FAIRFIELD — Accounting switches being made by the California Public Employees’ Retirement System will likely mean higher payments for Solano County and local cities.
That in turn could leave local governments having to find more money, make cuts or do fewer service expansions, get employees to pay a higher share of retirement costs or use a combination of options to make up the difference. The big question is how much money will be involved.
“It won’t be small change,” Solano County spokesman Stephen Pierce said.
CalPERS provides the pension and health benefits to more than 1.6 million public employees, retirees and their families and for more than 3,000 employers across the state. It receives money through its investments, employer contributions and member contributions. Its unfunded liability is a reported $87 billion. The goal is cover that and future costs in 30 years.
The agency has used what it calls a “smoothing” method to reduce volatility in employer contribution rates. But CalPERS investments have seen large fluctuations in recent years, including a $57 billion loss in 2008-09.
Now CalPERS wants to smooth employer contribution rates over five years instead of 15 years. It’s an accounting change that will make a difference for counties, cities and school districts.
Solano County across all its various funds pays CalPERS about $23.8 million annually, Pierce said. He didn’t know Wednesday how much this might increase once the changes take effect in the 2015-16 fiscal year that starts in July 2015, adding there’s no simple formula.
“How it may affect one organization compared to another may be different,” Pierce said.
The county will need an actuary to figure out its increased costs, he said.
Solano County already faces an estimated $14.7 million general fund structural deficit next fiscal year, though it has savings to cover the amount. Left unchecked, this structural deficit could grow to $18.6 million in 2014-15 and $20.9 million in 2015-16, a county report said.
Pierce said higher CalPERS costs are included in such budget projections. The question is whether the estimates are high enough to cover the planned accounting changes. Another variable is how much an improving economy might send more money into county coffers to help cover CalPERS increases.
Amid all the unknowns, Pierce could make one certain statement: “It’s not an additional cost we want to have.”
Local cities are also preparing for the changes.
“We’ve been tracking this issue for a couple of months,” said Jeremy Craig, Vacaville’s director of finance and technology.
Craig described the CalPERS issue as a cost escalation that the city can’t control. He said the city is a few years from feeling the financial pinch itself, but that it will hurt when it hits.
“Any new increase in cost to the general fund is just more stress,” he said. “Our pace of revenue growth has not come back from the recession, so any cost increases like this that are above the growth rate are going to put stress on the general fund.”
David White, deputy city manager and director of finance for Fairfield, said CalPERS is being open about what it is trying to accomplish with the change. That means higher rates in coming years.
“We should expect some very significant increases in rates during the ramp-up period,” White said Wednesday. “That’s been told to us, clearly.”
White the next step for the city is to review all of the information that CalPERS has released and make cost estimates so the city can revise its long-term budget projections. Other government agencies will likely do the same. Eventually, White said, CalPERS will let each agency know how much its annual rates will increase.
“All of us are in the same murky boat,” White said.
CalPERS rates were already set to increase to recoup losses from the Great Recession and its aftermath.
“This will be an additional increase,” White said.
Suisun City officials felt they didn’t have enough information on the change to comment, City Manager Suzanne Bragdon said. Rio Vista Finance Manager Mary Lee Sharer said she couldn’t comment on how the changes would affect the city until city staff does an analysis.
Fairfield-Suisun School District Assistant Superintendent Kelly Morgan said she first read about change in a The Sacramento Bee and had that familiar feeling from past years.
“Oh great, another cut to education,” Morgan said. “It’s terrible to feel that way. It certainly doesn’t make me happy.”
She said it’s far too early to know how the changes set for 2015-16 will affect the district. At some point she will get advice from School Services of California and present the information to the board of trustees, Morgan said.
With any luck, she said, the financial situation will improve and the district could somehow absorb any extra costs. One of the alternatives would be to bargain with labor groups, which in the past has caused tension among the ranks.
The news comes just as the district’s finances are improving and it looks as no cuts will be made this year. Other financial obligations such as an increase in CalPERS could change that, she said.
“I think things are getting a lot better. But we still aren’t anywhere close to where we were five years ago,” Morgan said.
Kari Sousa, the Vacaville School District associate superintendent of business and administrative services, said that school districts are in a unique position with CalPERS. The state froze the rate for schools at 13.2 percent. Currently the district pays 11.4 percent to the retirement system but the state takes the remainder. It adjusts dependent upon the CalPERS figure, Sousa said.
“It’s created a stabilization for schools,” Sousa said. “For years and years (districts) have been able to budget that it’s going to be 13.2 percent. But it’s created an inherit volatility to the state budget.”
She’s heard numbers that could bring the employer rate up to 18.9 percent, but she’s uncertain what the reality will be, Sousa said. That depends on a host of factors, including the economy.
“We do have a certain amount of rate insulation because of that arrangement with the state,” she said. “I think there are going to be a lot of factors that will come into play before it affects the schools.”
A CalPERS report said the expected results of the change are higher peak and median employer contributions over four years, but lower contributions in the long-term. The change would begin in 2015-16 for counties and cities and 2014-15 for the state pools and school plans, a CalPERS report said.
More rate hikes may be in store. CalPERS is also revisiting its assumptions on retiree mortality, White said, because people are living longer after they retire. That review is designed to make sure the retirement system is properly funded to account for current and future life expectancies.
“Today’s action is not the only potential rate increase in coming years,” he said.
White described the CalPERS changes as the latest in a series of economic realities cities and other local governments have faced in recent years. It’s not the three R’s of education, but rather the four R’s of California finance: recession, redevelopment, realignment, retirement.
“Who knows what the fifth R will be,” White said.
Susan Winlow, Danny Bernardini, Glen Faison, Amy Maginnis-Honey and Heather Ah San contributed to this report. Reach Barry Eberling at 427-6929 or [email protected] Follow him on Twitter at www.twitter.com/beberlingdr.