Kevin Valine

City waiting for details on higher pension costs

The Diablo range can be seen from downtown Modesto on I Street in January.
The Diablo range can be seen from downtown Modesto on I Street in January. Modesto Bee file

A top city official says Modesto is waiting for more details to emerge to gauge the impact of the California Public Employees’ Retirement System’s decision to lower what it expects to earn on its investments, which will require public-sector agencies to pay more toward their employees’ pensions.

But Deputy City Manager Joe Lopez said he expects the decision will add to the challenges the city faces in balancing its budget.

“It will impact us,” he said.

The CalPERS board voted last week to lower what is called the discount rate from 7.5 percent to 7 percent over three years. The rate is what CalPERS expects to earn from its investments. But it has wildly missed that target in its last two fiscal years, earning 2.4 percent and then 0.6 percent.

Each 0.25 percent drop in the discount rate is expected to result in a roughly 10 percent increase in what public-sector agencies pay CalPERS for the pensions of their civilian employees. The increase is expected to be higher for the pensions of police officers and firefighters, but CalPERS could not provide more details. These increases could vary among individual cities based on a variety of factors.

Lopez has said Modesto 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.

He said Modesto expects to learn more next month about the impact of CalPERS’ decision. He said the city is a member of the League of California Cities pension task force and the task force will meet with CalPERS on Jan. 20.

CalPERS is phasing in lowering its discount rate. The rate drops to 7.375 percent in the first year, then 7.25 percent in the second and to 7 percent in the third. The decreases start in July for the state and July 2018 for cities and other local governments.

But dropping the discount rate to 7 percent may not be enough. CalPERS’ own experts expect the pension fund to earn 6.2 percent on its investments over the next decade.

And this change affects other local governments. Stanislaus County’s other cities belong to CalPERS except Ceres, which is a member of the Stanislaus County Employees Retirement Association.

Kevin Valine: 209-578-2316