Investment Flop Increases City Pension Deficit

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Unfunded Liabilities

City News Editor Sarah Springfield talks with Yousur Alhlou about unfunded liabilities in this year's pension program.

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A $253 million debt in employee pension funding looms over the city of Berkeley after investments made by a state-wide pension agency flopped, necessitating a re-evaluation of the city's contribution to employee benefit funds.

In a special meeting held by the Berkeley City Council Tuesday night, the city manager argued that the $200 million loss on California Public Employees' Retirement System investments between 2009 and 2010 will result in drastic changes to future city contributions to pension plans, drawing further on the city's limited budget that is already plagued by an $11.5 million deficit.

Although the city's CalPERS pension plans - under which most city employees collect their pensions benefits - are funded at a relatively high rate of 85 percent, increases in pension costs per employee will make it increasingly expensive for the city to continue funding benefits at low rates to employees, according to City Auditor Ann Marie Hogan.

"This is a deep recession, and the cumulative impact of the economic downturn combined with higher medical costs, and of course then higher retiring costs, have created a huge gap in our long-term employee benefits need," City Manager Phil Kamlarz said at the meeting.

According to the audit report presented by budget manager Teresa Berkeley-Simmons on Tuesday, the increase in CalPERS pension rates signifies an approximately $8 million increase for the Berkeley Police Department alone in fiscal years 2012 and 2013.

In fact, according to a case study outlined in the report, if CalPERS decreases its assumed return on investment by even 0.25 percent, the city would be forced to fund an additional $750,000 in fiscal year 2013 plus $951,000 more the next year to bridge the gap for department pensions.

"This is an example of how sensitive the rates and costs are to simple assumptions," Kamlarz said at the meeting. "The rates are volatile."

To foot the bill of these increases, though, would detract from funds available for other city services. However, choosing not to contribute more to the plan in the coming years will only pass the liability on to future city councils and residents as it continues to grow.

For example, a 7.2 percent increase in contribution to the pensions fund would help decrease the deficit, but the city would have to withdraw cash from city service funds - up to $1.6 million.

"That's where the trade-off comes in," Kamlarz said at the meeting. "You have to find the money someplace."

While many factors have to be considered in the near future, short-term measures are already being implemented. According to Kamlarz, 75 job eliminations - beyond the 130 positions recently cut - are scheduled come March.

Still, Hogan argues that in comparison to cities across the state, "Berkeley's problem isn't that bad."

To cope with the unfunded liabilities, city departments have implemented mandatory furloughs and reduced city services. A resolution in the near future could also encompass decreased total compensation - salary, benefits or both - or alternative investment options.

"They are lucky to have a job," Mayor Tom Bates said at the meeting in response to suggestions that employees themselves may have to pay more into the fund.

Nonetheless, all possibilities will be considered as the budget deadline approaches at the end of June, according to city spokesperson Mary Kay Clunies-Ross. Primary negotiations on police contracts will begin on Jan. 31.

"The only thing that will reduce how deep the cuts to employee compensations are is finding ways to do things more efficiently, safely and effectively," Hogan said.


Yousar Alhlou covers city government. Contact her at [email protected]

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