For more than a year, Costa Mesa leaders have cited stark fiscal realities as justification for an unprecedented outsourcing plan and the possible layoff of nearly half of the city’s workforce.
But there continue to be questions about the reality of these stark fiscal realities.
Consider that last February, Mayor Gary Monahan said the city could be facing insolvency by the fall. But by December the city’s projected $1.4-million deficit had become a $3.8-million surplus.
The City Council majority also has fixated on the city’s unfunded pension liability.
“We have a lot of financial difficulties in this city,” said Mayor Pro Tem Jim Righeimer during last week’s City Council meeting, including a “$221-million unfunded liability for pension.”
But that number is misleading, according to California Public Employees’ Retirement System (CalPERS), the state agency that manages Costa Mesa’s pension. The $221 million is the city’s “termination liability,” or what it would cost the city to pay off all of its pension obligations right now — something that it has no current plans to do.
The city’s correct unfunded liability, according to CalPERS, is its “actuarial unfunded liability,” which as of last April was estimated at $125.6 million. CalPERS doesn’t have an updated figure, but the city says it’s now $134 million.
This means that while the city’s unfunded pension obligation over the next 30 years is still significant, it is between $87 million and $95 million less than what Righeimer and his council colleagues have been telling the public.
CalPERS officials say it is wrong to cite the “termination liability” as the city’s actual unfunded liability.
“I think it’s misleading,” said Brad Pacheco, a spokesman for CalPERS.
Said Ed Fong, another CalPERS spokesman: “That’s one of those theoretical, hypothetical numbers that unless you are about to terminate and have to come up with that money, then it’s just an intellectual exercise.”
“It means nothing. … It’s a number on paper only,” Fong said.
However, Righeimer insists CalPERS’ accounting methods are misleading and says he trusts the termination, or market value, figure.
“All that’s baloney. I want to know today, how much do we owe on pension,” he said. “We have no guarantee it’s not going to get worse every single [year].”
Councilman Steven Mensinger’s estimates of the pension liability are even higher. He said his understanding is that it would cost up to $400 million to end the plan. “If the 221 [million dollars] is their termination cost, then that’s totally different” from our understanding, he said.
Fong described the council members’ assertions regarding the termination unfunded liability as “bogus” and “designed to, I think … affect public opinion. That is really a distortion of the truth,” he said.
Costa Mesa made national headlines last March when it issued layoff notices to nearly half the city’s workers and announced plans to explore outsourcing numerous city services. Those efforts have been delayed by a legal challenge from the city employees union, though in the meantime the City Council has been soliciting proposals from potential contractors.
Councilwoman Wendy Leece, the council’s sole opponent of the outsourcing efforts, says the other council members have been inflating the unfunded liability figure to justify their outsourcing plans.
“It’s a way to exaggerate a problem and create fear so that the public is willing to agree that the council needs to take drastic action,” she said. “I’ve been saying for a year that the sky is not falling … We do not need to take these drastic actions and do it at a breakneck speed. It’s reckless.”
Enter Costa Mesa’s finance director, Bobby Young. He says both the termination and actuarial numbers are valid figures for the city’s unfunded liability. And when asked whether it’s misleading for council members to cite the termination figure as the city’s unfunded liability, Young responded that “it’s a correct number.”
“I don’t think that either one are wrong,” said Young.
But in the nine months since CalPERS presented the termination figure to the council, the city’s finance department has not seriously explored whether termination would be feasible.
“It would require a lot more analysis to say whether that would even be beneficial or not,” said Young.
CalPERS calculates an entity’s unfunded pension liability through a process called “smoothing,” which takes the often volatile short-term swings in its annual investment returns and averages them over time. It is a process that is widely accepted by pension fund managers.
Righeimer, however, believes this accounting is completely wrong.
“What they are doing in accounting, no other company — insurance company, private company — in America can do without going to jail.”
Nonetheless, city officials as recently as April acknowledged an unfunded liability amount that was much closer to the CalPERS “actuarial unfunded liability” than the “termination liability.”
In an April 29 “fact check” news release, the city wrote that it “has an estimated $130-million unfunded pension liability.” That was just days after a CalPERS actuary told the council that Costa Mesa’s unfunded liability was $125.6 million and its termination figure would be $221.7 million.
You can reach Nick Gerda at ngerda@gmail.com, and follow him on Twitter: twitter.com/nicholasgerda.