June 9, 2010: City's Pension Fund Costs to Double Between 2010 and 2015

By Carolyn Schuk

One of the reasons for Santa Clara's "systemic" budget deficit over the next five years is a big jump in payments into the California Public Employees’ Retirement System (CalPERS) system.

The U.S.'s largest public pension fund, CalPERS administers pensions for 1.6 million active and retired California public employees. The fund manages about $180 billion in assets. Because CalPERS is a "defined benefit" plan, benefits are determined by a defined formula based on salary and years of service – regardless of fund value.

(This is in contrast to "defined contribution" plans – such as 401Ks –, which calculate the benefit, based on the value of individual accounts at retirement. Defined contribution plans have largely replaced defined benefit pensions in private businesses).

California's public employee pension system CalPERS experienced 

huge investment losses between 2007 and 2009, contributing to financial 

pressure from higher pensions paid for longer terms.

CalPERS expects its payouts to rise dramatically in the next few years, according to Santa Clara Director of Finance Gary Ameling. First, the giant fund is coping with $68 billion in investment losses over the last two fiscal years, shown in Figure 1. "Normally those [losses] get smoothed over 15 years," Ameling explains.

However, at the same time that baby boomers are nearing retirement, workers are retiring younger, living longer and making more money. The result is that CalPERS forecasts payouts will exceed projected contributions and earnings. Employers have to cover these "unfunded" commitments.

Santa Clara's CalPERS costs will almost 

double in the next 5 years. 

Santa Clara's CalPERS costs will grow modestly this coming year, but take big jumps in 2011-12, 2012-13, and 2013-14 – growing a total of $16 million between 2010 and 2015, as Figure 2 shows. Both absolutely and as a percentage of the City's budget, CalPERS contributions will almost double during that period.

One short-term step that the City is taking is to refinance its CalPERS liability for 30 years at a lower interest rate, which will save $225,000, according to Ameling. However, while this lowers the City's annual costs, like refinancing a mortgage, the clock starts ticking again for a new 30-year term.