Pension liability concerns officials

NEWPORT BEACH — Officials here like to boast about the city's recent AAA bond rating, and how its finances are on a sound footing. But when it comes to its employees' pensions, Newport, just like governments across the country, is in bad shape.

City officials disclosed this week that its unfunded pension liability jumped 44% in one year to $134 million, according to their latest financial statement with the California Public Employees' Retirement System, or CalPERS.

"This is a confirmation that we have a really big issue we need to deal with," Mayor Mike Henn said.

CalPERS investments took a massive hit during the late 2008 financial crisis, and in recent years the city's pension benefits had been growing. That divergence is clear in the report, which analyzes the year ending June 2009.

Costa Mesa isn't in much better shape. It faces a $110-million unfunded liability and only has about half of the full-time employees of Newport, said Costa Mesa City Manager Allan Roeder.

An unfunded pension liability is the shortfall between what the city owes current and future retirees and what officials expect to have available to pay promised benefits. While it's not unusual for that number to climb as people live longer, the city lost 25% in its pension assets during the financial crisis, so it was hit especially hard.

It was a "huge loss in equity," said Newport's Deputy City Treasurer Dan Matusiewicz.

The CalPERS investment fund actually gained 13% in 2010, but the city won't reap those benefits for years down the line.

In the meantime, Henn said that officials plan to renegotiate with the public employee unions.

"Over time, the pendulum has moved too far in the direction of increased benefits and costs, and we need to find a way to center that today," he said.

The contracts for public safety employees — lifeguards, firefighters, police officers and their managers — will expire in December. Newport Beach officials hope to get them to pay for more of their pension costs.

In recent years, the city would cover the "employee share," effectively covering their full pension contribution. But recently unions have conceded some. Police, lifeguard and fire unions agreed to pay 3.5% of their 9% employee share. The other employees agreed to pay a full 8% of their share. Once all of those concessions are phased in, the city will be saving about $2.2 annually, City Treasurer Tracy McCraner said.

But that's just a fraction of the $21 million the city is required to pay CalPERS annually.

As recently as 2007 the pendulum was swinging in the other direction. Lifeguards that year negotiated a lower retirement age – 50 instead of 55 – and non public-safety employees secured a higher percentage of their final year's pay during retirement – 2.5% instead of 2%.

Public safety unions are willing to pay some of their costs, said Officer Dave Syvock, president of the Newport Beach Police Assn. He was unwilling to say how much.

"We've shown that we are willing to bear a burden," he said.

The city is also considering privatizing some services and negotiating a less-generous benefits package as other methods to reduce the city's pension obligations, Henn said. Ultimately, it would consider leaving CalPERS and creating a "defined-contribution" program similar to a 401(k), he said, but that was a serious decision that was well down the road.

"At least as a first step, employees should pay for all of the employee share," he said.

With all the public safety unions' contracts expiring in December, they may have some bargaining power.

"You are going to see some collaboration among the associations," Syvock said.

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