Roseville CFO addresses CalPERS shortfalls

City will repay about $16.6M in 2017-18FY that agency undercharged
By: Graham Womack, Staff Writer
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In talks last fall with its labor unions, the city of Roseville won a concession getting new hires onto a lower salary schedule.

The reason the city sought this concession: The California Public Employees Retirement System allows cities to pay two-thirds of its future retirement costs, provided that CalPERS receives approximately 7 percent on investments.

When returns fall short, as they have in recent years, CalPERS requires cities to make up the shortfall—what it refers to as cities’ unfunded liabilities. For the 2017-18 fiscal year that begins July 1, Roseville expects to send just over $32 million to CalPERS, including $16,563,631 in unfunded liability payments, city spokeswoman Megan MacPherson said in an email.

It’s a precarious situation in a city where there’s talk of service cuts in the next year, though Roseville leaders say there isn’t a looming pension crisis. City CFO Jay Panzica said Roseville is currently funding 68.5 percent of its retirement costs with CalPERS and plans to get to 100 percent over the next 20 years.

“There’s a plan in place,” Panzica said. “If we pay our bill every month, we’ll be fine.”

To Pete Constant—a Roseville resident, former San Jose city councilman and executive director of Roseville-based nonprofit Retirement Security Initiative—Panzica’s line of reasoning doesn’t suffice.

Constant tabs Roseville’s total unfunded liability at $273 million—assuming CalPERS gets a 7.5-percent rate of return, which he said the agency hasn’t gotten in years. In July 2016, the agency’s chief investment officer Ted Eliopoulos said in a written statement that CalPERS had received a 0.61-percent rate of return over 12 preceding months.

Eliopoulos pledged in his statement that CalPERS would continue to manage its “investment portfolio in a cost-effective, transparent, and risk-aware manner in order to generate returns for our members and employers.”

In December, the agency opted to lower its long-term, projected rate of return from 7.5 percent to 7 percent.

Whether CalPERS can deliver on its revised rate could shape city services in Roseville for decades to come while the city repays its unfunded liabilities. At a 4.5-percent rate of return, Constant said, Roseville’s liability jumps from $273 million to $700 million. With more conservative calculations, Constant figures the debt as high as $1.6 billion.

“The real discussion that the CFO and the city council need to have is, what risk are we willing to take as a city?” Constant said. “Because if we continue to go forward, make our payments based on these assumptions that we know are wrong, that we believe are wrong, then we’re going to keep adding to our debt.”

City leaders stressed that Roseville consistently paid its bill with CalPERS during the recession when the city deferred maintenance on some properties and underfunded some capital improvement projects. But city leaders say Roseville didn’t short CalPERS beyond what the agency allows cities to underpay.

Legally, Roseville has to contribute something for retirement costs.

“I don’t believe we even had the option to underfund the PERS payments that were due,” MacPherson said.

Panzica said that with CalPERS, much is out of Roseville’s control.

“CalPERS is really a large actuarial company that invests money,” Panzica said. “No, we can’t be smarter than them, we can’t invest money better and we can’t come up with the rates. So we can’t affect the formula. But we could choose to pay faster.”

Panzica questions the need to pay early, though.

“It’s already been addressed, because there will be an acceleration in the next several years to get up to speed,” Panzica said.

One point of agreement between Panzica and Constant—both men say Roseville’s unfunded liability payments will rise.

Panzica said CalPERS had forecasted for several years out and that the unfunded liability amount is “going to continue to increase for at least the next four or five years.” Constant sent figures via email stating that Roseville’s unfunded liability payments would rise to more than $28 million by the 2022-23 fiscal year.

Panzica acknowledged that Roseville is currently paying back the highest amount CalPERS has ever required of it. This comes at a time when city leaders have acknowledged a looming $2-3 million shortfall in next year’s budget, partially relating to lower-than-expected sales tax receipts.

Asked where the city might get money to pay CalPERS more than the 68.5 percent the agency requires, Constant said, “I don’t know.”

In the meantime, Roseville continues to look to cut costs. The city will convene an advisory committee of residents this summer to review possible service cuts.

Panzica said there was “not really” any talk of layoffs for city staff.

“I really haven’t looked at reducing staff yet, because they’re already operating at a (much) higher level of efficiency than the experts believe they should be,” Panzica said.

The worst-case scenario Constant envisions with Roseville’s pension situation would be something akin to what happened in his former city where, he said, rising pension expenses eventually consumed much of San Jose’s payroll.

“We saw what happened in San Jose,” Constant said. “They had to cut services. They went from 8,000 employees down to 5,000… Police force went from 1,450 down to 1,100. These are decisions you don’t want to have to be making.”