Expert: Costa Mesa must address pensions

COSTA MESA — A financial consultant advised the City Council this week to change its spending habits and address mounting pension costs.

At issue is the poorer-than-expected performance by the California Public Employees’ Retirement System (CalPERS), which is the pension program Costa Mesa and other cities pay into.

“If you continue to pay what CalPERS is asking you to pay, that gap will continue to grow,” said actuary John Bartel, president of Bartel-Associates, a Northern California-based consulting firm. “The odds are not on a great investment return.”

Bartel, who spoke this week at a council study session, said CalPERS’ projections that investments will earn 7.75% annually were overly optimistic.

The equities markets, he said, are too volatile for Costa Mesa to count on its debt with the statewide retirement fund shrinking any time soon.

Costa Mesa’s payments to CalPERS cover the annual costs for the city’s already retired workers and payments to cover its future retirees.

The fund’s investments are supposed to help, but the recession, which was followed by market volatility, sapped years of gains in short order, which left cities statewide to cover the losses.

Add Costa Mesa’s substantial reliance on sales-tax revenue — also bruised in the recession — and the city found itself in a hole hard to climb out of without using its reserves.

“Pensions are not the problem,” Bartel told council members at the study session Tuesday. “They’re exacerbating the problem.”

The problem, at least according to four of the five members of the council, is that Costa Mesa’s pension payments are taking up an increasing amount of the city’s budget.

An estimated $18 million of Costa Mesa’s $114-million budget will fund pensions this year.

The council majority wants to reduce those costs — through outsourcing, mostly — and increase city spending on maintenance and capital improvements.

Councilwoman Wendy Leece, the lone dissenting voice, wanted to negotiate with employees before trying to outsource their jobs.

Bartel suggested the city pay more on top of what CalPERS requests from it annually, a move that would limit the peaks and valleys in its annual costs, but be more expensive in the short term.

The biggest change, though — one that non-public safety employees agreed to last year — would be to create a second pension tier for new hires, Bartel said.

The Costa Mesa City Employees Assn., representing more than 200 city workers, last year switched from a 2.5% at 60 to a 2% at 60 pension formula, which accumulates retirement slower and maxes out later in a career.

Bartel suggested police and fire employees followed suit. Both departments’ employees work under a 3% at 50 formula, meaning they would theoretically max out their retirement at 50, earning 3% a year. Most employees have to work longer than that to max out their retirement in reality.

Bartel said reducing public safety’s plan by even 1%, to 2% at 50, could save the city as much as 10% in costs over a decade.

The city could also stop paying the employees’ share of their pension payments, Bartel said. Those payments covered by the city are counted as income for the employees, so it goes into their final pension calculations.

The city could save as much as $7 million over 10 years if it switched police and fire to a 2% at 50 plan and stopped paying employees’ portion of their pensions for current and future workers, according to Bartel’s calculations. The numbers are rough estimates that don’t calculate in a 5% contribution city employees also pay and other benefits workers receive after retirement.

The council will have to negotiate any change in its pension formula with the employee groups at a future date.

joseph.serna@latimes.com

Twitter: @JosephSerna