Santa Monica is about to shell out $45 million toward tackling its biggest threat to long-term fiscal sustainability: its long-term unfunded pension obligations for staff members under CalPERS. The money will add up to about an 11 percent decrease in the City’s unfunded liability, according to estimates from PERS cited by the City.
The City Council approved the decision Tuesday to pay down a chunk of the City’s more than $380 million unfunded liability in order to save costs overtime. A recent decision by CalPERS to lower the anticipated rate of return on its investment portfolio is expected to increase the burden on cities across California. In Santa Monica, the City’s employer contribution rates could go up by as much as 50 percent in the next five years.
“As a result, members like us will have to increase our annual contributions into the plan to make sure that it is funded over time,” said the City’s finance director Gigi Decavalles-Hughes. The City estimates the $45 million pay down will save the City about $3.8 million a year.
“Santa Monica is one of the early adapters of a best practice where we make accelerated pay downs of our liability, similar to paying down a mortgage,” Decavalles-Hughes told the City Council Tuesday. “Since 2010, we’ve paid down over $31 million and this has resulted in savings of over $2.5 million in our contributions each year. Aside from paying our debts and lowering annual costs, were able to invest funds in the PERS portfolio which yields a higher return than the City’s portfolio.”
The majority of the money, approximately $35 million, will come from General Fund reserves. The City will also use $8.6 million from other operating funds’ reserves to make the payment.
CalPERS’ decision to lower its rate of return assumption accounts for $13 million of Santa Monica’s $19 million budget shortfall in fiscal year 2021. Pension costs make up approximately seven percent of the City’s overall budget and 10 percent of the operating budget.
Santa Monica City employees who work more than 1,000 hours per year receive pension benefits after five years of service. Employees contribute up to 30 percent of the total payment each year and do not participate in Social Security, meaning CalPERS is often their only source of retirement income.
Santa Monica established a second-tier retirement in 2012 so that new civilian employees accrue pension credits under a reduced formula and contribute seven percent of their income towards retirement, according to City Manager Rick Cole.