Sunday • December 15, 2002

Agencies brace for CalPERS crunch

By Karen Nolan/Reporter Correspondent

Public agencies throughout Solano County are bracing themselves for a double whammy.

As the state prepares to cut the funds it sends their way, local agencies are being told they will have to put more money toward their employees' retirement fund - 300 percent or more in some cases.

"We aren't going to be able to keep our budget balanced with these higher costs, and this is before the state takes something away from us, which is a probability," said Bob Leland, Fairfield's finance director.

Public agencies spend the bulk of their income on personnel, and next to salaries, "the biggest ticket is retirement," said Leland.

This fiscal year, Fairfield will spend about $591,000 on retirement contributions; next year that amount will grow to nearly $2.7 million, according to Leland's projections.

Like most other public agencies in Solano County, as well as the state itself, Fairfield contracts with the California Public Employees Retirement System (CalPERS) to provide pensions for its 602 employees.

CalPERS is an "actuarially sound" system, which means that "enough money is put aside to cover all of the projected liability for people who are retired now and who will retire in the future," Leland explained. "That differs significantly from Social Security, which is a pay-as-you-go system."

The system gets its money from three sources, CalPERS spokesman Clark McKinley said:

• Employee contributions, which are set by law. The rate varies between 5 percent and 9 percent, depending on the retirement plan. The highest rates are paid by public safety employees, who generally retire at an earlier age.

• Earnings from investments in stocks, bonds and real estate.

• Employer contributions, which vary from year to year, depending on investment returns.

"When investment income rises, the employer rate declines," McKinley said. "But that's with the understanding ... that in lean years their contributions go up."

Therein lies part of the problem local agencies are now facing.

In the mid-1990s, the market turned bullish, and the required employer contributions began to fall, dropping to zero - or less, as some agencies received refunds.

With 17 years experience in public finance, Leland was wary at first, because "when the rate goes down, you know it won't be there for long," he said. "However, CalPERS was coming up with estimates that were breathtaking."

In fact, the market was so good that less than two years ago Fairfield was told its retirement account was "superfunded," and no employer contributions would be needed for 97 years (24 years for its public safety fund).

Indeed, at the beginning of the 1999-2000 fiscal year, CalPERS had more than $171 billion in its fund.

Then the economy began to sour. As of Sept. 30, the most recent figure available, the fund stood at $133 billion - a 28.6 percent drop in value in three years.

"They've been periodically coming back and saying, 'We've got more bad news," said Leland.

Other changes were taking place at the state level, which also saw its required CalPERS contributions drop. In lieu of pay raises, some employees associations negotiated deals to have the state pick up the employee's share of the CalPERS contribution. That effectively put money into the worker's paychecks.

And the Legislature adopted a law that allowed better retirement benefits, particularly for those in public safety. "The improved safety benefits have spread like wildfire throughout the state, and to stay competitive, we have to offer that," Leland said.

But those benefits are more expensive, and that is pushing employer rates even higher.

Consequently, Fairfield paid CalPERS an amount equal to 2.813 percent of salary for each of its safety employees this year, and is expected to pay at a rate of 17.082 percent starting July 1. That's an jump from $376,000 a year to $1.9 million.

For other employees, the rate is more than tripling, from 0.957 percent this fiscal year to 4.316 percent next, or from $215,000 this year to $753,000 next year.

If the bear market continues, Leland said, by July 2004 CalPERS could be charging the city an amount equal to more than a quarter - 26.4 percent - of salary for public safety workers and 10.7 percent of salary for all other employees.

"You can see why everybody's concerned," Leland said.

Indeed, the problem is cropping up everywhere.

In Vacaville, which employed 584 people this year, the dramatic rates for police officers' pensions aren't expected to hit until 2006, when the improved retirement plan kicks in, said City Manager John Thompson. "We've known for two years now we will have to make adjustments to the budget to get ready for that, but we were not ready for any shift of the state budget problem to us."

Even without the more costly pension, Vacaville's employer contribution for public safety employees is expected to jump from $468,000 to $1.2 million as its CalPERS rate more than doubles, going from 3.089 percent to 8.233 percent. By 2004, that figure could double again, to 16.2 percent.

For other employees, the city was required to make no CalPERS contribution this year, but will have to come up with about $486,000 as its rate swings to 2.193 percent in July. It, too, could go up - to 8.5 percent - the following year. (Non-safety employees are also covered by the Public Agency Retirement System, which this year assessed the city a rate equal to 4.02 percent of salary.)

Thompson also has seen CalPERS contributions rise and fall through the years, so when the city's share dropped "to virtually nothing" a few years ago, he urged the City Council to act as if it were still paying into the account. "We budgeted as though our contributions were running at 6 percent, which is kind of a middle ground between what the old rate used to be and zero," Thompson said. "We used that budgeted money for one-time things, mostly related to upgrading computer programs and Web pages."

Now that the higher rates are being required, Vacaville is somewhat prepared to pay them.

That's not the case at Solano Community College, where CalPERS contributions are expected to rise more than 300 percent in July.

"It was zero for a number of years, and then it went up," said Willard Wright, vice president of SCC's administrative/business services. This year's rate of 2.894 percent of salary will jump to 9.527 percent.

The college, like other area school districts, uses the CalPERS pension for its non-teaching staff. Those with teaching certificates are covered by the California State Teachers Retirement System (CalSTRS), which by law must keep its contribution rates stationary. Those rates currently stand at 8.25 percent for employers and 8 percent for employees.

Unlike Vacaville, SCC hasn't been setting aside its CalPERS savings, said Wright. "The money was spent," he said, adding that decision was made before he arrived three years ago. "It was used in programs."

The increase in contribution "is a problem for us," Wright acknowledged. "With all the letters coming out of the state in the last few days (about cutbacks) ... this exacerbates the situation for us."

Fairfield also is not prepared to absorb the increased costs, Leland said.

Initially the city put its CalPERS savings into a special fund, along with "other pittance" of money the state returned "that they stole from us in the early '90s," Leland said. "Then the council adopted a policy that we would restore some positions that were eliminated in the early '90s and pay for it out of this fund. Over time we were going to let the normal budget growth take up the slack. But the savings spigot has been turned off."

So what will Fairfield do?

"We and other cities across the state are going to have to do what we do periodically: Hunker down and cut back and try to preserve the core of what the city does and its highest priority services," said Leland, whose career has spanned three recessions.

"With CalPERS, what goes up comes down," he said. "They'll come back down in the future, but for now, they're forecasting a pretty grim outlook."