It’s Time to Tackle the Long-Term Challenge of Pensions

October 19, 2018 5:29 PM
by Rick Cole

It’s time to tackle the long-term challenge of pensions.

Why now?  After all, the economy is strong.  CalPERS, the State agency which administers Santa Monica’s employee pensions, earned 8.6% on its investment portfolio last year, the second year in a row that it exceeded its 7% annual projection.  Santa Monica’s balance sheet is also strong – our City’s net assets are the second highest per capita in Southern California (after Beverly Hills.)  We have more than $300 million in General Fund reserves. We have already contributed $76 million in advance payments toward our pension liabilities.  In Southern California, only Newport Beach has made a commitment of similar magnitude – and the vast majority of cities are struggling simply to keep up with their current pension payments.

The reason to act now is so we won’t have to face a crisis later.  While there are creative ideas for addressing the issue, there are only four ways to solve a pension shortfall: increase payments, improve investment returns, reduce benefits – or some combination of those three.  What’s even more urgent is that the longer you wait to do any of them, the more it will cost to do them later.

So we won’t wait. 

As City Manager, under our City Charter, one of my principal duties is to “keep the City Council advised of the financial condition and future needs of the City and make such recommendations as may seem desirable.” For that reason, I’ve selected an 11 member advisory panel of thoughtful members of our community and our workforce to comprehensively study the challenge and identify steps I can recommend to the City Council to address it.

Right now, based on the most current CalPERS projections, we have an “unfunded liability” of approximately $461 million.  That’s not an exact number – it’s an estimate based on CalPERS earning an average of 7% on its pooled investment portfolio.  While that is reasonable based on CalPERS record over the past several decades, many investment experts think this may be too optimistic going forward.  Another deep recession could complicate matters considerably –not only would a downturn send that estimate soaring, but falling local revenues would make it more difficult for cities like Santa Monica to pay for the growing shortfall.

No one who is paying close attention to this problem believes there are simple answers.  The problem is, few people are paying close attention.  So that’s why I’ve chosen people with a range of views and backgrounds to take a long and hard look at the numbers – and the alternatives. 

I am optimistic that the leadership and good will of the advisory committee will help build consensus to ensure both the long term fiscal sustainability of our City government and the services we provide our community – and to also protect the benefits earned by the workforce that delivers those services with excellence and pride.

I’ve selected seven local residents from among the many who responded to my invitation to serve.  The first four of them bring experience from their service on the Compensation Study Citizen Advisory Committee.

I’ve also asked our labor unions to propose four members representing our workforce.  Like most cities, Santa Monica has separate pension accounts for sworn public safety and the civilian employees.  Representing the Public Safety sector will be Sgt. Matt Rice, the former president of the Santa Monica Police Officers Association and Firefighter Dominick Bei, a member of the Board of Local 1199.  Representing the Coalition of Santa Monica Employees will be City Traffic Engineer Henry Servin, vice president of the Management Team Associates and Permit Specialist Sheri Batalla, president of the Municipal Employee Association.

The first meeting will be next month.  They will begin with a thorough review of the financial and legal aspects of Santa Monica’s pension challenge.  Then they will get an overview of the City’s operating and capital budgets and fiscal status.  Then, with the help of an expert hired by the City, they will work with our Chief Operating Officer Katie Lichtig, our Chief Financial Officer Gigi Decavalles-Hughes and me to analyze our options and work together to find consensus on common sense steps we can take together as a city.  I hope to bring those recommendations to the City Council in January to help shape our next two-year operating budget – which must be adopted by the end of June.

Being pro-active on this complex and controversial issue won’t be easy.  But it is the right thing to do.  I am optimistic that the leadership and good will of the eleven members of the advisory committee will help build consensus to ensure both the long term fiscal sustainability of our City government and the services we provide our community – and also to protect the benefits earned by the workforce that delivers those services with excellence and pride.

Authored By

Rick Cole
City Manager