City of Santa Barbara looks for solution for accrued liabilities
The Santa Barbara Grand Jury is requesting the County of Santa Barbara and the cities within the county develop a plan by the end of June to address solvency risks in defined-benefit pension plans.
While the Grand Jury didn’t find that any municipality was in imminent danger of being unable to fulfill pension contracts, it labeled Santa Barbara, Santa Maria and Lompoc at higher potential of solvency risks in comparison to the other cities.
The City of Santa Barbara Ordinance Committee is currently analyzing its pension plans.
The county holds its plans’ assets in the County of Santa Barbara Employee Retirement System. The cities feed into California’s holdings, the California Public Employee Retirement System.
CalPERS, the largest public pension fund in the nation, was able to provide 55% of funding through its investment returns, as of June 30, 2020. Employer contributions paid 32% of benefits and employee contributions made the last 13%.
CalPERS assets comprised 70.6% of its accrued liability, or what all working and retired beneficiaries had earned, as of June 30, 2020.
At the same time, SBPERS assets covered approximately 74% of its accrued liability.
Many industry experts have lauded a rate of 80% as healthy, but actuarial scientists debate its application in the public sector.
In 2020, CalPERS was barely above average when compared to other state’s pension plans’ funding. Illinois is eyed as the country’s lowest-funded, at 40.4% funded in 2020.
In 2020, Santa Barbara was 67.3% funded; Lompoc was 68% funded, and Santa Maria was 68.5% funded.The three cities also have significantly higher employer contributions when compared to their projected payroll.
The City of Santa Barbara’s pension contribution was 51% of the projected payroll in 2020. The average among the eight cities is to spend 34.2% of payroll on pension contributions.
The City of Santa Barbara has over $386 million in pension liabilities to pay off. The county has over $1.1 billion.
The Grand Jury sees potential to reduce debt as more years pass since the California Public Employees’ Pension Reform Act of 2013. The law was intended to reduce the debt counties and cities were facing after the recession but dulled benefits to new hires.
Employees hired prior to PEPRA retained classic, more expensive plans, and public employees hired in 2013 and thereafter became less costly to governmental bodies.
The Grand Jury studied the 32 pension plans in the cities, of which 12 are PEPRA plans. The PEPRA plans are funded over 90% whereas municipalities only have the assets to cover an average of 68.7% of classic-plan costs.
The eight cities accrued $631 in unfunded liabilities — but only $1 million of unfunded liabilities are from PEPRA plans.
The Grand Jury suggested Section 115 pension trusts, pension reserve funds and pension obligation bonds as ways to pay debt.
The City of Santa Barbara Ordinance Committee heard a presentation Tuesday on these options as it begins to plot a path forward.
“Oftentimes when cities talk about pension systems and the overarching cost, the question inevitably comes up about why can’t we just leave CalPERS and start our own retirement system. And it is not practically an option,” finance director Keith DeMartini said “It is very much prohibitively expensive for a number of reasons.”
The city’s contribution is paid through the General Fund, mainly. The City has saved $3.3 million over the past five years by paying its fees up front annually instead of making payments, he said.
The city will begin looking at current methods, like upfront payments, and then revise its reserve policies.
Mr. DeMartini suggested establishing a Section 115 Trust and making discretionary payments to CalPERS. A Section 115 Trust would not allow the city to pull the funds for any other purpose.
He also said the city could consider a pension obligation bond, but council members were wary of the idea Tuesday.
CalPERS received criticism this week for being one of the largest investors in fossil-fuel companies, with nearly 7% of its portfolio staked in fossil fuel. It was one of 14 pension funds exposed in a report by Stand.earth and Climate Safe Pensions Network.