Lost in the din of cheering about the progress of going from the 8th worst-ranked City in California to only the 13th worst (out of 482, yay us!) was the fact that El Cerrito is tied with its Rogue’s gallery peers as the least prepared to tackle the future costs of employee pension and benefits. So long as we enjoy this dubious company, El Cerrito’s bond rating and operating deficit will remain stuck in the basement.
Despite the “aggressive” cost-cutting, much of it temporary pay freezes, and the federal windfall that plugged a gaping general fund hole, the City has made zero meaningful progress toward determining how it will pay the long-term liabilities. Sure, many cities have a pension and OPEB (mainly retiree health benefits) funding deficit, but, as the report showed, El Cerrito is one of the least prepared. That distinction is notable because fixing it will take the most resources. Recalling how painful the recent cuts were and the battles they entailed, and how lucky we got ($6.5 million from ARPA and the City’s ability and willingness to skirt the use restriction rules), the casual observer might conclude that pension and OPEB are a festering wound, and they would be right. Adding salt to the wound, RPTT will be a LOT less than the $3.5 million received last year and assumed in the budget. In conclusion, we are looking at dwindling resources and a future of reduced services.
As Greta Thunberg told the world…” it is time to panic.” And plan. And act.
(N.B. If you have ideas for a quick fix or hope for another gift from above, you are dreaming. If you want to talk about eliminating waste, get rich quick development schemes, past fraud, manager pay, no new taxes or shifting blame, please start a separate NextDoor thread.)
Step 1. Plan. Create and codify INTO LAW a Pension Funding Policy.
There are many good examples of Pension Funding Policies out there, and the City’s financial advisory firm is well-equipped to assist in this process, provided the City is committed to committing a fixed set aside each year to fund its Policy. These policies have many elements, but this article focuses on the money piece. The Policy MUST require the City to budget and set aside a meaningful amount of money every year to bring down the unfunded liability. This means paying more than our normal plus amortization cost every year (aka the Actuarily Required Contribution or ARC).
Unfunded pension liability is a debt owed to CalPers on which we pay 6.8% annually, the amount CalPERS expects to earn on its investments. This is very expensive debt, even for a City barely hanging on to a BBB rating. It’s like keeping your credit card outstanding and paying the minimum while still running up expenses, using ever more of your regular income as your balance increases. Are there other ways to pay down this debt other than sending prepayments to CalPers in dribs and drabs (which, BTW, is still better than nothing)? Fortunately, yes.
This is where a Section 115 Trust comes in. Many of you are familiar with trust funds, heck, some of you may be living off one (marry my kid, please). A trust is a vehicle for segregating money for a specific use or person. California Employers’ Pension Prefunding Trust (CEPPT) is an IRC Section 115 Trust (commonly called a “115 Trust”) that public agencies establish exclusively to set aside money to prepay pensions. Once this money is deposited into the fund,it is legally segregated from general fund assets. The plan sponsor is the governing body, i.e., the City Council or an outside sponsor. This is key to its value and one reason it beats stashing the money in a general fund restricted reserve (which, see above, is ALSO better than nothing!). Once in the Trust, the money can only be used to pay down long-term pension and OPEB obligations (which would actually be two separate trusts).
What happens to the money in the 115 Trust? They can be invested with CalPers or with a third-party administrator. There are many third-party investment managers out there seeking this money that claim they can beat CalPers. A competitive process is generally held to hire an investment manager.
As some have pointed out, you can create a 115 Trust with a negligible initial investment. This is meaningless and the equivalent of doing nothing. If the City takes the time, and money, to create a trust which then carries a $0 balance for years, this is WORSE than doing nothing and would and should be used as evidence that the entire creation was a sham intended to make it LOOK like our fair City was committed to paying down its debt.
Step 2: Act: We are looking at YOU City Council!
Time to act. The only way to accomplish this and give it sticking power is to make the Policy Law. We are calling on the City Council to create a Pension Cost Management Committee charged with adopting a Pension Funding Plan. We are calling on FAB to make recommendations to the Committee and City Council for affordable but meaningful pension funding levels. We recommend that this be put in place and numbers finalized so that they can be included in the F.Y. 2023-24 City Budget and the long-range plan.