There are positive things happening in Del Mar. Construction projects, including the 21st Street Pump Station, the Beach Safety Center, and improvements along Camino Del Mar are being completed. We have a very comprehensive Village Specific Plan which will go before the voters in November for approval. And we are financially strong, with balanced budgets. All of these things represent steady progress and are the result of hard work by community groups and our city employees.
But there is a big issue that is facing the city that may not have grabbed your attention.
It is the city’s pension obligations to its employees, how these liabilities will impact the financial health of the city, and how to correct the problem over the coming years.
Like many other cities throughout the country, Del Mar offers its employees a “defined benefit” retirement package, which basically says that the city will pay a retired employee an annual payment based on a negotiated formula. The negotiated formula is: number of years worked x compensation at retirement x 3%. As an example, an employee earning $80,000 at retirement, who has worked 25 years would receive at retirement $60,000 per year ($80,000 x 25 x .03).
If the employee retires at age 60 and lives another 20 years, the city is obligated to pay a benefit of $1,200,000. And this amount grows annually based on the cost of living.
To fund these benefits, cities in California contribute to the California Public Employees Retirement System (CalPERS). Del Mar pays an assessment to CalPERS each year based on the projected retirement benefits the city has to pay in future years. CalPERS then takes the money and invests it in stocks, bonds, and real estate, hoping to grow the funds and earn enough money to meet retirement obligations of each city. During boom times, when the stock market is doing well, CalPERS has been able to grow at about 7.8% per year. But during the last 10 years, the investment returns have only been 5.3% per year. And that is the problem. The growth of the money set aside to pay city pensions has not kept up with the “defined benefit” obligations the city has promised its employees. The result …..CalPERS pension funds for Del Mar are not fully funded.
Seeing this looming problem, the City Council asked the Finance Committee back in June of 2011 to analyze the magnitude of our pension problem and make recommendations on strategies the city could implement to meet our retirement obligations to our employees while still maintaining the long term financial health of the city. At the City Council meeting on April 2, the Finance Committee reported their findings to council.
What is the magnitude of this under-funding of the pensions? Per CalPERS data from October 2010, Del Mar’s three pension funds have funding levels of 63%, 65%, and 66%. Using CalPERS data, the Finance Committee estimated that the unfunded liability of Del Mar’s pensions range from $9.9 million to $16.4 million, depending on whether you assume CalPERS earns 7.75% or 6.2% on their investments in the years ahead. That is 1.0 to 1.5 times the amount of the city’s annual general fund revenues ($11 million).
These estimates, although not exact, give us the magnitude of the problem. In either assumption, the number is huge. After hearing their report, the City Council directed the Finance Committee, city staff, and the city attorney to work together to investigate feasible strategies to reduce this liability and make our city pensions whole for the long term.
And let me quote a portion of the Finance Committee report of April 2. “It is tempting to hope that the good old days of high investment returns will sweep in and save the day. A hope is not a strategy. It seems much better to get in front of this undeniable problem and solve it now through negotiation combined with careful and realistic planning rather than continue on an unsustainable path which can only lead to unfortunate and unproductive disputes, with everyone losing”. We owe it to our employees and community to avoid that outcome.
I want to thank Jim Eckmann and his Finance Subcommittee for doing this analysis for the community. This is the first step in addressing a very difficult problem.