the annual growth in the 140 Fund to make the payments.

The bottom line is that it is possible to put in place a plan to cover our unfunded liabilities and also provide a new parking structure in the Downtown. How the financing is structured and whether any of the funds are a loan to the Downtown is up to Council.

For what it is worth that is my two cents on the subject. – Roy Moore

Moore on MadronaAs always, thanks Roy.

Follow The Money!

Brea Matters has been purposefully silent since the new Council was seated. Operation Clean Sweep left many exhausted and in need of a little peace and quiet for a change. Now that Council is settling in… I’ve turned my attention to money matters, our largest and most threatening issues.

debt_400Unfunded Pension Liabilities was a widely used campaign buzzword. Though some attempts have been made to rein in it’s almost exponential rate of growth, Brea remains strangled by debt.

I made a list of financial topics to investigate and my initial inquires uncovered a maze of interrelated issues.

Revenue Over Expense, a smoking gun?

Forever I guess, Brea’s P&L (Profit and Loss) statement has concluded with Revenue Over Expense… which has been treated like free money. Honestly, I’d never noticed it before. I am familiar with the myth of free money however.

Every year, Council and staff announce, with much back patting and fanfare, that a balanced budget has been reached. However, try as I might, I can’t remember ever hearing mention of these leftovers.

Typically, I’m told, this money has been put into FARP (Fixed Asset RePlacement Fund). How much has gone into the fund, how FARP spent the money and how big this Revenue Over Expenses might be is still a mystery. I’ll keep digging, we deserve to better understand how our money is being managed.

Do not pass GO, do not collect $200 dollars.

MrMonoplyAt an upcoming Council meeting (I’ll give you a heads-up) staff will, for the first time, suggest splitting the reallocation of Revenue Over Expenses. The plan, I’m told, would reduce the FARP allocation to 90% and 10% would go to Fund 150.

Also known as the OPEB (Other Post Employment Benefits) Fund, OPEB pays for retired employee medical coverage (previously unfunded) plus current employee premiums. The unfunded debt is $16 million. This is the mystery component not generally mentioned in discussions on Unfunded Pension Liability which is now an additional $70 million. Don’t look for a calculator, that’s $86 million and growing.

Roy Moore, in his independent analysis and public presentation on our Unfunded Pension problem a couple of years ago, did include OPEB in his audit and projections. Sadly, neither Council or staff at the time allowed Roy’s efforts to gain any traction.

Bank error in your favor, collect $200 dollars.

wormsWell, if we can fold OPEB into the mix, what about Unfunded Pension Debt? What about repaying the 560 Fund the $1.4 million borrowed to make solar payments? Could we tap Revenue Over Expense for a little money to put drought tolerant landscaping at the Civic Center?

Opening this can of worms opens a lot of questions. I’m confident Council, especially if they seek answers publicly, where we can wade in with our comments and suggestions, will make the sort of policy changes needed.

Doubling up payments to CalPERS makes perfect sense, why hasn’t this been done already? The 560 Fund should never have been tapped to pay for a solar project that was sold, in part, on the basis that it would pay for itself. Why has there never been an audit of this project, framed in terms that all could easily understand?

Defining, once and for all, the proper use of the 560 Fund, conducting audits of O’Donnell’s Fire Department reorganizations and accurately calculating the ROI on the solar energy project have been systematically kept off calendar and away from public input. Why? What are they trying to hide?

Drought garden planted the seeds of public distrust.

FB_palmtree_300The original drought garden, jammed through at the last minute and without considering public input, was a poorly designed masquerade to avoid spending proper funds on a public works project. The story leaked to the public, objections and outrage could be heard from all sides, the Mayor was counseled to postpone discussion and refused.

Today’s Council has a win-win opportunity to bring the “Rock” Garden back for further discussion. Here’s a chance to reverse a major blunder of it’s predecessors, to be honest with the public and clear the air, once and for all.

First, admit that repairing the leak in the Civic Center parking structure and avoiding spending Building Maintenance funds on it was the real objective. Put a standalone item on the agenda for a Public Works project to fix the leak. Pay for it with the Building Maintenance fund.

Put  a second item on the agenda to put drought tolerant landscape on the effected area once repairs have been completed. Tap MWDOC for their sod removal subsidy and Cal Domestic for the promised grant. That’s $17,500 in the bank. Allocate another $17,500 from Revenue Over Expenses. Boom! The budget is now only $35 thousand dollars, not the quarter million as originally stated. Invite CSUF grad students to do the design.

Please, it’s a business, not a board game.

govt_money_400The City Manager has often characterized himself as the CEO of a large corporation as justification for his salary package — twice that of California’s Governor.

Okay, it’s time to start running this city like a real business instead of a board game.

Start trapping all expenses against all projects and programs. No More soft costs. No more robbing Peter to pay Paul. No more hiding special interest projects by calling them something they’re not.

Every time accounting principles are pushed to their limits the door is opened to slip the difference into Revenue Over Expense.

The ball’s in your court now.

Thanks to Operation Clean Sweep and a voting population interested in rebooting City Council, we now have five Council members with open door policies, offering greater transparency and accountability in government and dedicated to fostering meaningful community engagement. Let’s not waste it.

The time to stand up and be counted is now.

Send your thoughts via email to:

Of course you can always come share your thoughts at Council meetings during Matters From The Audience. Check the Council’s agenda on the city’s website so you know what’s coming up. You’re not limited to commenting only on agenda items. Something bugging you? Speak up. Don’t be afraid to ask Council to pull an item from the Consent Calendar for discussion or to move a discussion item from the Study Session to the formal meeting in Council Chambers.

I’d be remiss if I didn’t encourage you to send positive vibes their way too. Council is a big commitment. It’s hard work. It shouldn’t be a thankless job. We have a winning team now, there’s nothing wrong with showing a little team spirit and cheering them on.

Oh, and in the unlikely event you’re one of those who didn’t vote… never mind.