Lessons to learn from city pension

The billion-dollar price tag on the city of Modesto dropping out of the California Public Employees Retirement System offers three lessons for local voters and taxpayers:

• It confirms that the 11th hour proposal by then-mayoral candidate Brad Hawn was never well thought out and was nothing more than a campaign gimmick to capitalize on citizens' anger at high public pensions and public employee unions.

As you'll remember, that advisory measure was rushed onto the ballot to correspond with the November 2011 mayoral contest. The proposal was for the city to switch from a defined benefit plan to a defined contribution plan, which is similar to a 401(k). There was no substantive discussion by council members, who voted 4 to 3 to put it on the ballot. That vote reflected the majority that supported Hawn over fellow Councilman Garrad Marsh in the race for mayor.

• It underscores the importance of investment return projections — the percentage used to calculate how much investments will earn/ grow. Between 2003 and 2007, CalPERS' investment returns were much higher than the 7.75 percent projection it was using. Then in 2008 and 2009, the system suffered big losses, as did all investors. But the losses didn't and won't fall on the retirees, but on the employers because it is a defined benefit plan.

CalPERS now uses a 7.5 percent investment projection, but for agencies that are talking about pulling out, it has dropped its projection substantially and there's talk of it going to 1 percent. For Modesto's calculation, it used estimates of 2.2 to 2.35 percent. What that does is substantially increase what the city, as the employer, will have to pay.

• It highlights the size of the pension liability for Modesto and all of the other public employers offering these guaranteed benefits. The reduced pension plans going into effect for new hires will provide relief in the long run, but the liability will be huge for decades.

A lack of openness

Last Sunday, we ran a large chart on this page outlining pension plans and obligations of five of the largest government employers in Stanislaus County, not counting school districts. For that chart, the city of Modesto estimated its total pension liability at $758 million — for an ongoing pension arrangement within CalPERS. But when an agency is closing out its pension — as more than 100 entities around the state have done — CalPERS has to collect a lump sum from the employer that would cover every conceivable obligation for lifetime pensions. A retiree might live to be 105 and that promised pension has to be provided.

In doing research for last weekend's editorial, The Bee specifically asked a high-ranking city official whether the estimate had been received on what it would cost to drop from CalPERS. The answer was no. After our editorial ran, a CalPERS spokeswoman sent us an e-mail saying that the estimate was provided to the city in September.

Bee staff writer Kevin Valine contacted city officials Tuesday, asking again about the drop-out estimate. This time they acknowledged they had it, but said they hadn't made it public because of difficulties in opening the documents and because of questions for CalPERS.

A time lapse of a week or two would seem reasonable. However, it took more than three months for this information to be released — and only then after specific inquiries from The Bee. At best, there was poor communication and no sense of urgency at the city over this matter. At worst, top city officials were hiding what is clearly public information about a subject of high interest to the public.

Conclusion: Switch not possible

In November 2011, almost 58 percent of Modesto voters supported Measure Q, the advisory proposal for the switch from a defined benefit plan to a defined contribution plan. There was no estimate offered of what it might cost to set up a new system and, as is painfully clear today, the guesstimate for getting out of CalPERS was wildly low — in part because staff had no time to review the subject.

The bottom line is obvious now: The city can't afford to drop out of CalPERS. It must continue to focus on negotiations that increase employee contributions to their pensions and that eventually the city out of from under its other big retiree obligation — the sick leave conversion to health insurance premiums.