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High pension risk in Lompoc affects the future of public projects citywide

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The following article was posted on January 11th, 2022, in the Santa Maria Sun – Volume 22, Issue 46 [ Submit a Story ]

The following articles were printed from Santa Maria Sun [santamariasun.com] – Volume 22, Issue 46

High pension risk in Lompoc affects the future of public projects citywide

By RON FINK

Lompoc taxpayers and those in many other cities of the county have a problem: The Public Employee Retirement System (CalPERS) is underfunded. This should concern everyone, and I’ll explain why.

CalPERS was created to provide public (government) employees with a retirement fund paid by employee and taxpayer contributions. It replaces the federal Social Security program, which is funded by employee and employer contributions from money earned working for a private sector employer. 

But, while a nongovernment employee pays 6.2 percent, some Lompoc employees pay as much as 14 percent, and the majority pay at least 9 percent from wages paid for by taxpayers. However, if you add what many private sector employees add to their 401K to subsidize Social Security each pay period, it averages out about the same.

The Santa Barbara County grand jury investigated the health of the CalPERS system; its conclusion wasn’t very optimistic for us taxpayers. The grand jury observed that “each year, employers within the CalPERS pension fund are required to make contributions to the fund. These contributions are made up of two components, the employer normal cost and a payment that represents amortization of the unfunded accrued liability (UAL).”

These payments are composed of two components: the negotiated employee contribution and the employer (taxpayer) contribution.

The grand jury also reported that “counties and cities have the option to administer their pension plans, but the costs and risks associated with doing so make using an outside administrator more attractive. In California, most counties and cities that have decided not to administer their own pension plans use CalPERS.” 

But reliable sources say that once in the system, the only way out is to pay off the current balance owed.

There are eight incorporated cities in the county; all are using the CalPERS administered system. The 2017-18 jury found “the highest risks are in the plans of Lompoc, the city of Santa Barbara, and Santa Maria, which are the largest in the county.” The county manages its own system, and in the 2017-18 report the grand jury found that the financial risk was “moderate and well managed.”

The amount of risk is very important since it impacts the interest rate Lompoc must pay if the City Council decides to fund any improvements using municipal bonds.

Unfunded accrued liabilities (UAL) are an important measure of how much trouble a government is in concerning their pension obligations. The grand jury found that “Lompoc, the city of Santa Barbara, Santa Maria, and the county have higher per capita UALs than the remaining cities, suggesting there could be a higher strain on those communities than on those with lesser per capita UALs. Also, the cities of Lompoc, Santa Barbara, and Santa Maria have significantly higher estimated total employer (taxpayer) contributions than the other cities.” 

That’s not good. Basically, it means that an increasing amount of the taxes we pay to provide needed services and maintain city infrastructure is being used to subsidize the retirement system. A table in the 2021 report clearly demonstrates that with 51.4 percent of the projected Lompoc payroll going to CalPERS contributions, it is the highest in the county.

So, the grand jury found that in the four years since it last looked at retirement system risk, not much has improved. The jury found that “the cities of Lompoc, Santa Barbara, and Santa Maria are at higher potential pension plan solvency risk.” 

In all fairness, the CalPERS system was only 70.8 percent funded in fiscal year 2019-20, while Lompoc is lower at 68 percent in 2020.

I guess because it’s neither improved nor gotten worse either, it’s relatively stable.

They also recommended that each City Council “develop and publish a comprehensive plan by June 30, 2022, addressing their pension plans and how they intend to properly assure future obligations are paid when due, without impacting the timely delivery of essential and promised services to residents.”

However, an incredibly reliable source says, “For instance, their (CalPERS) refusal to allow local jurisdictions to place new hires under a 401K plan, as opposed to requiring local jurisdictions to add new hires to the CalPERS pool, has prevented member agencies from radically reducing retirement contribution costs. That act alone—allowing new hires to be placed in a 401K plan rather than CalPERS—would free up significant funds that would accelerate UAL paydowns.” 

The city of Lompoc has taken some steps to lower future risk. Like many other cities, Lompoc has a tiered retirement system, which was agreed to by employee union groups. What that means is that new employees will receive a lesser benefit than heritage employees and will contribute more toward their retirement.

A couple of years ago, Lompoc voters approved a 1 percent sales tax increase; the council majority then used a large portion of it to initiate a CalPERS contribution “fresh start” by locking in increased payments for 15 years. The CalPERS rate of return, like those in your own 401K retirement fund, is doing well, but a person knowledgeable of the subject says, “The earliest those returns would benefit the city’s contributions would be 2029.”

Another recently passed cannabis manufacturing tax will add more revenue to our cash-strapped city coffers.

So, will the city provide the plan recommended by the grand jury? The short answer is yes. However, I am guessing they will simply reiterate what they already are planning to do as a solution. Should employees worry about receiving their retirement benefits? The short answer is no, since taxpayers subsidize their retirement fund from taxes collected to provide services, and more funds would be diverted from tangible improvements to CalPERS.

In a few years, the grand jury will once again examine this issue; my hunch is it will once again find “the highest risks are in the plans of Lompoc, the city of Santa Barbara, and Santa Maria, which are the largest in the county.”

Ron Fink writes to the Sun from Lompoc. Send a response for publication to letters@santamariasun.com.