Crescenta Valley Water District officials this week voted to draw down heavily on the utility’s reserves to pay off a ballooning pension liability — a decision they said would have positive long-term affects given the high interest rate they were being charged.
Officials said the California Public Employees’ Retirement System had been charging the district 7.75% interest on the original $855,192 debt since 2005, which would have brought the total tab over its 20-year lifetime to roughly $1.7 million.
So rather than continuing to incur the pain of high interest by slowly paying the debt off, the utility’s board of directors on Tuesday voted unanimously to use about 15% of their reserves to clear the liability.
“This could be a first step in addressing the [retirement benefits] issue,” board President James Bodnar said by phone Wednesday.
The vote was a simple decision to make, officials said, since the district was being charged 7.75% interest by CalPERS on the debt while the district’s $4.9 million in reserves was making just about 1% interest via an investment portfolio.
“It makes sense for us to use money that’s earning a low interest at this point in time to pay off a debt that’s causing a high interest rate,” said Ron Mitchell, the water district’s treasurer-secretary.
The debt came about when CalPERS determined the Crescenta Valley Water District was $855,192 behind in meeting future retirement obligations. Rather than plug the gap all at once, the district spread payments out over 20 years. Since then, the utility has paid about $598,884, but 81% of that has gone toward interest.
While using reserves will save the district money in the long run, officials still must backfill the reserve fund to meet future demands.
That could be done in a variety of ways, including increasing water rates more than expected, Mitchell said.
A water-rate hike, which could be as high as 8.9%, is slated for discussion early this year.
Water rates have been on the rise in the district for years, including a rate boost of 8.2% last January and 3.1% in July. In October, sewer rates jumped 8.2% and are set to go up by an additional 8.4% to cover higher wastewater treatment costs.
Another option could be to use possible settlements from a lawsuit filed in federal court in which the utility alleges several gas companies leaked a water contaminant into the ground years ago. But those settlements aren’t guaranteed and a trial is scheduled for February.
What officials ultimately choose to do to backfill the reserves will be a topic for another day, said district spokeswoman Christy Scott.
Crescenta Valley officials aren’t alone in their efforts to get a handle on the rising cost of retirement benefits. Glendale Water & Power has been negotiating with its labor groups to increase the amount employees contribute to their pension plans for years. Currently, 8.5% to 12.5% of employee paychecks pay for retirement benefits, depending on the bargaining unit.
The Crescenta Valley Water District, on the other hand, pays the full cost of benefits for all 34 of its employees.
As of June 2012, Crescenta Valley’s annual pension obligation was $315,706 after having jumped by 7.8%, according to the district’s most recent financial audit.
Mitchell said employees contributions to the cost of their pensions may come up in June 2014 when the current contract is up for review.