Pension Crisis: Simi Valley and Riverside County

Back in July 2019, I wrote about how Simi Valley was looking into issuing pension obligation bonds. They must have decided to put that idea on hold, because according to the Simi Valley Acorn that idea is back. One reason is that the unfunded accrued liability increased from what was $147.4 million in July 2019 to a current estimate of $158.8 million:

On Dec. 9, the City Council voted 4-1 to file for judicial validation with the Ventura County Superior Court, a first step that would allow the city to issue a pension obligation bond as a means to refinance the interest rate on debt payments to CalPERS. That rate is currently 7% and could be reduced to 3% or 4% with the bond, officials said.

. . . Councilmember Elaine Litster objected because she’s concerned about the impact a bond could have in the long-term. She pointed to cities in San Bernardino and Stockton that issued obligation bonds to deal with pension liability problems and then faced bankruptcy.



Having an unfunded accrued liability of $158.8 million is rather small when compared to Riverside County, which is at $3.5 billion. It was previously $3.0 billion so somehow in just one year that unfunded accrued liability increased by over 15%.

NBC Palm Springs writes:

With $8.1 billion in assets, the county’s retirement apparatus is about 70% funded in both the miscellaneous and safety categories.

. . . A major influence on pension costs is CalPERS’ investment performance, which county officials have long complained has lagged the markets as a whole due to a state preference for narrow investment focuses — what Supervisor Kevin Jeffries referred to as “politically correct” choices — over broader money-making opportunities. 

According to the report, the mammoth public pension fund’s assumed rate of return on investments — also known as the discount rate — in the most recent fiscal year was 6.55% — nearly half a percentage point below the anticipated rate of return of 7%. 

. . . In order to make up for losses, the county will have to push its contribution rates up in the current fiscal year — to the equivalent of 24.5% percent of payroll for the safety category, compared to 21.6% currently, and the equivalent of 43% of payroll for the miscellaneous category, compared to 37.3% now, according to the report. 

The Press Enterprise adds this little nugget:

The 2020 report from the Pension Advisory Review Committee shows the county’s unfunded pension liability grew $424.5 million to $3.5 billion as of June 30, 2018, due in part to CalPERS lowering its assumed rate of return from investments.

So this $3.5 billion is based on returns as of June 30, 2018. I'm not sure how this all works out as we're now in February 2020. Why exactly is Riverside County (and I'll assume Simi Valley) working off of data from 18 months ago? I wonder if the huge stock market returns for 2019 help mitigate the unfunded accrued liability?

Also, I wonder if these increases in the unfunded accrued liability for cities like Simi Valley and counties like Riverside is partially due to how California is incrementally lowering their assumed rate of return.

Finally, notice how in the NBC Palm Springs article there is the "politically correct" statement. This might refer to the social investing that is done by CalPERS. If true, I wonder if I'm going to start reading more and more complaints about how CalPERS is purposely getting returns that are below what the over-all market would provide.