Sorry to keep banging on the drum of California municipal finance (here and here for a few of the bankruptcy beats) but the news keeps coming. Reuters reports here (note: may be behind a paywall) that the City of San Jose (which is not in bankruptcy) can't afford to quit paying CalPERS (short for the California Public Employee Retirement System) because the termination charge is too high.
The article does a nice job of explaining why a municipality that quits paying into a defined-benefit retirement plan must pay more than one that continues to contribute. In brief, employers who continue to pay can later be assessed a "make up" charge if the plan's investment assumptions turn out to have been too rosy. Conversely, it's now or never for an employer like San Jose that wants to quit. CalPERS must get every penny up front that it believes it will ever need to pay the benefits to the covered employees.
The dispute here is over why CalPERS assumes a 7.5% rate of return on its investments for current contributions but only a 2.5% return on the contributions made by cities that opt out. The higher the rate of return, the lower the payments and vice versa. San Jose intimates CalPERS is unfair and that the city is being punished for the temerity of withdrawing.
But here's where the article makes a point that is often ignored: Maybe instead of getting overcharged with a too-high termination payment, the current payers are being undercharged. Indeed, I'm confident this is the case. Go here for a justification for my opinion that municipal pension plans are woefully underfunded. While the post is about state pension plans, I'm sure the same is true for cities as well. And be sure to follow the embedded link to Pew Center report titled "The Widening Gap Update" that provides the actuarial backup for this time-bomb.
If San Jose really wanted to reduce the termination payment CalPERS claims would be due, it would need to terminate the pension plans for its retired city council members. Ain't gonna happen and the reason is not (only) political. The only way a city can unilaterally modify a contract going forward, as by, say, reducing retiree benefits, is for it to seek bankruptcy relief under Chapter 9, and given the current experiences of San Bernadino and Stockton, that route would cost substantially more that what CalPERS wants.
Thus, the real winners in San Jose are the retired city council members, not CalPERS, and certainly not the city's taxpayers. One can only hope that citizens of other cities are quick to oust government "servants" who feather their own nests.
The article does a nice job of explaining why a municipality that quits paying into a defined-benefit retirement plan must pay more than one that continues to contribute. In brief, employers who continue to pay can later be assessed a "make up" charge if the plan's investment assumptions turn out to have been too rosy. Conversely, it's now or never for an employer like San Jose that wants to quit. CalPERS must get every penny up front that it believes it will ever need to pay the benefits to the covered employees.
The dispute here is over why CalPERS assumes a 7.5% rate of return on its investments for current contributions but only a 2.5% return on the contributions made by cities that opt out. The higher the rate of return, the lower the payments and vice versa. San Jose intimates CalPERS is unfair and that the city is being punished for the temerity of withdrawing.
But here's where the article makes a point that is often ignored: Maybe instead of getting overcharged with a too-high termination payment, the current payers are being undercharged. Indeed, I'm confident this is the case. Go here for a justification for my opinion that municipal pension plans are woefully underfunded. While the post is about state pension plans, I'm sure the same is true for cities as well. And be sure to follow the embedded link to Pew Center report titled "The Widening Gap Update" that provides the actuarial backup for this time-bomb.
If San Jose really wanted to reduce the termination payment CalPERS claims would be due, it would need to terminate the pension plans for its retired city council members. Ain't gonna happen and the reason is not (only) political. The only way a city can unilaterally modify a contract going forward, as by, say, reducing retiree benefits, is for it to seek bankruptcy relief under Chapter 9, and given the current experiences of San Bernadino and Stockton, that route would cost substantially more that what CalPERS wants.
Thus, the real winners in San Jose are the retired city council members, not CalPERS, and certainly not the city's taxpayers. One can only hope that citizens of other cities are quick to oust government "servants" who feather their own nests.
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