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By Councilmember Laura Ferguson
This year’s long-term financial plan included a paper on the city’s unfunded CalPERS pension liability that has grown to $49.5 million. This was a positive first step to acknowledge the problem, discuss publicly and realize the need for the city to get more aggressive at paying down pension debt to reduce the growing burden on taxpayers.
Now is the time for city council to come up with a concrete written plan/policy that identifies funding sources and allocates a specified dollar amount to make extra payments to the pension fund, going beyond the required annual amount to pay down the pension debt.
Our city’s most recent annual contribution to CalPERS was $750,000, but at this rate, it would take more than 50 years to pay down.
The city’s retirement plan is 68% funded. If a pension is 80% funded, it is considered healthy, though fully funded is best. I believe the city can craft a realistic plan to improve its funding position and pay down pension debt without selling hard assets, or reducing services or cutting current staff.
Timing is critical, as pension debt, or unfunded liability, can grow unexpectedly. For example, in a short time span, from June 2020 to February 2021, the city’s unfunded pension liability increased by $4.5 million.
We cannot continue to kick the can down the road. Making occasional payments from one-time resources and budget savings isn’t going to work anymore. An extra annual payment to the pension debt must become a budget component (a line item) for retiring city pension debt.
Other municipalities are doing this and adopting plans to make these extra payments, and millions of dollars are being saved long-term.
The Newport Beach City Council approved a plan for extra payments to CalPERS that is expected to save $47 million over 30 years, compared to the standard payment plan. And Huntington Beach City Council approved extra payments to CalPERS based on an analysis by an independent actuary, that demonstrated each additional $1 million contributed to CalPERS saves $5 million over 25 years.
These actions are necessary to offer sustainable pensions for retirees, and protect residents from future service and program cuts, and I would like to see this done in San Clemente.
Just how might we come up with these extra payments? Because consultant costs are low-hanging fruit, I think these should be the first to reduce. At my request, the city manager provided a list of consultants (which totaled $5 million-$6 million) for councilmembers to review at our June budget workshop.
I suggested up to $2 million in cuts be identified from this list. Staff is making a revision to the list and is expected to bring it back to council this month.
An easy $528,000 annual savings can result from eliminating the toll road marketing/strategic communications consultants and lobbyist. The court ruled in late July that the city’s lawsuit against the TCA was moot, because the toll road is not being extended.
It’s one thing to fight when the threat is present, but there is no justification now to waste money on consultants.
More savings could come from our legal services budget if capped at $1 million annually. Other savings can be found through attrition. Council does not want to cut staff, so as people retire, we should analyze positions for necessity and determine if they can be outsourced to achieve savings over time.
Council could also consider placing “new hires” in defined contribution plans to help further reduce the pension burden.
Our council can be pragmatic and instruct staff to develop intelligent strategies, sensible solutions, and a plan for council to adopt and advance forward.
As policy makers, the council must gain control of this issue and direct staff so they have a clear path for paying down pension debt to ensure the city remains on solid financial footing.
Laura Ferguson was elected to the San Clemente City Council in 2018.