Commentary: Some FAQs about Costa Mesa pension liabilities

Editor’s note: Attorneys John Stephens and Tim Sesler, two members of Costa Mesa’s Pension Oversight Committee, asked the Daily Pilot to publish the panel’s findings and recommendations. The committee put together a series of three articles, titled “Fast Facts,” that seek to explain and simplify the complex subject matter to residents. This is one installment in a series.

Frequently asked questions (FAQs) about Costa Mesa employee pensions

The Costa Mesa Pension Oversight Committee has been investigating the status of our city pensions since April 2013. Following is a compilation of frequently asked questions and a summary response to each. Additional information can be found on the committee webpage at .

Much has been said about Costa Mesa employee pensions, is there really a problem?

Like many state, county and municipal pension plans, Costa Mesa faces a serious pension shortfall. A recent non-partisan analysis indicated that Costa Mesa owes retirees and currently working employees about $600 million in pension benefits. Unfortunately, the savings for these payments only totals about $372 million. The difference, between what is owed and what is saved, is called an “unfunded liability.” Doing the math, Costa Mesa has an unfunded liability of $228 million, and yes, this is a serious problem.

How did Costa Mesa get into this situation?

There are two primary causes for the problem: Increased pension benefits awarded to employees and investment performance that was below the California Public Employees’ Retirement System (CalPERS) projections.

The increased benefits were awarded to employees several times since 2000. In collective bargaining with the city, increases were granted for future service and in certain instances, retroactively for past service. In hindsight, it appears that in some cases, the financial analysis supporting the increased benefits was either flawed or did not adequately evaluate the potential risks of the increases.

While poor investment performance by CalPERS can be associated with the recession, many CalPERS critics claim numerous assumptions used by CalPERS actuaries (the financial professionals who calculate the value of investments and future pension payouts) are overly optimistic.

How could the $228 million in unfunded pension liabilities affect the city budget?

Costa Mesa’s 2012-13 General Fund budget was $103 million of which $15 million (about 15%) was paid for pension benefits. The General Fund is essentially the city’s operating budget, which Ipays for all of the costs related to the ongoing maintenance of the city, capital improvements and all employee salaries and benefits. When comparing our unfunded pension liabilities of $228 million to our General Fund, the unfunded liabilities are more than two times our annual General Fund budget.

Have pension payments always had such a major impact on the city budget?

No. As unfunded liabilities have increased from $9 million in 2001 to today’s $228 million, the growth in pension expense as a percentage of the city’s budget has also grown. For reference, in the fiscal year 2002-03, the pension expense consumed just under 10% of the budget. In the fiscal year 2012-13, the pension expense consumed nearly 15% of the budget. Working with CalPERS and city Finance Department projections, the Pension Oversight Committee estimates that for fiscal year 2022-23, pension expense will consume at least 22% of the budget.

Who should be concerned about the pension problem?

Every current and retired city employee, and every Costa Mesa resident, should be concerned about the problem. While city pensions are guaranteed by state law, increasing pension payments will place significant financial pressure on the city.

Current employees, who already contribute certain amounts to their pensions, will likely be asked to contribute more money to help cover the cost. With the city paying more to cover pension obligations, there will be less money available for wage increases. In negotiation with the city, hard choices, such as increasing the retirement age, reducing pension cost of living increases, or even changing the structure of the pension plan, will have to be considered.

Future employees are already affected by a recently enacted state law (PEPRA) that increases the retirement age and caps pension payments. However, these reforms apply only to newly hired workers with no work history with any other CalPERS agency. Savings from this legislation is many years away and these savings by themselves, will not address the depth of the unfunded liability issue.

Citizens should be prepared to consider tax increases that will fund payments on the unfunded liability. Some tax increases suggested include a city sales tax or an increase in the property tax. Neither of these taxes can be imposed without a vote of the citizens, but absent their approval, citizens will likely be faced with reduced city services at all levels in order to cover the pension liabilities.

Is the pension problem likely to get better or worse without significant action?

Without additional and significant change, this matter will likely get even worse. CalPERS is subject to new governmental reporting standards that require more stringent reporting of invested assets and most importantly their associated liabilities. These new standards will also result in additional increases to the annual pension payments made by the city. Beyond the new reporting standards, CalPERS actuaries also recently recognized that retirees are living longer than they previously projected. This means pensions are being paid for a longer period of time, and the city must fund these additional payments.

Is Costa Mesa in this problem alone?

No. Statewide most public employers are members of CalPERS. Since they all use the same financial basis for their pensions, most face similar financial burdens. There are very few wealthy cities, counties or agencies that have the financial capacity to make the increased payments. Nationally, states with strong unions and generous pensions face similar underfunding of pension plans. Numerous states that recognized the burden of such generous pensions have modified their retirement plans and they appear to be on stable financial ground.

What can be done to solve the problem?

Solving the problem will take a unified effort by all interested parties, but that is much easier said than done. To truly solve the unfunded liabilities it will require changing state laws, likely reducing pension benefits, and increasing taxes. The political climate for such major change is difficult to muster, but those who continue to ignore the hard realities of the matter will be destined for greater financial distress.