The city of Santa Barbara is looking at $ 344.5 million in unfunded pension liabilities, and city officials behind the scenes are scrambling to find the money to pay.
“None of our pension plans – for police, fire and others – are fully funded,” said CFO Keith DeMartini.
DeMartini and Dan Matusiewicz, consultant for GovInvest, recently made a presentation to the city’s three-member finance committee, outlining the extent of the problem.
“Usually, for me, I often struggle with conversations about unfunded pension liabilities,” committee member and city councilor Meagan Harmon. “It just seems so much of a problem to me that I didn’t create it, and sometimes I just feel like running screaming in the other direction.”
Santa Barbara and most cities and counties in the state have tried to get their retirement commitments under control over the past decade. Then-Gov. Gray Davis in 2009 signed the SB400, which granted public safety employees, including prison guards, park wardens and CHP officers, grandiose retirement benefits. Local governments have followed suit, offering public security workers the opportunity to retire as early as age 50 and the opportunity to earn up to 90% of their top salary upon retirement.
These benefits are known as defined, and the employee is guaranteed this retirement income even if CalPERS is having difficulty.
“Retirement costs are crushing some valuable program costs,” DeMartini said.
The 2008 recession hit the nation and CalPERS. Pensions are paid by government agencies and employees, along with returns on CalPERS investments. When these investments collapsed during the recession, government entities began to rack up massive pension liabilities.
Santa Barbara will pay $ 32 million in pensions in 2022, and that number is expected to grow to $ 38 million in the next few years.
The city has little control over how to close the gap. In some cases, he has negotiated with unions and public security unions to have their employees pay their pensions. In return, however, these unions often negotiate higher wages.
The city is exploring strategies to pay off the unfunded liability, but there is no easy choice. The complexity of the options makes matters even worse, as elected officials do not always have the financial expertise to necessarily understand the right path to follow.
The finance committee, and possibly the entire city council, will have to decide what options to take to help stabilize the situation.
Among the options on the table is the prepayment of the annual pension obligation, to take advantage of a 7% discount, a tactic the city has already used.
The city could also create a Section 115 trust, which essentially sets aside money in its own investment plan that could generate a higher return than CalPERS. A trust is a common way that local governments tackle their retirement issues.
The city could also issue bonds to help cover the costs of pensions.
In Santa Barbara, approximately 55% of pension payments are paid with investment income through CalPERS. This number reached up to 70%. City employees contribute between 6.75% and 13%. If investment income goes down, the city must find a way to pay the rest.
Committee member and city councilor Eric Friedman said he enjoyed the presentation, adding that he leaned towards creating a Section 115 trust on bond issuance, in order to “not not exchange one liability for another “.
Harmon said the city has a long way to go before fixing the issue, but it is moving in the right direction.
“I see this as an opportunity to really put in place future generations much better than we have been and to really try to solve some of these big questions that I think weigh on us all,” he said. she declared. “I really want to make sure that our employees are valued and respected, and that unfunded liabilities are not dealt with solely on the backs of employees.”