Ever since getting involved with local politics and now serving on the City Council, I’ve seen firsthand that our city’s fiscal health and stewardship over our tax dollars has been nothing short of impressive.
The term “balanced budget” in Sacramento is either a misnomer or achieved by ignoring blatant fiscal responsibilities that have yet to fully surface. But here in Santa Clarita, it means exactly that! We hold a 20% operating reserve each budget year, our CalPERS funding obligations has continually sat near 90% funded (except when the CalPERS portfolio fails to live up to their promises), and our other post-employment benefits (OPEB) obligations are fully funded.
This is all why we are continuing to prioritize investments into public safety, open space preservation, public parks and infrastructure designed to improve the quality of life to anyone who calls Santa Clarita home!
The massive and continually growing unfunded pension liability in California is no secret, and last year the number was estimated to be around $298 billion (at the actuarial rates).
If you wanted to look at a more conservative market rate, estimates come in over $800 billion in unfunded liability waiting to be addressed, if not more!
This burden will not simply disappear, and in order to bring it under control, the state will have to make large contributions to fulfill promises to the retirees who have paid into the system. But now, the state has a double whammy on its way.
First, the state budget, after touting years of surplus during the pandemic (amazing what “free” money can do), is looking at a deficit over $20 billion.
Second, CalPERS released its investment for the fiscal year that ended June 30, and for the first time since 2008, it sustained a 6.1% investment loss.
In November 2021, the CalPERS Board of Administration had lowered the discount rate from 7% to 6.8%, meaning the program would be making less money than expected, and cities would be on the hook for more of the pension dollars.
But not only did CalPERS not hit 6.8%, they went negative on their return.
So, aside from just acknowledging that missing your investment numbers is not a good long-term plan, what happens now?
Long-term investment promises are not being met, return rates on the investment portfolios are overinflated to what is actually occurring, and the state is not calling on employees to up their contributions for their retirements, which simply leaves putting more onus on local municipalities to cover the costs.
Think about that: CalPERS misses its mark, and the result is they CHARGE cities like ours for their failure.
This charge is in the form of what’s called a city’s unfunded accrued liability (UAL) pension cost. This past year alone, because the state made a negative 6.1% when they anticipated a 6.8% return, that means cities are now on the hook to cover the nearly 13% difference.
While the impact of this financial miss will not hit immediately, rest assured this means Santa Clarita, and cities across the state, will see their funded pension percentages take a drastic hit on future budgets, causing more dollars to be pulled away from important local infrastructure needs.
Furthermore, California also has significant other post-employment benefits obligations, which are the costs associated with providing health care benefits to retired state employees.
These costs are also mounting, with then-Controller Betty Yee announcing in August 2022 that these benefits now exceed $95 billion, which like the CalPERS liabilities, continues to rise, with the plan to address it seemingly a mystery and relying on just a long-term belief that it will all work itself out.
California is not immune to the inflation caused by the pandemic, supply chain interruptions, and overspending and borrowing at the federal level, but unfortunately, we have not truly helped ourselves prepare, either.
In Santa Clarita, we have several budget philosophies that have served the organization well through our decades of existence. First on the list in the city budget is, “Decisions made in good times are more important than the decisions made during bad times.”
When we come out of this difficult economic time, it is imperative CalPERS take an honest look at its trajectory, and find solutions that, even if politically challenging, can protect those who have given their careers in service to the people of California.
Otherwise, will continue to watch an ever-increasing liability waiting to become more than just a talking point, but a financial time bomb that may very well rob future generations of opportunity, retirement and financial stability.
Jason Gibbs is a member of the Santa Clarita City Council. “Right Here, Right Now” appears Saturdays and rotates among local Republicans.