The California Public Employees’ Retirement System has fallen short in recent years with investments aimed at financing money needed to pay retirees. Cities in San Mateo County, including Pacifica, face annual shortfalls as a result, said City Manager Kevin Woodhouse.
The typical pension liability contains the amounts owed for those still working but not yet retired, those retired and drawing retirement benefits, and inactive employees who have not yet retired but who have transferred to another agency that delivers CalPERS benefits. Pension assets accumulated by employee contributions and investment earnings is known as the market asset value of the pension. The difference between the pension liability and the market asset value represents an unfunded liability, Woodhouse said.
Pacifica’s unfunded liability was $47.1 million as of June 30, 2017. As of 2019, the city paid retirement benefits to 355 retirees and has to accrue pension liability for an additional 185 employees. The city contributes a share of the pension and employees contribute the rest.
CalPERS manages city contributions and has projected a 7.5 percent rate of return on the contributions of the city and its employees. However, for the last five years, that rate of return was 6.3 percent, Woodhouse said.
A CalPERS asset liability management process started in February with the goal to balance the expected cost with the expected future investment returns. Final approval of that process is expected by November to be effective in July 2022.
As the result of the CalPERS policy change, staff estimates the city will incur additional pension expenses averaging $436,000 annually over the next five years, dropping to $154,000 in the successive five years. That will have to be factored into the budget development process.
“This is a big issue that CalPERS is looking at, at the asset liability management plan,” said Woodhouse.