Arcadia's Unfunded Liability

By Mary E. Dougherty

While Arcadia is in a better position than many other cities, we should begin to address the issue of unfunded liability for pensions and post retirement health care benefits. Talking only about the budget surplus and not the unfunded liabilities leads to unrealistic expectations for greater expenditures and higher levels of service. We should not saddle our children, grandchildren and future generations with solving this problem.

Further, PERS used unrealistic assumptions in their reporting. PERS used a projection of 7.75% income from investments, when their actual income from investments had been in the neighborhood of 1-2%. PERS just recently lowered their projection of expected income from investments to 7.5%. Why didn't they make it a more realistic figure? If they had done so, many cities would have had to declare bankruptcy, since that would mean they would have to increase their funding to the retirement system beyond their ability to pay. That means that Arcadia's liability is even greater than what was reported.

Now let's look at the level of funding compared to expected pension funding in private industry. The report states that Police and Fire pensions are 77% funded, and funding for other employee pensions is 82%. The expectation in private industry is 80% funding, so that doesn't look too bad until you realize that the funding level is way overstated because of the unrealistic assumptions of PERS earning levels. Also, the report notes that the Post-Retirement Health Care is 0% funded.

Arcadia did attempt to address the problem of its unfunded liability by no longer paying the employees' contribution to the pension fund. However, to make that change the City negotiated a 9% increase in police and fire salaries and a 7% increase in other employees' salaries over a three-year time period. Some would say this was probably a good business decision. It would seem that these pay increases would only make the unfunded liability greater, and thus would dig the hole deeper. The next report from PERS won't be out for two years, so hang on and we'll find out!

The City also created a Second Tier retirement system for New Employees. Under this system, when new Police & Fire employees retire they will get 3% at age 55, instead of 3% at age 50; other new employees will get 2% at age 60 instead of 2.5% at age 55, for each year of service.

Added to this complex set of issues is the fact that the City projects that a third of its employees will retire within the next 10 years. To complicate the problem further, retirement is based on the highest paid year + typically the last year of employment. So, the amount of retirement that must be funded from General Fund monies each year depends upon the length of employment and the pay level at the time of retirement of each retiree. That is whether or not the individual is an Arcadia City employee at the time of retirement, or has moved on to some other jurisdiction to a job at substantially higher pay.

There are so many variables in this equation that my head is spinning just thinking about it! How about yours?

Admittedly Arcadia is in a better position than many or most other cities; however we should not ignore this problem. Talking only about the budget surplus and not the unfunded liabilities leads to unrealistic expectations for greater expenditures and higher levels of service, and kicks the can down the road to a future generation. Let's start a discussion of how to address this issue and not saddle our children, grandchildren and future generations with solving this problem.