Serious shortfalls in the city’s contributions to its employee’s pension plan costs through the Stanislaus County Employees’ Retirement Association (StanCERA) system must be covered and last week the Ceres City Council received a crash course in ways to minimize financial impacts.
The city is legally obligated under the pension plans to pay any unfunded accrued liability, or UAL, which is the amount by which StanCERA is short of what will be necessary, without further payments from the city, to pay benefits already earned by current and former employees covered by the plans.
According to City Manager Doug Dunford, ideally, the pension plans should be fully funded because the city is legally obligated to fulfill 100 percent of pension benefits promised, and because it is very expensive to carry the 6.75 percent interest cost associated with UAL. However, the plans are only approximately 74 percent funded, with total UAL now approximately $47 million. Not only does the city have to pay normal pension costs but also 6.75 percent interest on the UAL fund balance each year and the amortizing principal balance of the UAL.
Unless proactive measures are taken, said Dunford, the city could wind up paying $43 million in interest payments alone. Thus, the council was presented with options to consider. The city turned to representatives of the Weist Firm, a bond counsel firm, and California Municipal Advisors LLC to analyze options.
Andrew Flynn of Weist noted that StanCERA has calculated that the city of Ceres has $133,886,000 saved up for retirements while the city is liable for $180.4 million earned by past and present employees.
The shortfall comes to $46,547,000. Flynn said the city needs to make up the 6.75 percent that that same amount would be yielding to stay ahead of obligations.
“What we’re trying to do is mitigate your exposure to it,” said Flynn, “because that’s a very expensive carry cost on the $46.5 million.”
StanCERA’s investments were analyzed and Flynn said on average those investments has earnings at or above the discount rate of 6.75 percent.
The city has the option of using reserves saved up for capital projects, such as a wastewater treatment system improvement, and using that money to pay down on the UAL while issuing tax-exempt bond financing for the capital project. Cameron Weist used the hypothetical example of the city using $5 million in reserves for a capital project, and issuing bonds for a 4 percent return to result in a $4.3 million savings.
He also said the city can save by refinancing the StanCERA UAL. Refinancing $30 million could bring the city’s plan funded levels from 74 percent up to 90 percent.
Given the market rates now, 15-year financing could save the city nearly $11 million.
