A single year's pension loss leaves trail of pain
| Tuesday, Sep 01 2009 06:31 PM
Last Updated Tuesday, Sep 01 2009 06:37 PM
Bakersfield will pay about $7.5 million annually for 30 years to cover a single year's heavy losses at the giant state pension fund it contracts with, city officials estimate.
The staggering bill will be in addition to ongoing pension payments. The city will pay about $19 million to the retirement fund this fiscal year, which started July 1.
State and local officials have known for months investment losses during the fiscal year that ended June 30 would bring a painful payday.
"It's an obligation we knew was on the way," said Bakersfield City Councilmember Ken Weir. "It will be a very difficult obligation to overcome and it certainly will affect city services."
Last week, numbers came into clearer focus after the California Public Employees' Retirement System, or CalPERS, sent a letter to cities and counties around the state with initial calculations for their plan to recover 2008/2009 losses. Nearly a quarter of the fund's assets were wiped out during the fiscal year.
It's an unprecedented scheme in CalPERS history: isolating a single year's devastating results and setting up a specialized payment plan to recover.
Bakersfield's extra $7.5 million bill will start in July 2013 following a three-year phase in beginning in 2011.
Even if the market recovers and the city's regular pension payments decrease, the extra payment remains for three decades.
"$7.5 million a year is a very significant part of our general fund," said Alan Tandy, Bakersfield's city manger, in an e-mail. Bakersfield's general fund this fiscal year is about $165 million.
Since a good chunk of that covers salaries and benefits, Tandy said, the extra pension cost is likely to impact future staffing or pay levels.
The county of Kern operates its own pension fund. Results for the latest fiscal year will be out in the next week or so.
PERS doubts
Recent events, such as CalPERS' chief actuary saying last month pension costs may be unsustainable, have stoked reform efforts long considered politically impossible.
At the state level -- where a 1999 major benefit increase transformed the landscape and trickled down to local governments -- Gov. Arnold Schwarzenegger has reignited an effort to overhaul the system. His current proposal would reduce benefits for new hires.
David Crane, the governor's special adviser for jobs and economic growth -- and his pension guru -- said any state overhaul will likely impact Bakersfield and other localities contracting with CalPERS.
"Whatever is done at the state should include locals," he said, referring to city and county governments.
Reform, however, will only apply to new employees. Existing liabilities are set in stone.
Pension obligations "have the force of law no different than a general obligation bond," Crane said. "There is no reform you can undertake for existing contracts."
While some critics have said upgraded pensions approved by the state legislature in 1999 were too big, Crane -- who previously sat on the board of the state teacher's retirement fund, CalSTRS -- said the main problem has been governments paying too little into the plans.
That's in large part because CalPERS and CalSTRS have assumed too-rosy investment returns that don't truly reflect the cost of the benefit obligations.
CalPERS now plans on average returns of 7.75 percent, down from 8.25 percent a few years back.
The current expectation is "still too high," Crane believes. He thinks it should be 6 percent or less, and points out some argue it should be set at risk-free levels -- Treasury rates.
Local union leaders couldn't be reached Tuesday, but state union officials have so far been rejecting the idea of reduced benefits for new hires.
