The City and CalPERS - Unfunded Liabilities
The city has taken major strides in reducing its unfunded pension and other post-employment benefits, including a two-tier pension system for public safety employees, a change from defined benefits to defined contribution for all new employees, the ARMP program for current employees and many others. These will go a long way in reducing future liabilities. Meanwhile the City is well positioned to maintain its pension obligation to existing employees as explained below.
The concept of unfunded pension liability can most easily be explained by comparing it to an individual retirement account.
How do you ensure that you have sufficient funds to provide for your retirement years? Let’s assume that you intend to retire at age 60. It is estimated that you will live another 25 years and you want to have an income of $75,000 a year growing at 3% per year. Over that 25-year period you would receive $2,734,444.82 in payments. In order to ensure that level of funding, you would need to have $1,502,950.00 on deposit the day you retired and that deposit would need to earn a 5% return to fund your retirement payments.
So starting at age 25, what you would need to save each year to have $1,502,950 on the day you turned 60? You would need to save $23,752.31 a year earning at least 3%.
Fast forward, you are now 50 years old and you have saved a total of $943,195.53 including your interest earnings. You currently have an unfunded liability of $559,745.47.
Is it time to worry about your retirement? No, you are right on track. You have to keep saving $23,752.31 a year for the next 10 years so that you can retire at age 60.
What happens if you can’t earn 3% for a couple of years? You will need to put a little more into savings to fill the gap of the lower earnings.
What happens if you earn more than 3% for a couple of years? You can either reduce your contribution or you can just put more onto the bottom line for your retirement.
The PERS actuarial report for June 30, 2011 shows that the City has an unfunded liability, which is the future amount owed to fully fund employee pensions through the PERS system, of $108 million. The same PERS report shows the City’s unfunded liability increased by $25.3 million during that time frame.
Just like the example above, the increase in City PERS unfunded liability means that the City must revise its PERS calculations accordingly to save enough to meet this obligation. This revised amount will be included in every budget and will remain part of the City’s operating expenses just like payroll and electric bills and payments to the school district for use of facilities.
Actual amounts are noted in the chart below. The increase in unfunded pension liabilities over the past 10 years is largely a result of the weak economy and the resulting decrease in the value of the CalPERS pension fund. Since CalPERS only reports the unfunded liability amounts every two years, next year's report will show the impact of the rebounding economy on the City's unfunded liabilities. It’s also important to note that, at the same time that liabilities have gone up, the City’s actuarial value of assets have increased by $44.4 million, which ultimately reduces the liability amount.