Berkeley faces difficult path to funding pension liabilities

The City Council heard a sobering report from outside actuary John Bartel at its special meeting on Tuesday night this week.

“I wore my Valentines Day tie, but that’s unfortunately the only good news I have here,” Bartel said. “Your contribution rate will not be going down. It will actually be going up in the future.”

The council has had a number of presentations on the unfunded pension liabilities in the last year. On Tuesday, Bartel explained that the actuarial target he was encouraging the city to meet was to reach 100% funding of the liabilities “over a reasonable period of time”.

But the difficulty of achieving that was highlighted by the figures Bartel presented. For the police safety plan — overwhelmingly the largest cost and the largest unfunded liability for the city — the city is currently paying 42% of salary in pension contributions. To reach a target of 80% of the liabilities funded in 20 years, Bartel said the city contribution would have to rise to 50.7%. To reach 80% funded in 10 years, the contribution would climb to 61.5%.


Depending on the method of calculation, the police plan is currently between 64% and 72% funded.

Bartel said pensionable wages for the police currently run between $22 and $23 million. So the annual cost of raising the pension contribution to 50.7% would be around $2.3 million.

Many cities, according to Bartel, work with a 30-year amortization of unfunded liabilties, and keep rolling the completion date into the future.

“If you do that, I think you end up not paying your unfunded liability off,” Bartel said. “I’m a fan of either a slightly shorter fixed period, so, for example, a 25-year fixed period of amortization. To the extent that clients can afford it, I recommend 20. You have to have the money to realistically pay that. I really do recommend 20. Most of my clients say to that recommendation, ‘Thank you very much, John, but we can’t afford to go there.’

“If you have a fixed period, even if that fixed period is 25 or even 30, so long as you have a legitimate end time, you are going to pay that unfunded liability,” he said. “Rolling amortization you’re just kidding yourself. You’re not going to pay that unfunded liability off.”


Among the policies the city is considering to address the unfunded liabilities is implementing a two-tier system, where new employees have a different plan. Current miscellaneous employees (non-police and fire) have a 2.7% at 55 plan (police have 3% at 50). If there were a second tier for new employees at, for example, 2% at 55, short-term savings would be negligible, but would come to around $15 million over 10 years. Bartel cautioned that implementing a second tier is “a long-term project” in terms of addressing unfunded liabilities.

Before the actuary’s report, the council was informed of a forecast $1.9 million revenue shortfall in fiscal 2012, based on figures from the first half of the year. The major shortfalls are in supplemental taxes ($1 million), property transfer tax ($600,000), utility user’s tax ($655,452), and interest income ($500,000). There were, however, some counterbalancing items: sales tax is running $539,000 above budget, transient occupancy tax is $300,000 over budget, and business license tax is $121,000 up.

“There are some bright sides,” said Mayor Tom Bates. “Sales tax is up, business license is up and hotel occupancy is up. These are all signs of economic activity.”

City staff recommended trimming expenditures by $1.9 million by eliminating transfer from the city’s General Fund $400,000 allocated for the council chambers move (which won’t happen in FY12), $1.1 million for the solid waste program in the refuse fund (again, not planned for FY12), and $400,000 for Measure B streets and roads fund because expected revenue decreases to that fund have not materialized.

The staff also reported on deficits in the permit service center fund, where expenditures exceed revenues by an expected $566,000 in FY12 and $150,000 in FY13. The fund balance will be down to $1.5 million at the end of FY12.


“We’re still not seeing big development projects coming in,” said Acting City Manager Christine Daniel. “Expenditures in the PSC have been reduced, the folks are managing their costs well, but we’re still running a deficit.”

The refuse fund is also running a deficit, expected to be $600,000 this fiscal year. Daniel said further cost reductions are planned. The mental health fund continues to face “significant revenue challenges”, largely because of a state audit that disallowed nearly $3 million in payments. An appeal on the audit has resulted in nearly $1 million in expected reimbursement.

Daniel was asked by Bates when the reimbursement could be expected from the state.

“Slow would be what I expect,” she said. “We have been extremely aggressive in pursuing these disallowances, and we will also be aggressive in pursuing the repayments. We are not the only jurisdiction in the state with these problems.”