Santa Rosa's pension costs are set to soar by about $12 million over the next six years as it is forced to pay higher rates by a state pension system trying to come to grips with a massive gap between its assets and what it owes current and future retirees.
The increases of about $2 million per year would result in the city by 2020 paying about 45 percent more that it does now toward employee pension costs, already one of the largest costs in the city budget, the City Council learned Tuesday.
Costs would rise from about $27.4 million a year now to nearly $40 million in 2020, a figure that city actuary John Bartel said he knew was difficult for the city leaders to swallow.
"From a budget standpoint, it's horrible," Bartel told the council.
But he also argued that the pain would be worth it because it would begin to bridge what is a nearly $200 million gap between what the city owes its current and future retirees and the money it has set aside to pay for their rapidly increasing retirement benefits.
"From an intergenerational taxpayer point of view, I think it's the right thing to do," Bartel said. "From actuarial perspective I think it's the right thing to do."
The increases keep coming in spite of city and state pension overhaul efforts which focused on establishing lower pension benefits for new workers.
That's because the lower tiers, while helpful in controlling costs long-term, won't affect a large percentage of the city's workforce for more than a decade, Bartel said.
Bartel explained that his estimates are based on several factors, most of which revolve around policy changes the state Public Employee Retirement System has either already made or is likely to make in the near future.
One was the CalPERS board's April decision to base rates that it requires cities and other public agencies to pay annually on the actual, or market, value of the assets in the funds. The previous method allowed another method to be used, called the actuarial asset value, which smoothed out changes in value over several years but which critics argued allowed cities to pay less than they truly owed.
For Santa Rosa, the difference is significant. The old valuation put the gap, or unfunded liability, at $128 million in 2011, the latest data available. When the market value of assets is used however, the gap grows to $197.4 million.
The new rates will be aimed at eliminating this larger gap. That portion of the rate dedicated to reducing that gap is expected to last 30 years, though it will be phased in over five years beginning in 2015/16, Bartel said.
Another change likely to happen in the near future is a change to the assumptions about how long retirees live. With life expectancy climbing steadily for decades, Bartel said, he expects CalPERS to dispense with the formality of requiring a study to justify the assumption and just assume future retirees will live an average of about two years longer.
Lastly, he said it's likely, though far from certain, that the board will also reduce its assumed rate of return on investments by a quarter of a percent, from 7.5 percent to 7.25 percent. Though that seems minimal, Bartel explained that even a slight drop in how much CalPERS earns from its massive investment portfolio can lead to higher rates for cities that have to make up that difference.
One of the key reasons Santa Rosa's costs are increasing is because of an increase in the number of retirements compared to active workers. In 1994, the city had 1,030 active workers and 382 retirees.
In 2011, it had 1,193 active workers and 1,096 retirees. In three or four years, the number of retirees will probably surpass the number of active workers, Bartel said.
That's not a problem by itself if enough money is set aside, he said. But average annual retirement payments are also on the rise. In 2003, the average retirement payment for nonpublic safety workers rose 58 percent, from $20,300 to $32,200. For police that figure was 49 percent, increasing from $36,900 to $55,200. For firefighters that figure was 69 percent, rising from $41,000 to $69,200.
Councilman Gary Wysocky noted that of the $12.3 million in additional costs expected by 2020, about $9 million would come from the city's general fund, while the balance would be borne by ratepayers. But he said that assumes a flat salary budget, which he said is not reasonable, meaning the increases are likely to be even higher.
The problem is the city will face a $9 million increase in pension costs the same year that Measure P, the general quarter-cent sales tax that brings in about $7 million per year, will expire.
"That's quite a hurdle," he said.
You can reach Staff Writer Kevin McCallum at 521-5207 or kevin. mccallum@pressdemocrat.com. On Twitter @citybeater.
UPDATED: Please read and follow our commenting policy: