The Costa Mesa City Council on Tuesday will consider a plan to take a small bite out of its pension debt by making a series of early payments that could save the city $12 million.
By paying $25 million to fire department employees’ pension fund faster than planned, the city could save significantly on interest, according to a staff report on the proposal.
Costa Mesa accrued that specific $25 million in debt when it retroactively increased pension benefits for fire employees in 2008.
The $25 million is a small part of the city’s $228 million pension debt — known as unfunded liability — but a report prepared by the city’s Pension Oversight Committee this month paints paying it off as a small step toward tackling a larger problem.
The committee, made up of nine volunteer Costa Mesans working with city staff, began meeting in May 2013.
On Jan. 21, it issued its first report to the City Council, laying out the city’s pension obligations and suggesting ways to address the debt.
“The greatest threat to our pension plans and city finances is the accumulation of unfunded liabilities,” the report states.
In the 2012-13 fiscal year, pension costs ate up 14.6% of the city’s $103 million general fund, and the pension committee’s report projects that number will grow to 21.7% of the general fund in 2022-23.
To fight those costs, the committee outlines seven tactics the city could use to reduce its unfunded liability.
Without endorsing any particular options, the report considers the pros and cons of moves such as issuing $228 million of bonds, raising taxes or selling assets to cover the costs.
The plan the City Council will consider Tuesday comes directly from two of the tactics the report details.
Costa Mesa can receive a discount of about $450,000 annually if it pays certain pension obligations up front annually instead of bi-weekly as it does now, according to the report.
Using that $450,000 annually, plus $1 million the city has accumulated the past two years and earmarked to pay unfunded liability, the city could pay off the $25 million debt from fire employees’ retroactive benefit increase in seven years instead of the planned 20.
That $25 million pot is a prime candidate to pay off early because it’s small enough to do so practically and it would save the city 7.5% in interest costs, according to a staff report.
The city’s total $228 unfunded liability will likely take more than financial maneuvering to pay off, according to the pension committee.
The report ends with a series of conclusions noting that the city’s growing liability is “unprecedented” and that pension costs are expected to double in the next decade.