Modesto, other cities brace for higher pension costs

Modesto and other government agencies across California could be paying a lot more for their employees’ pensions, which will squeeze their budgets, as the state pension fund tries to shore up its finances.

The California Public Employees’ Retirement System board could vote Wednesday to lower what CalPERS expects to earn on its investments. That would require the roughly 3,000 public-sector agencies that belong to CalPERS to contribute more to make up the difference. CalPERS is looking at lowering what is called its discount rate – or rate of return on its investments – from 7.5 percent to 7.25 percent or even 7 percent.

If the board does not take a vote Wednesday, it could do so in February.

Critics say the state pension system is not sustainable and dropping the discount rate to 7 percent is not enough. CalPERS earned 2.4 percent on its investments in its 2014-15 budget year and just 0.6 percent in the 2015-16 budget year, which ended June 30. CalPERS had considered a plan that would have taken 20 years to adjust the discount rate, easing the financial strain on employers. But Gov. Jerry Brown criticized that approach.

CalPERS spokeswoman Amy Morgan confirmed that each 0.25 percent drop in the discount rate would result in a roughly 10 percent increase in what public-sector agencies pay for the pensions of their civilian employees. She said the increase would be higher for the pensions of police officers and firefighters but added that CalPERS could not provide more details.

Modesto Deputy City Manager Joe Lopez said his city expects to pay nearly $15.2 million in its current budget year to CalPERS, with nearly two-thirds of that for police and fire pensions. So the city would be paying at least $3 million more this year if the discount rate were 7 percent.

But Modesto would have time to prepare. CalPERS spokeswoman Megan White said if the board reduces the rate, it would not take effect until July 2018 for cities and other local government agencies. She said the change would take effect July 2017 for state agencies and school districts. (School district employees who are not teachers or hold certificates belong to CalPERS.)

“It could make the city’s budget challenges more difficult and (affect) its ability to provide services,” Lopez said about cutting the discount rate. “It would continue to put stress on our budget and crawling out of the recession.”

The CalPERS board will hold a workshop on the discount rate Tuesday and could vote on reducing the rate at its Wednesday meeting, according to White. The board also held a workshop in November about the discount rate.

Turlock City Manager Gary Hampton said dropping the discount rate would have a significant impact on the ability of small and midsized cities to deliver services. He said these cities look for efficiencies and technology to stretch their dollars but there is a limit to those savings. “We are heavily laden with personnel costs,” he said, “because we are in the business of having people providing services to people.”

All of Stanislaus County’s nine cities belong to CalPERS except for Ceres, which is a member of the Stanislaus County Employees Retirement Association.

This story was originally published December 17, 2016 at 3:02 PM with the headline "Modesto, other cities brace for higher pension costs."