By Jim Eckmann, Chair, Pension Subcommittee of the Finance Committee, City of Del Mar
- What kind of retirement system does the City provide for its employees?
The City provides a “defined benefit” plan; this means that at retirement age the employee receives a specified percentage of the full-time pay received at the end of his or her career. The City then contributes each year an amount that hopefully will be sufficient to meet that number.
- How are the retirement benefits estimated?
Actuaries take into account the age of each employee, salary level, years remaining to retirement age and reduce that number to a present value needed to fund each year. The City, like dozens of local agencies, is in “retirement pools” managed by the California Public Employees Retirement System, called “CalPERS” and CalPERS does all those calculations.
- So the idea is to predict benefits several years, or even decades, into the future and fund over time starting when a City employee starts work?
- Isn’t that difficult, or even risky, to do?
Yes. The annual contributions are, of course, invested. So a key variable is what rate of return the annual amounts will earn over time. Actuaries assume or estimate certain rates of return and if the actual rate of investment return is less than the estimated the retirement funds can fall into “underfunded” quite quickly.
- Does this type of retirement system exist in the private sector?
The “defined benefit” system has been all but eliminated in the private sector. A Stanford University research institute says that 7 percent of private employees have “defined benefit” programs as of 2009, down from 62 percent in 1975.
- What if the calculations are wrong?
Then the retirement funds can be underfunded, and substantially so. Rarely are they overfunded, though that was true a few years ago when investment returns were much higher.
- Who checks CalPERS calculations?
There are no monitors or checks. CalPERS is a separate entity, with a separate governing board of directors. In 2011 its practices came under scrutiny by The Little Hoover Commission, an nonpartisan state agency and by the Stanford Institute for Economic Policy Research, also nonpartisan. Their reports were very alarming, not only about the present levels of underfunding but the predicted future funding needs for public employees’ retirements.
- Is the City’s retirement funding in the hole, or ahead, or right where it should be?
Well, the good news is we have paid each year the contributions calculated by the CalPERS actuaries. The most recent reports from CalPERS for the fiscal year ended June 30, 2010, states that we are only about 67 percent funded in the three retirement pools of which our employees are members. In the private sector that would mean a “distressed” condition.
- How large is the unfunded amount for Del Mar alone?
Only a rough approximation can be made, so the range would be $10 million in the hole right now up to $16 million, depending on the rate of return we assume.
- Is this unique to Del Mar?
Not at all. It’s a big issue in San Diego and an election is coming up to change the pension system there. The 67 percent funding mentioned above is common to CalPERS and to all the pool members of CalPERS. San Jose laid off about one-fourth of its employees and is still $3 billion underfunded. And the state employees programs, again depending on the rate of return assumed, is up to $500 billion underfunded, according to the Stanford report. CalPERS can point to recent higher actual rates of return so the question is “will those high returns last?”
- What are the next steps?
City staff is working with the Finance Committee and the City Council to investigate options. Legal issues exist, and the City is party to union agreements which also play into the mix. The hope is we can find solutions that take into account our employees’ interests as well as the financial health of the City. There is no quick fix.