In October of 2019, the Perris City Council took bold action and decided to do what other cities only wish they could do: pay off its CalPERS unfunded liability, which totaled $14.3 million.

The Press-Enterprise wrote an excellent article on the City of Perris paying off its unfunded liability and in that article, it indicated that the average California household owes $80,643 in unfunded pension debt, according to the worst-case scenario projections from the Stanford Institute for Economic Policy Research’s PensionTracker.org website, which uses 2017 data from pension funds and several state agencies.

The newspaper article goes on to say that the level of unfunded pension debt varies widely in the Inland Empire, depending on the number of employees local government agencies employ and the generosity of their pension benefits, particularly benefits provided in the late 1990s during the dotcom stock market bubble.

The Press-Enterprise article concluded by saying that most California public agencies still owe more in pension benefits than they have cash on hand to cover, should all eligible employees retire tomorrow-something that’s unlikely to happen. As pension costs continue to rise for many agencies, more of those agencies’ budgets will go toward paying for pension costs, rather than the other functions of government, such as hiring teachers and police officers, paving streets or building new schools.

The City of Perris decided to do something about their unfunded liability and contracted with Bartel Associates, LLC. to conduct an actuarial valuation. Based on recommendations contained within their feasibility report, The Perris City Council took action to pay off its unfunded liability. The findings in the feasibility report were quite astonishing. The study concluded that payments on the unfunded liability for fiscal year 2018/2019 were going to be $603,000; however, if the City did not pay off its unfunded liability, that same payment would grow by 340% to $2,047,000 in fiscal year 2029/2030!

At June 30, 2017, the City of Perris’ Miscellaneous pension plan had an unfunded liability of $9,300,000 and was 75.3% funded. By comparison, the City of Perris’ Safety pension plan at June 30, 2017 had an unfunded liability of $3,400,000 and was 69.3% funded. The two plans together totaled $12.7M and would grow to $14.3M just two years later.

During the creation of Perris’ two-year budget cycle for Fiscal year 2019/2020 and 2020/2021, staff was able to identify that sufficient funding sat in reserves to be able to pay off its unfunded liability and even though making this one time payment of $14.3M would significantly reduce its cash on hand in reserves, the Council decided that this option far outweighed the option of having to continually pay unnecessary interest on the CalPERS payments for many years to come.

Once this information was put into perspective, it became clear to Council that the best decision would be to pay off the unfunded liability.

According to Bartel Associates, Agencies have unfunded liabilities for the following reasons:

1. Investment losses;
2. CalPERS contribution policy;
3. Enhanced Benefits; and
4. Demographics

Knowing that agencies do not have much control over the above items, it becomes the duty of the Finance Department to actively monitor the unfunded liability and actively seek creative ways to pay down the ever-growing balances.