Member of Santa Monica Audit Advisory Group Urges City to Pay Down $461 Million in Unfunded Pensions by 2030

By Niki Cervantes
Staff Writer

February 28, 2018 -- The City of Santa Monica is being urged to retire a $461 million debt for unfunded employee pensions in the next dozen years, imposing across-the-board freezes on salaries and/or hiring to pay for the move.

The “2030 Challenge” -- outlined in a letter by a member of the Community Compensation Advisory Committee that also calls for cutting capital expenditures -- goes before the City’s Audit Subcommittee during its meeting tonight at 6 p.m. at the Santa Monica Institute Training Room, 330 Olympic Drive, 2nd Floor Plaza Level.

It would require the City to set aside $40 million a year for the debt, tripling the paydown.

Last June, the City made a a one-time payment of a record $45 million to reduce the looming bill for unfunded City employee pension liabilities ("City Council Approves Record Payment Toward Santa Monica's Unfunded Employee Pensions," June 15, 2017).

Tonight’s main piece of business is consideration of an outside audit analyzing City employee salaries and benefits, as well as the level of performance of city services.

Tackling the City’s unfunded liability was not part of the Moss Adams audit.

Still, the audit’s findings of unusually big spending for personnel intensified concern about the looming pension crisis among members of a citizen’s panel working with the Audit Committee.

The proposal to be issued at tonight’s meeting urges the City to retire the entire debt by 2030, instead of stringing it out over 30 years, as the City is now doing.

“The rational is simple: our generation incurred this debt; it is ours to pay,” said Laurence Eubank, the Compensation Study Advisory Committee member who authored the letter.

Huge unfunded pension commitments are a crisis hitting governments at all levels in California, as well as elsewhere. The issue, at least in California, stems from decades of employee retirement commitments without fully setting aside the money for them.

In the beginning, the roaring Stock Market provided most of the bounty need to fund pensions through the The California Public Employees' Retirement System (CalPERS).
After the market crashed, and even post-recovery, the losses were shifted to governments to offset.

Governments also became responsible for reporting the debt more clearly to the public.

“Over the previous three decades, Santa Monica City Council members have made ironclad financial commitments to fund pensions of retired city employees without investing the requisite capital to meet those commitments,” Eubank said.

“The result is a $461,000,000 shortfall between promises made and the money set aside to meet them,” he said.

Instead of putting an extra $13 million toward the debt, the City should hike its paydown to $40 million a year, regardless of other “macroeconomic conditions,” the letter said.

“Otherwise, experience shows the City Council will succumb to inevitable pressures and/or agree to enticing options that postpone repayment of the pension debt,” Eubank said.

He notes the City is already projecting red ink in the near future, including a $19 million deficit in 2021 ("Fiscal Forecast Improves but Red Ink Looms for Santa Monica City Hall," February 8, 2018).

Eubank called the deficit projections “obvious excuses to massage the pension debt into the future,” he said.

The proposal calls for “an immediate, indefinite” hiring and wage/salary freeze across all city departments and subcontractors.

It also calls for an end to all future “defined” pension obligations to ensure that public pension benefits share the same risk as private sector employees --returns are market-based and not publicly guaranteed.

The letter also asks that the City “forego” capital expenditures to make the increased paydowns possible.

The City’s current biennial budget totals $1.57 billion, or $774.9 million for the 2017-18 fiscal year and $802.8 million in 2018-19 fiscal year. Its workforce includes about 2,300 employees.