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.

An Elephant In The Room – Part 1

elephant_aTo launch Brea Matters for 2013, I asked a number of regular readers what they believe are the key issues facing the city during the coming year. The responses were interesting, to say the least.

The respondents include elected and appointed officials, mainstream residents on the high probability voters list and no one on city staff.

Repeatedly, the important issues lumped themselves into two categories, “Money” and “Mechanics.”

The first are issues for which there are specific, calculable fiscal concerns, and the latter centers on issues of policy, protocol and ethics impacting Council’s ability to lead with vision and govern with clarity and fairness.

Council’s obvious dysfunction over the past six years or so, amplified by the criminally unbelievable reorganization fiasco on December 18, leaves many of us with no sense of confidence in Council’s ability to do the work they were elected to do. They’re failing in the most fundamental tasks and seem to have turned a deaf ear to the public outcry for transparency and accountability.

Almost without exception, respondents believe that the fiscal issues facing Brea this next year are manageable, assuming a well functioning Council. And there’s your elephant in the room.

Here’s a rundown of the fiscal issues, in no certain order… sort of.

Pension Reform.

  • Movement must be made in direction of defined contribution versus defined benefit type pensions.
  • The city can no longer afford the extravagant pensions afforded city employees, in fact, we haven’t been able to afford them for many years.

Employee Compensation.

  • Brea needs to establish a new employee compensation policy that is not dependent on any salary surveys comparing us with other cities.
  • Current study shows that all OC cities pay at a similar high level (about 30% greater than the private sector).
  • Further adjustment to salary and benefit plans for public safety also deserve immediate attention.
  • The upcoming review of the City Manager’s contract, in light of recent performance, deserves more than a cursory glance and rubber stamp.
  • Likewise our contract with Richards, Watson & Gershon.

Unfunded Liabilities.

  • There needs to be a comprehensive recognition and addressing of Brea’s unfunded liabilities in general.
  • Roy Moore requested a review several months ago but was rebuffed by Schweitzer, Murdock and O’Donnell. He is pursuing his own independent review. We need to support him in this endeavor.

Redevelopment Agency.

  • We must recover from our past reliance on the Redevelopment Agency to direct growth of the city.
  • A clear explanation of the role of the “Successor Agency” is overdue. The Successor Agency needs to meet when the public is better able to attend and participate.
  • What funds has the state taken? What funds are left? What projects were stranded without funding?
  • What projects do not have the capacity to generate the tax increment necessary to retire their debt?
  • What debts remain and what is the extent of our liability?
  • Where is the old Redevelopment Agency staff and who’s paying their salaries?

Public Safety.

  • Assessing the Fire Department’s progress following the O’Donnell forced reorganization seems to have stopped, at least no reporting has been made public in some time. Have we saved any money or not?
  • The Police Department, following the woefully unexpected loss of the contract with Yorba Linda, is trying to establish a new “Brea Only” organization plan. What is it? How does it work? What will it cost and how will we afford it?

Economic Adjustment.

  • Maintaining a balanced budget without tapping reserves or redirecting funds without full disclosure and public consent.
  • City services and the cost to provide them, all of them, need to be adjusted in the face of a continued slow economic recovery.
  • Dramatic reduction the all travel allotments for Council and Staff.
  • Elimination of the City Manager’s privilege of discretionary spending (without Council review and approval).
  • Allegations were made that Brea is over charging businesses for fire and business permits, this should be reviewed.
  • We must continue discussions with our neighbors regarding “regionalization” of services (expansion beyond Fire Department Command Staff, Police Department and Command Staff, Public Safety Dispatch Services, Maintenance Services, and Service Delivery).

Alpha-Olinda Landfill.

  • Brea is in line to receive in excess of $30 million by the time the closure is complete and how those dollars are spent must have community input.
  • Redirecting of these funds, thanks to nebulous contract language, to replace monies lost in the dissolution of the Redevelopment Agency or any other declining or needy revenue source ought not be allowed.

Well, that’s a summary of the “fiscal issue” responses I received. Most respondents asked for anonymity, I’ve decided to give it to them all. I’m confident they would agree that what they’ve said is far more important than who said it.

As my Gramma used to say, “Eat it up. Wear it out. Make it do, or do without.” It’s how us common folks learned to live within our means. They could do well to learn that lesson down at city hall.

Next post will summarize the “Mechanics” issues. Stay tuned. Undoubtedly feathers will get ruffled.

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