CalPERS unfunded accrued liability that needs investigation

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Mayor John Zaragoza (Photo by Chris Frost)

Oxnard – The City Council on Tuesday, March 1, approved CalPERS’ unfunded accrued liability (UAL) and the concept of restructuring the UAL for a lower interest rate and a recommendation to initiate a validation process.

The panel approved a resolution authorizing the initiation of a validation process and entering into an escrow agreement on the concept of restructuring UAL at a lower interest rate, potentially saving the city money.

NHA Advisors’ Mike Myer and Craig Hill made the presentation along with Russ Trice, partner of Norton Rose Fulbright.

Hill said the process began back in 2017.

“In 2018, we began making presentations to both your committees and your council on how much the city’s pension obligation really was and where it was going, and what cost strategies could potentially be implemented,” he said.

The NHA’s Myer said the work focused on rising pension costs related to CalPERS.

“At the spring workshop, we started implementing various cost management strategies before the outbreak of the pandemic,” he said. “It is intended to continue this process this spring with a deeper look into these cost management strategies.”

He said the City of Oxnard owes CalPERS $323 million, known as an unfunded accrued liability.

“The UAL is the deficit of what the city must have in assets to fully fund and fully pay out retirement benefits,” he said. “Then there’s the actual market value of the assets you have in the account. The actuarial liability is $1.1 billion. You have about $805 million in your account. That shortfall is $323 million. That’s a big number, and CalPERS doesn’t require you to pay it off all at once, but they do amortize that debt over time. Just like a mortgage or a loan.”

He said CalPERS charges the city a 6.8 percent interest rate on the UAL debt.

“The city’s UAL has grown fairly rapidly, as have other California agencies, based primarily on changing CalPERS assumptions as well as the underperformance of their investments,” Myer said. “The city’s UAL has grown from about $94 million to over $300 million over the past 11 years.”

He said the good news is that CalPERS had a strong 2021, earning 21.3 percent.

“We expect that UAL to drop to about $250 million next year,” he said. “This is a snapshot that UAL fluctuates and increases each time CalPERS misses its target.”

He found that the budget impact of CalPERS was significant when payments to repay the debt increased rapidly.

“About 10 years ago, those payments were about $5 million a year off budget,” he said. “Five years ago it was about $12 million. They are currently at $24 million. The city is also currently paying about $15 million annually in normal expenses, so that’s the cost of keeping current employees. That’s approximately $40 million that CalPERS receives each year for retirement costs.”

He said the city also collects a voter-approved property tax waiver, a tax that has been in place since the early 1950s.

“Each year, the city works with their actuary to produce a fairly comprehensive analysis of how much of the CalPERS pension expense can legally be paid from the transfer,” he said. “The override can only be used for the city’s security, fire and police plan. Not the other plan.”

For the full story, visit tricountysentry.com.

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