Newport Beach grapples with soaring pension liabilities

With Newport Beach’s unfunded employee pension liability expected to soar to $315 million in 2017, city leaders are walking a tightrope in their efforts to pay down the debt while maintaining a high quality of life for residents.

The city’s Finance Committee last week reviewed a staff proposal to increase annual and discretionary payments to the California Public Employees Retirement System to help pay off the city’s growing unfunded pension obligations.

The city’s unfunded liability, which reached $276 million in 2015, is projected to climb to $315 million in 2017, according to a city staff report. The unfunded pension liability is the difference between the amount the city owes in retirement benefits and the money it has set aside to fund them.

Each year, city staff looks for ways to more quickly pay down the city’s unfunded liability compared to what the state recommends. In the coming months, the Finance Committee will be making a recommendation to the City Council about how much Newport should contribute to the liability in the next budget.

“This is our biggest nut to crack,” said committee member Patti Gorczyca.

The challenge for the city is that it is responsible for paying down the liability, but the amount of debt fluctuates annually based on CalPERS investments, making it difficult for city leaders to get their arms around the issue, officials have said.

The California Public Employees Retirement System is expected to receive a 7.5% annual return on its pension investments. In 2015 the investment earned 2.4%, which resulted in Newport’s liability growing from $252 million in 2014 to $276 million.

In 2016, the investment fund again performed poorly, earning a 0.6% return, which officials say will further increase the city’s unfunded liability to more than $300 million.

Staff on Thursday suggested the city begin paying on the 2016 investment loss during the 2017-18 fiscal year and pay down the two-year losses over a 20-year period rather than 30 years to save money on interest.

Staff also recommended the city make one-time payments to pay down the debt faster and consider budgeting for higher annual payments in years it can afford it.

If approved, the proposal would require the city to pay $5 million more to the state agency in the first year but result in a $69-million saving over 30 years, according to city staff.

Several committee members emphasized that the city needs to balance paying off its unfunded liability with maintaining the services that residents expect.

Councilman Keith Curry, who also sits on the Finance Committee, said major reforms to the CalPERS program are needed at the state level to help municipalities get a handle on the issue.

“Chasing the unfunded liability number is a fool’s errand,” he said. “The real issue we need to focus on is our affordability. I don’t think this is a solvable problem at the municipal level.”

Rising unfunded pension liabilities isn’t a new issue for Newport Beach.

City leaders have taken steps to mitigate rising pension costs over the last several years, including establishing lower benefit formulas for new hires, having employees pay more of the pension costs and reducing staff by nearly 100 employees.

The City Council approved a fresh start payment plan in 2014, which increased the amount of the city’s annual payments to the fund, allowing them to get caught up after 19 years. In theory, the move allowed the city to pay the pension costs in a more timely fashion, with less money going to pay off interest.

Committee member and City Council candidate Will O’Neill said that although the city has taken proactive steps, there is more work that needs to be done.

“More money toward this issue necessarily means less money is available for services to our residents,” he said. “We risk our fiscal house going up in flames if we take our eyes off this front-burner issue.”

Hannah.fry@latimes.com

Fry writes for the Daily Pilot