Richmond’s $446 million in retirement debt like ‘cancer’ on city’s finances

Sean Pyles

blogimage.jpg“If you don’t bite the bullet now, you’re going to bite ten of them later.” 

That was the message from Daniel Borenstein, a Contra Costa Times columnist who has written extensively about public pensions. Speaking before the Richmond Rotary Club this past Friday, Borenstein cited decades of fiscal mismanagement as the main cause of this crisis.

Richmond has a staggering $446 million in unfunded public pension obligation – that equates to $4,150 per resident of Richmond.  According to Borenstein, it will take a complete overhaul of the city’s finances to dig us out from under this amount.

The $446 million is made up of $320 million in public pension debt and $126 million in retiree health benefits. While the city has a long-term plan for the public pension debt, there is no plan for the mounting costs of retiree health benefits as of yet. 

“Think of it as a huge credit card debt,” Borenstein explained. “The city is not making even the minimum payments. As a result, the balance is growing rapidly.” 

To tackle this debt, Borenstein calculates that the city needs to pay an additional $9 million a year, increasing the annual payment to $13 million.  With that additional amount, this debt could be cut nearly in half within nine years, according to Borenstein. 

That’s easier said than done.  Richmond currently has an operating deficit of over $10 million, which makes finding an additional $9 million for retiree health benefits a serious challenge.

“This debt is going to impact public services,” warned Borenstein. However, Borenstein explained that addressing the debt now is better than the alternative of kicking the can down the road. Either Richmond can work out a plan now and cut the debt in half over the next nine years, or see it balloon to $178 million dollars in the same amount of time.

“[Public pension debt] is like a cancer that keeps growing,” explained Borenstein.

Richmond is not alone in this crisis. Borenstein explained that many municipalities in California are confronted by similar public pension debts as a result of underfunding pensions, which are supposed to be pre-funded. Under a functional pre-funded model, employees earn benefits for each year they work. Money is supposed to be set aside and invested at the time of labor so the funds are available when the employees retire. That’s not what’s happening in Richmond.

As retiree health care costs are estimated to increase, Borenstein explained, it would take 30 years to balance this debt if the city pays his suggested $13 million annually. 

“Doing it right means a city has to take initiative on its own,” he said. “That means paying off debt for past service in more reasonable period than 30 years. There is no reason grandkids should be paying for this debt from work a generation before. 

Borenstein painted a detailed picture of the crisis for the audience at the Rotary Club, but no specific solutions were proposed. Sorting through finances and creating a plan to conquer this mounting debt was left to the city to figure out.

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  • Don Gosney
    commented 2015-03-30 16:55:06 -0700
    The pension model that most government agencies use is flawed in so many ways.

    First, elected officials are responsible for awarding the pension benefits to their employees. They often do this to curry favor with the employees and their unions so the next time the put their name on the ballot they can claim the support of the employees.

    They tend to ignore the basics of money management in that you don’t give away the store. You don’t offer wages, pension and health care benefits unless you have a way to pay for them. This doesn’t mean that the employees are undeserving. It just means that if there isn’t a way to pay for them then maybe they shouldn’t be offered up.

    Secondly, these same elected officials and the managers (city, county, etc.) struggle with their budgets and rather than tell everyone they simply don’t have the funds to pay for these expenses, they often put off banking the pension monies for another day. Maybe they hope that the problem will remain hidden until after they leave and it will be the next guy’s problem—and it often is.

    They can’t seem to embrace the idea that they need to pay as they go. If an employee has racked up XXX amount of dollars in pension benefits then the governing body needs to set aside XXX amount of money to pay those benefits when the time comes.

    This is what’s meant when you hear that a pension plan is fully funded. It means that money has been set aside to pay for the pensions. They’re not hoping the their investments do so well that they will cover the shortfall. That’s unrealistic and deceptive.

    With the City of Richmond, they relied on Calpers too much with their predictions of returns on investments that failed to materialize.

    But that’s only a small part of their problem because they failed to set aside even the basic amounts necessary. That means that as we have to dig deep into our pockets to pay for this year’s pension set-asides, we’re having to dig even deeper to pay for last year’s pension set-asides. And when we don’t have the money for this year’s obligations, where does anyone think we’re going to find the money for last year’s obligations?

    Someone needs to seriously sit down with City staff and the public and ask the hard questions and hold the appropriate people accountable. If it was our elected city officials then it needs to go on record that they screwed up. If it was City staffers, then they need to be held accountable. Sticking their collective heads in the sand is not a viable option.
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