Costa Mesa’s plans to outsource its fire department took a significant blow Tuesday night when an actuary from the California State Employees’ Retirement System explained during a City Council special session the high costs of cashing out employees early from the state retirement plan.
Additionally, Costa Mesa CEO Tom Hatch told council members that a formal proposal for transitioning the fire department to the Orange County Fire Authority wouldn’t be ready for the May 10 budget study session.
He added that retirement projections were complicating the transaction and staff needed more time to study the impacts and numbers before going into a public session.
The outsourcing of the fire department is just one aspect of a massive privatization plan championed by the City Council majority, led by Mayor Pro Tem Jim Righeimer. They see escalating pension costs as eating away at the city’s ability to provide basic services, and are calling for a fundamental shift in the city’s business model.
The council’s lone dissenter, Wendy Leece, labor officials and some community activists argue the council majority is taking advantage of a temporary fiscal crisis to advance an ideological agenda.
Tuesday’s budget session was the first of many planned for the next two months as city officials try to figure out exactly what the ramifications of such a plan might be.
Rick Santos, a senior CalPERS actuary, gave council members a glimpse of at least some of the ramifications, telling them that to terminate their pension plan for firefighters would cost $88 million, payable over the next 10 years.
“When you terminate you are locking in liabilities,” Santos said.
Santos explained that unfunded liabilities related to pension systems undergo significant swings over time due to the performance of investments and a slew of assumptions. However, ending a retirement plan immediately locks in liabilities and turns them into hard debt.
Santos told council members that the they could alternately choose to simply inactivate their plan for firefighters, which would save up to $1.5 million a year in costs but also leave the city open to further swings in the stock market each year because it would technically still be open (just asleep) for actuarial purposes.
Santos went on to discuss complicated financial concepts such as unfunded liabilities, rates of return, discount rates and actuarial smoothing.
“Mental gymnastics” is what Costa Mesa resident Tom Egan called it.
Egan, who was among the crowd of 50 who attended the session, pleaded with Santos to better explain the concept of an unfunded liability, saying from the public podium, “I really don’t know if it’s something we should be scared of? What’s it mean to the common man?”
To an actuary, unfunded liabilities are the gap between long-term commitments and the projected revenues to fund them.
For the city of Costa Mesa, Santos showed a total unfunded pension liability of $125.6 million in fiscal 2011 ($41.5 million for general workers/$34 million for firefighters/$50.1 million for police).
Yet when it comes to unfunded liabilities, Santos said the key issue when considering whether to stay in the state retirement system — as it is with anything related to investments — is timing.
The state retirement system has a portfolio of investments that it counts on to keep the annual payments made by public agencies stable over the long haul. But those investments are susceptible to short-term swings, and some are more violent than others.
We’ve just gone through the worst short-term swing since the Great Depression. And the massive investment losses incurred by CalPERS in recent years have fueled stark estimates of the unfunded liability — and annual payments — for the decade ahead.
Santos said that even with the usage of statistical smoothing — which evens out payments over time — public agencies everywhere are bracing for significant increases.
“You have to ask yourself, can we withstand the storm and be around in five to 15 years,” Santos said. “The real question is can you stick it out?”
“If you can, then these unfunded liabilities are accounting programs that at some point disappear.”
But if it can’t, as Councilman Steven Mensinger put it from the dais, “the downside risk is on the city side.”
John Bartel, actuary who has been hired to review Costa Mesa’s finances and CalPERS projections on rates, said the city is “sitting at the edge of a cliff.”
Bartel is expected to give a public update sometime next month. Tuesday night he told the crowd that the future isn’t rosy. “If investment returns are good, you’re rates aren’t going down much,” Bartel said. “But if the investments go down, the city could experience big rate hikes.”
Against that backdrop, the city’s beleaguered management staff will also prepare for an unprecedented budget process with hearings or study sessions on a weekly basis through May and June.