Quitting CalPERS Comes With Price For California Cities

California State Seal

City officials from a handful of California cities—Canyon Lake, Pacific Grove and, most recently, Villa Park—have publicly weighed the option of leaving the CalPERS system as their memberships become more costly.

But leaving CalPERS got a lot less enticing when the cities learned about the fee that would be levied on them upon their departure—a termination fee that could be as high as $3.6 million for Villa Park alone. From Reuters:

Villa Park fears that pulling out of its contract with the California Public Employees’ Retirement System could be prohibitively expensive because of a termination fee that could exceed the city’s annual budget.

Calpers, America’s biggest public pension fund with assets of $300 billion, last provided the city with a hypothetical termination fee of nearly $3.6 million as of June 2012. The city’s annual budget is $3.5 million.

“Getting out of Calpers is like getting out of jail,” said Rick Barnett, mayor of Villa Park, population 5,800. The City Council will vote next month on a resolution to begin the process of quitting Calpers.

Calpers recently voted to raise rates roughly 50 percent over the next seven years, citing its responsibility to maintain the fiscal soundness of the fund.

Now Villa Park is following the trajectory as California cities who have tried, but ultimately declined, to leave CalPERS in the past. Reuters reports:

Two other California cities, Pacific Grove and Canyon Lake, tried to quit Calpers last year, but both balked when they learned the termination fee.

If a city quits, Calpers continues to administer pension payments for the current and retired workers already on the books at the time of termination.

To do that, Calpers generally asks for an up-front sum to pay for potential future pension costs for all current and retired workers on city rolls.

Canyon Lake, with an annual budget of $3.6 million, was handed a termination bill last year of $1.3 million.

Keith Breskin, Canyon Lake’s city manager, said: “It would have been a serious depletion on our reserves, so the city decided not to proceed.”

If a city quits, Calpers also places that city’s funds in a more conservative risk pool, which lowers the potential return rate on its investments and in turn boosts the termination fee.

Villa Park Mayor Rick Barnett said this week that the termination fee hasn’t completely deterred the city from their plan to leave CalPERS. He did, however, leave open the possibility that the termination fee would be too burdensome to even consider leaving the System.

Will Villa Park Cut Ties With CalPERS?

Villa Park California

The California city Villa Park could vote today to remove itself from the California Public Employees Retirement System (CalPERS).

The decision comes in the face of mounting pension costs and calls for increased transparency in local budgets, which would shine more light on California cities’ unfunded pension liabilities.

First reported by the Voice of OC:

The Villa Park City Council could vote Tuesday to end its contract with the California Public Employees’ Retirement System or CalPERS, the world’s sixth largest pension provider, in an effort to reduce increasing pension costs.

The CalPERS move follows an Orange County Grand Jury report that called for greater budget transparency in Orange County cities.

The report indicates Orange County cities’ unfunded pension liabilities have been increasing on an annual basis since 2007.

There have been increased calls for budget transparency in recent years as cities and towns in the CalPERS system have shouldered more liabilities. A recent report called for all cities to put their budgets online and include CalPERS cost projections in all budgets going forward.

Villa Park has millions in unfunded pension liabilities. From Voice of OC:

For its pension costs, Villa Park, a north OC bedroom community of about 5,000, has a shortfall of about $3.5 million, leaving 17.5 percent of its employee pension costs unfunded, according to the grand jury report.

Gov. Jerry Brown enacted sweeping pension reforms in 2012 aimed at reducing pension payments for most public employees hired after 2013.

But because many public workers were hired before 2013, they are grandfathered into the old system, and reforms likely won’t make a dent for another decade, the grand jury report states.

Villa Park could vote on leaving CalPERS as early as 6:30 pm (Pacific Time) Tuesday. The city wouldn’t be the first to leave CalPERS; Canyon Lake, a city of 11,000, left the system in 2013 due to increasing employee contributions.