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Daily Pilot

Costa Mesa: A City Divided

Pension obligation estimates differ greatly

Costa Mesa's pension forecasts, released in 2011, were based on a worst-case scenario that did not immediately come to pass.

By Joseph Serna and Mike Reicher

9:22 PM PDT, August 25, 2012

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Second in a series about Costa Mesa's political battle.

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Costa Mesa's estimated pension costs could climb by about $3 million over the next five years, according to a recent estimate released by the city.

That figure stands in stark contrast with the $10 million to $12 million pension spike forecast in 2011, when the City Council directed its staff to issue pink slips to the city's employees.

The differing data sets represent best- and worst-case budgeting scenarios based on projections of how retirement funds are likely to perform. The council a year and a half ago went with a pessimistic forecast.

"Government always has to assume worst case," said Mayor Pro Tem Jim Righeimer.

But critics say the council's 4-1 majority, led by Righeimer, purposely presented dimmer-than-necessary estimates to the public to justify its plan to reduce the municipal workforce.

"It's just another example of how they'll manipulate the numbers and say anything and do anything to advance their political agenda," said Jennifer Muir, spokeswoman for the Orange County Employees Assn., which represents some 200 Costa Mesa employees. "They throw out a number to create a crisis and advance their political agenda."

But Righeimer said local government cannot bank on sunny estimates for the California Public Employees' Retirement System (CalPERS), an organization he calls "a pseudo government body that can do whatever they want to do."

In fact, he said, he asked finance officials to choose the rainy-day estimates when they presented a chart on the city's pension liabilities to the City Council.

Most of his colleagues on the council concurred with the decision.

"Hope is not a formula that's accepted in business," said Councilman Steve Mensinger. "The consequence is we keep pushing the losses out 20 years, 30 years, and I'm dead, you're dead, and your kids are asking about it. I don't want to leave my kids with an unfunded liability."

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Contrasting data

In February 2011, then-Budget and Research Officer Bobby Young presented to the City Council a chart of projected payments Costa Mesa would need to make to CalPERS to fund employee retirement programs.

Young forecast city costs climbing from about $15 million in 2011 to more than $26 million in 2016. An increase like that, without significant new revenue sources from taxes or fees, could lead to potentially crippling problems for City Hall, council members argued at the time.

The data became the rallying cry of Righeimer and the council majority, which, in the 16 months that followed, grounded the city's shared police helicopter program, eliminated positions, merged departments and, most notably, handed out layoff notices to more than 40% of the city's workers.

In turn, the pink-slipped workers sued, and a judge blocked outsourcing their jobs to the private sector — outsourcing to other public agencies would be OK — until the lawsuit is resolved.

By the end of fiscal 2010-11, the city had its first balanced budget in three years that did not rely on reserves; council members touted the accomplishment.

Fast-forward to the present day. Young, who has since been named the city's finance director, recently released pension-cost projections substantially lower than those from 2011: $19.3 million in 2016, and $19.6 million in 2017.

That forecast is close to $7 million under the $26 million initially estimated for 2016.

Young said the first forecast was indeed based on worst-case assumptions. He qualified his numbers to the council in 2011 by saying the predictions were unlikely to come to fruition but were indeed possible.

Both the 2011 and recent data sets are based on assumptions made about CalPERS, which pools and invests contributions made by public employees in a variety of financial vehicles, such as stocks and bonds.

Because it is impossible to predict the behavior of financial markets, government agencies rely on forecasts made about CalPERS' likely rate of return.

Costa Mesa's

2011 chart assumed that CalPERS would lower its rate of return from 7.75% to 7.5% that March — a significant drop in a $236-billion portfolio. When the fund doesn't perform at expectations, cities and other agencies that pay into it must increase their contributions to make their contractually required pension payments.

Though 7.5% may seem like a healthy return to private investors, CalPERS has outperformed that figure over the long haul. From 1983 to the present, it returned 9.2%, according to agency spokeswoman Amy Norris.

The rolling average for the last 10 years has been 6.1% — which is below the present-day forecast — but is healthy considering the recession and volatile worldwide market.

There were other factors that influenced Young's worst-case scenario forecast in 2011: The chart assumed Costa Mesa's employees would stop paying into their own pensions once their current agreements ended, significantly increasing the city's obligation, or unfunded liability.

However, most city employees, save for the firefighters, had been contributing to their retirement plans since 2007. Whether they will continue to contribute to their plans in the future is something that will be collectively bargained, but several Southern California cities are reaching agreements that require employees to pay into their plans.

Righeimer, however, is not so sure that the employee associations would agree to concessions.

He said he told Young when he was preparing the budget data not to include forecasts for employee contributions.

"You never budget based on what somebody may or may not give you," he said recently.

Young stands by the numbers and denied receiving any input from the council, outside of a request in October or November 2010 to estimate future CalPERS payments.

"These were coming from me," he said.

He said he kept the contributions out to try and "not to influence future negotiations."

"Any forecast is based on assumptions, either good or bad," Young said. "People did look at one graph and say 'ah-ha!' It's all about how people receive it."

Had the quarter-point decrease taken effect, as Young calculated, it would have added 1% to 2% to the payroll contribution percentages Costa Mesa would owe nonpublic safety employee pensions, and 2% to 3% for police officers and firefighters.

Ultimately, CalPERS chose not to lower the rate that year.

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'Draw two lines'

Joe Nation, a professor of public policy at Stanford University, said the city should have examined more than the worst-case scenario.

"It's not that hard to draw two lines [on a graph]," he said.

However, "all the signs were on the table that they should have reduced it then," Young said, noting that all discussions with CalPERS representatives were done over the phone.

"Was it bad info from [Cal]PERS? Maybe," he said. "It's easy enough to look at that after the fact."

In November 2011, firefighters stopped most of their pension contributions. Police officers are scheduled to stop in February 2015 and nonpublic safety workers in February 2013. However, future contributions can still be bargained.

Nation said the city's conservative estimates, particularly with CalPERS rates, are nonetheless a wise way to budget.

"There are some back-of-the-envelope calculations that even CalPERS uses" for contribution rates, he said. "If you miss [the projection], you dig that unfunded liability hole deeper… [or] there's the hopefully approach … let's roll the dice, let's gamble, and let's hope we hit that number."

Earlier this year, CalPERS dropped its return rate to 7.5%, which will affect cities in fiscal 2013-14.

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Unfunded liability

Costa Mesa's unfunded liability — the amount not covered by CalPERS to cover current and future employee pensions — is about $131 million.

When CalPERS' lowered return estimates take effect, "darned if it [won't be] pretty close to my original projection," Young said.

Council critics contend that CalPERS' method of "smoothing" fund gains and losses over decades is a solution to avoid drastic actions.

Norris, the CalPERS spokeswoman, said smoothing allows city contributions to remain predictable and manageable.

The effect of the latest return rate reduction will be "immaterial, a very small increase," she said.

The council majority is uncompromisingly skeptical of CalPERS.

"It's a bunch of puffery," Righeimer said. "We've been making up a number for too many years, and it's going to come home to roost."

mike.reicher@latimes.com; joseph.serna@latimes.com

Twitter: @thedailypilot