Recently there has been some press around a "pension crisis" asserting that "...at least one-third of local and state budgets now go toward public employee pensions..." That's not exactly correct for every agency and it is NOT correct for Atherton.
The Town's Fiscal Year 2017/18 Operational Budget (not Capital Infrastructure) is $13,053,362. This is the Operational Budget that includes Administration, Police, Public Works, Finance, Building, Planning, and City Attorney. Town services are customer service based and are therefore "people-heavy." For its pension obligation, the Budget includes the Town's Annual Required Contribution, based on salaries, for pensions. the Town pays $637,222 toward its pension obligation. The employees pay $444,228 toward their share (and a portion of the Town's share) of the pension obligation. The Town's annual pension obligation represents 5% of its budget.
However, CalPERS pension plans are not unlike private sector plans with a “funded status” ratio of Market Value of Assets (MVA) to Accrued Liability (AL). The average corporate plan funded ratio (top 100 pension plans) is around 82%. The Town's funded status of its pension obligation is about 74%. Funded ratios will vary year to year based on market conditions both in the private sector and public sector. The current market rallies will have an affect on the funded status of plans since most plans, public and private, have a stake in the investment market. The most current pension system valuations from CalPERS are as of June 2016. CalPERS Valuation Reports typically lag 18-24 months. These Reports can be found online.
The difference between a market value of 74% and an accrued liability of 100% means that, based on current market conditions, if everything was due and payable today, approximately 26% of the Town's pension obligation is underfunded. Because of that, in addition to its basic annual pension obligation, the Town contributes to the underfunded liability as well in an effort to move the needle closer to 100%. This contribution is approximately $682,013 for Fiscal Year 2017/18.
If you add both the annual pension obligation and the underfunded contribution together, that amounts to $1,319,235 or 10% of the Town's annual budget.
CalPERS Actuarial Valuations, market conditions, employer rates, employee rates, and underfunded status conversations are not helpful unless the Town has a funding policy in place - which it does. The Town pays 100% of its employer obligation toward pensions each year based on published CalPERS annual actuarial evaluations. The CalPERS pension system is designed as a “pay as you go” system with projections calculated based on actuarial assumptions such as length of employment, salary, mortality, and investment projection for return - all of which can fluctuate - changing the Town’s future obligations up and down.
The Town consciously decided not to "over fund" or contribute more funds into the pension plan than required under the actuarial valuations because the Town would rather keep its funds local than overfund at the State level. In other words, maintaining a healthy funded status is good, but giving more funds to the State than absolutely necessary is not - particularly since the funded status is market dependent and excess funds would be better served on local projects.
If, for example, the Town were to fund its underfunded amount entirely, in one year, if the market performed exceptionally well, the Town could be “overfunded” and those funds would no longer be under Town control - once paid, we don’t get them back but our rates stay consistent. They would be earning interest at CalPERS rather than in our local budget. Conversely, if the market performed poorly, we would not have overpaid and lost funds because someone at the State made a poor investment decision. Given the recent market performances, we expect the Town’s underfunded status to drop but we do not expect our annual rates and contributions to be dramatically different.
That said, the Town is conscious of rate fluctuations and via policy commits any excess ERAF funds if needed to help smooth out any fluctuations - we have not had to do this in recent years but it remains an option. ERAF funds (or Educational Revenue Augmentation Funds) are funds that were re-appropriated in the 1990s by the State from local government property tax revenues. These funds trace back to local Town funds. The State uses these funds to pay for its minimum school budget obligations. Excess from these funds (after the State meets its obligation) are returned to the local agencies from whence they originally came. The funds originate from basic Town property taxes returned to the Town after the State deducts its considered share.
Happy to go deeper on this issue with anyone, feel free to give me a call or send me an email.