How Can Troubled California Cities Address Rising Pension Costs?

San Bernardino

Matthew Covington penned a column for the Sacramento Bee on Thursday that dives into California’s recent spree of municipal bankruptcies — and postulates that, with pension costs rising, bankrupt cities of the future may not opt to preserve pensions the way Vallejo, Stockton and San Bernardino did.

Covington is a managing director at Conway MacKenzie, a financial firm that advises distressed governments. He proposes two possible solutions that could help troubled municipalities deal with pension costs. His ideas:

Establish a protocol for restructuring municipal pensions out of court.

For troubled municipalities, pensions are typically the single largest expense, the most intractable and the most uncontrollable (because CalPERS determines what the municipality will pay each year). If CalPERS decides to change its investment return or mortality assumptions, or its investment performance suffers, the municipality will have to pay more, regardless of its own activities. If a municipality is in dire straits and cannot meet its obligations, an orderly restructuring would likely be superior to a bankruptcy filing.

This could save tens of millions of dollars for the city in fees on lawyers and other advisers. Additionally, plans could be tailored to minimize the impact on vulnerable groups such as the elderly and long-retired pensioners whose pensions were set in the premillennial sane era, something which might not be possible in a bankruptcy case.

Provide uniform budgeting rules and guidance.

Too many municipalities have made promises that jeopardize their long-term fiscal health. While no one wants another bureaucracy meddling in local affairs, the task force could establish certain basic rules such as requiring municipalities to have long-term budget forecasts that clearly show pension expenses and require additional disclosure when a threshold is crossed.

For example, municipalities whose pension expenses exceed 20 percent of total expenditures (the levels at which voters in the non-CalPERS cities of San Jose and San Diego ratified pension amendments) could be forced to explain why the expenditure levels do not threaten the city’s financial stability.

The costs of municipal bankruptcies are borne not just by the creditors who invested in these cities, but also by residents hit with plummeting property values and deteriorating services. California can do more to protect its citizens from these failures. Let’s put systems in place to ensure this dangerous game isn’t played again.

Read the full column here.


Photo by  Pete Zarria via Flickr CC License

San Diego Pension Fund Pays “Big” Price For Big Office Space



One of California’s largest city pension funds is not only paying a “big” sum for its huge, high-end office space—it’s also locked into a long lease.

An investigation by a ABC10 found that the San Diego City Employees’ Retirement System is locked into a 10 year lease for the office space it rents, and the System will pay over $10 million in rent over that period. From ABC10:

The San Diego City Employees’ Retirement System manages a $7 billion fund. A review of office leases by Team 10 found SDCERS will spend $10.1 million renting office space at 401 West A Street in downtown San Diego. The lease is for 26,000 square feet over 10 years, and an SDCERS spokeswoman said 58 employees use the space — which breaks down to roughly 450 square feet per employee.

“I have to wonder why more than 20,000 square feet. Forget whether you own or lease it. Why that big a space?” real estate appraiser and San Diego State University lecturer Dana Kahn asked after reviewing the SDCERS lease.

Those numbers fall roughly in line with what SDCERS has reported publicly for years; according to its latest financial report, the System spent $998,000 on rent in 2013.

The investigation also looked into office space rented by the California Public Employees Retirement System.

CalPERS—the nation’s largest public fund—has eight offices around the state, although its staff is much larger than that of SDCERS.

CalPERS is a bit more secretive about its rental costs, as its financial reports don’t specifically disclose the cost of rent for its offices.

Its latest financial report does disclose that the System pays $3,789,000 for “facilities operations”, which may include rent as well as utility costs associated with its office spaces.

ABC10 managed to get a hold of SDCERS’ spokesperson over email, and she answered a few questions.

1. Why did SDCERS choose to rent office space?

SDCERS has been renting office space for many years. We’ve been in the current locating for the past seven, and then rented space in other downtown office building locations for many years before that.

2. Did SDCERS considering buying space?

No. The only investments in real estate done by SDCERS are as part of the fund’s real estate holdings in our investments portfolio.

3. How many employees work in the office?

There are 58 budgeted staff positions at SDCERS.

4. How much of SDCERS portfolio consists of real estate?

Real estate holdings in our investments portfolio account for 9.1 percent of the fund, or approximately $630 million.

5. Who negotiated the lease?

The original lease for SDCERS’ space at 401 West A Street was signed in April 2007. Signing for SDCERS were its then CEO and Board President. SDCERS was assisted in finding space by broker Irving Hughes. The first amendment to the current lease was signed in October 2013, again by its current CEO and Board President. SDCERS was assisted in negotiating the amendment by broker Hughes Marino.

Photo by Justin Brown via Flickr CC License