Managing The Pension Tiger

By Russell Buckley

LA MESA -- At Thursday's Strategic Planning Workshop (open to the public every year) a number of important topics were discussed - none more consequential than La Mesa's rising pension costs. A well respected actuary named John Bartel made the presentation, as he has for the past couple of years. His focus was on the consequence of approved changes in the way some of the calculations that determine pension cost are made.

            The most significant change is in the way that the assets in the pension fund are accounted for. Until now changes in asset value (e.g. large stock market losses) were artificially spread out over a number of years - to keep payments more stable (and maybe to avoid short-term pain). The new method accounts for changes in assets in a shorter time. There is good and bad in this change

            The bad part of the change is that it is projected to make already high pension costs rise quite a lot from fiscal year 15/16 to fiscal year 19/20. They are then projected to level off and remain flat until fiscal year 27/28 before tapering off some. The good part is that the funded status of our pension account will improve faster than it would have without the change, and once we "catch up" costs will be lower.

            For those who like numbers, here is the quantitative version of the last paragraphs. Our unfunded pension liability as of June 30, 2012, stated the old way (AVA) was about $38.2 million. Stated the new way (MVA) it was about $67.7 million. Pension cost (excluding Social Security) in 2013/14 was $5,458,912. Applying higher 19/20 rates resulting from the change, to the same payroll, will increase the cost considerably - to $9,221,046. (Editorial note: if La Mesa spent the same amount for pensions that is common in the private sector, that is 10% to 12% of salary, the pension cost using the same payroll would be $2,292,506.)

            Despite the good stock market returns for the past few years, and the remarkable return last year, pension costs remain a major budget issue. Maybe serendipity will prevail and the market will have another year or two like the last one, in which case the pension problem may fade away. Or maybe the market will suffer another really bad year and costs will be even higher. Something in-between - like the 7.5% average yearly return that CalPers uses in its calculations is more likely. Taxpayers have a tiger by the tail.

            At least one idea to better deal with the pension costs was discussed at today's meeting. Surely other options will be considered as the City manager and Staff meet with the Council to deliberate about the budget and new MOU's for our workforce. Lets hope they have the wisdom to make sound decisions and lets hope for a little serendipity too. 

Russell Buckley is a LaMesaToday.com member and follows pension issues closely.

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Tags: Government, La Mesa Today, La Mesa news, pensions

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Comment by Scott H. Kidwell on March 18, 2014 at 9:17am

Mayor Art Madrid said ( January 2014) in an annual “Audit Report” o...

La Mesa needs to develop a “realistic plan that will reduce unfunded liabilities,” Madrid said. “The good news is that there is a plan to bring these obligations into a realistic plan to reduce the unfunded liabilities,” he added. “The bad news, like any other financial obligations, is going to cost the City in the form of significantly increased annual assessments, especially over the next five years.”

Just what is a "significantly increased annual assessment", how much is it, and who will be paying it?

Comment by midge hyde on March 16, 2014 at 10:53pm

I am so tired of all the govt. workers around deiding we can alll just pay out more to cover these ridiculous benefits without considering our circumstances as citizens. we have some of the highest water bills and paying for sewer along with our yearly taxes is really hard on a majority of the older people living here. Do any of the so called "public employees" considering the citizens? There needs to be some comparisons and limits to pensions and benefits.  M Hyde

Comment by Scott H. Kidwell on March 16, 2014 at 7:03pm

Data from the Bureau of Economic Analysis illustrate that average state and local government compensation has been increasing at a faster rate than average private sector compensation over the past 30 years. http://object.cato.org/.../cato-journal/2010/1/cj30n1-5.pdf

Comment by Mark Cavanaugh on March 15, 2014 at 2:42pm

Did You Know Your Friendly Public Servant Probably Out Earns You?

http://www.ijreview.com/2014/03/121250-government-workers-cost-45-p...

Comment by Batman on March 14, 2014 at 5:56pm

Our behemoth federal government would love to take over all of our local governments. What better way to do this than by running our local governments out of business. Our cops and firemen are important, but not that important. The feds are talking about cutting the pensions of the military folks and they see nothing wrong with this.

Comment by Don Wood on March 14, 2014 at 12:38pm

Thanks Russell.

Comment by Russell Buckley on March 14, 2014 at 12:06pm

Don - it was the possibility of paying down some of the debt early. You are certainly right that my mention of it begs the question. In hindsight I probably should have left that comment out. Remedies were only briefly discussed. The staff needs to do the numbers on that one to see if paying early is in the best interest of the city. The meeting covered a lot of topics and there was not enough time to get into a lengthly discussion of remedies. That remains for the Council and staff to work out. 

Comment by Don Wood on March 14, 2014 at 11:33am

"At least one idea to better deal with the pension costs was discussed at today's meeting." So what was that idea? Why wasn't it explained in this article?

Comment by Chandra George on March 14, 2014 at 10:36am

Great explanation, Russell.  

2028 is something to look forward to.  I think the most important sentence in your assessment is the one you put in parentheses as an Editorial Note.  That should be the sound, guiding principle going forward.  

HousingWire

In Southern California, New Homes are Rare and Costly

Source: LA Times

New home prices have soared in recent months in the Southern California region, with the median for the six-county region peaking at $538,000 in June, according to CoreLogic DataQuick. And in affluent ZIP Codes, builders are bidding up already-high land values. Overall, new homes have become all too rare and costly for the average buyer. Making sense of the story:

- A surge in higher-end projects has pushed new home prices above their pre-recession peaks, even as prices for existing homes remain one-fifth below their bubble-era highs. - In Orange County, the median new home price has topped $800,000. - Builders have piled in to pricey ZIP Codes — bidding up land costs there in the process— and polished their projects to a high gloss to woo wealthy buyers with cash or good credit.

- Projects aimed at the middle of the market remain scarce, and overall home building is off about 60 percent from a decade ago. The shortage of new lower-priced product is one factor making Southern California among the toughest housing markets in the country for middle-income families.

- While new homes have almost always sold at a premium, that premium has hit new highs this year. In January, the gap between median-priced new and resale homes in Southern California peaked at $151,000, a 41 percent premium for a new house.

- Several factors contribute to the widening price gap between new and resale homes, housing economists say. For example, competing bids drove up the cost of land in prime areas in 2012 and 2013, which means higher prices today.

- Some builders have made a conscious decision to move upmarket because they see more profit and upside in catering to wealthier consumers. KB Home is among the builders moving upmarket. The Los Angeles builder, long a specialist in entry-level homes, has shifted to more affluent, "land-constrained" neighborhoods.

Read the full story:

http://www.latimes.com/business/la-fi-new-home-prices-20141014-story.html#page=1 _________________________

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