Why I Oppose Pre-Funding Pensions

At tonight’s meeting, the Council voted to pre-fund future pension costs, to the tune of $7.5 million. Doing this might, if things work out as expected, reduce San Carlos’ future annual pension costs by about $500,000. Those costs are currently around $4.5 million per year, having risen from about $2.5 million annually a few years ago, and are expected to peak at about $7 million annually by 2028.

I opposed this use of hard-earned community money, for several reasons:

  • The financial analysis was fundamentally flawed, because it only compared what might be saved re: future pension costs against what the same funds would earn if left in the bank…which completely ignored the value, admittedly non-financial, of investing the money to improve the quality of life in San Carlos. I’m not blaming staff for this shortcoming — such analyses are difficult to do*.
  • There’s a significant risk, IMHO, that the action will be seen as putting the interests of staff ahead of the community. That’s because the downside risks of not doing the pre-funding would primarily fall on staff (i.e., in the form of future push backs on salary & benefits and/or layoffs, if pension costs rise too much). That wasn’t the motivation for bringing the option forward, but it’s definitely a political cost I’d prefer not to pay when there are other ways of achieving the same goal.
  • There are no guarantees, or even contractual “assurances”, in the investment we’re making as to whether or not we’ll ever achieve the anticipated savings. That’s because the savings are, in part, a function of how well CalPERS, the state pension fund, manages the money in its portfolio. Put another way, we might save substantially less than the $500,000 per year if CalPERS doesn’t do well.
  • I found it disturbing the “solution” to the problem of our pension costs rising because CalPERS keeps lowering its anticipated investment return** is to…give CalPERS more of our money to manage (it’s common for staff and council members to express distrust of CalPERS, and disbelief in anything they say). Or, as I put it, it felt like Bernie Madoff hitting up his investors, as his investment scheme began to fall apart, for more money, and them agreeing to double-down. I’d much prefer to put the money in a separate fund, managed by a good investment manager other than CalPERS. Or invest it in San Carlos, and earn a return from people bidding up the price of housing, shopping and dining in our town, etc.

* Imagine what it would take to compare using the money to create a new or improved park to pre-funding pensions. Park improvements can clearly have great value to the community, but it’s hard to translate that value into dollars and cents. But that’s exactly the kind of trade-off the Council should have made, and didn’t.

Incidentally, a big part of the reason we’ve been able to cover our already-enlarged pension costs and still run up a $38 million surplus is that we did invest money into improving our quality of life. Which made San Carlos such a great place to live, work, shop and dine that are revenues grew a lot.

** reducing what you expect to earn on your savings increases the amount of the future contributions you must make, to be able to pay out the same benefits

2 thoughts on “Why I Oppose Pre-Funding Pensions”

  1. Maybe now is the time to replace the city staff – all of them. They are the same ones who brought the city to the edge of bankruptcy a few years ago. Find people who concern themselves with the good of the city and not with padding their own resume.

  2. Hi Tom.

    I don’t agree with your view on staff. For one thing, most, if not all, of the leadership team started in their positions during or after the restructuring.

    More importantly, they’ve done a good job of executing the Council’s decisions and policies. That’s part of why we have as much money in the bank today as we do.

    I see the Council as having fallen down on the job, by not developing, with community input, a plan for improving the quality of life in San Carlos. Instead, we tend to make mostly one-off decisions, that are mostly focused on setting the stage to increase revenues by supporting development.

    I have no problem with good development, but we can’t forget that we should be using development opportunities as a means to get the resources we need to make life better for our residents.

    Thanx for taking the time to share your perspective.

    – Mark

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