PD Editorial: Santa Rosa weighs a gamble on pension bonds
CalPERS, the state’s mammoth public employee retirement fund, reported a preliminary 21.3% net return on its investments for the fiscal year that ended June 30.
That’s an impressive performance for any investment portfolio. The year-over-year gain was nearly fivefold better than in 2020, and it lifted the fund value to $472 billion — about 80% of the assets required to cover CalPERS’ obligations to current and former state and local government workers.
But — you knew there was a “but” coming, right? — that 20% gap looms over the availability of basic public services in California.
Santa Rosa, like most California cities, is a CalPERS member, and it must pay its share of the unfunded liability. A city report describes it as “effectively a ‘past due amount.’”
Over the next 15 years, the city’s chief financial officer projects that cumulative payments to CalPERS for unfunded liabilities will add up to $110 million. That figure is above and beyond the $30 million (and growing) that Santa Rosa pays each year for employee retirement benefits.
To put it in perspective, the unfunded liability payment amounts to 16% of the general fund expenditure budget for fiscal year 2022, according to the city’s projections, and the amount due will increase each year for the next 10 years before starting to taper off.
What do all those eight- and nine-digit numbers mean for Santa Rosa residents?
“Increasing costs are crowding out the city’s ability to fund other basic and necessary services/improvements,” according to a presentation prepared for a City Council study session on Tuesday. Fewer cops, more potholes, messier parks.
To their credit, city officials are exploring ways to ease the pension bite so more money will be available for public services.
One of those approaches, the subject of Tuesday’s study session, is a real gamble.
The council is scheduled to discuss pension obligation bonds — borrowing money to pay off at least some of the city’s obligations to CalPERS.
Here’s how it would work: CalPERS charges 7% interest on unfunded liabilities owed by member agencies. Santa Rosa officials believe they can borrow at a better rate, perhaps as low as 3.25%. By paying less interest and accelerating payments to CalPERS, the city could reduce its pension bill, freeing money for public services here in Santa Rosa.
This strategy has worked in some places that got the timing right.
But, as they say on Wall Street, past performance is no guarantee of future results. Pension bonds carry substantial risks, the largest of which is beyond the city’s control.
If the value of CalPERS’ investment fund declines, the city’s unfunded liability will increase, and any projected savings can disappear. The city could end up owing CalPERS even more and still be on the hook for debt service on the bonds.
For a particularly stark example of how quickly an economic reversal can upend pension finances, consider the Great Recession. In 2007, CalPERS was more than fully funded. Within two years, the funded ratio plummeted from 101% to 61%. Assets have since climbed to record levels, and annual contributions for cities and other members have steadily increased, but CalPERS has never again approached full funding.
Three is no easy answer for public pension problems. Santa Rosa ought to explore all its options, but City Council members must understand that pension bonds could make their financial predicament worse. Is that a gamble they’re willing to take?
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