State of the City

The state of the City of Encinitas is "drowning in unfunded liabilities."

In 2005, the city council voted city employees a 35 percent increase in pension benefits, such that many employees will make more money in early retirement than most Encinitas residents make working 40 or more hours a week. Money doesn't grow on trees, and the cost of this largesse is showing up in the fine print of CalPERS statements as “unfunded liability.”

That mistake in 2005 is perhaps forgivable, given that so many people thought the bubble would never end and real estate would make us all rich. What is not forgivable is that seven years later, with both housing market and stock market illusions shattered, this city council continues to refuse to discuss pension reform. Even as our neighbors in Solana Beach and Carlsbad adopted pension reform, the council majority in Encinitas will not allow it on the agenda.

Page five of the most recent CalPERS Actuarial Valuation for the Miscellaneous Plan for the City of Encinitas shows an unfunded liability of $25 million. That's just miscellaneous employees – not firefighters, not lifeguards, and not Water District employees. Each of those groups' pension funds is similarly underfunded.

Yet even the $25 million figure drastically understates the amount that the miscellaneous employee fund is underfunded. This figure uses CalPERS' assumption that it will earn an average of 7.75 percent a year on its investments. 7.75 percent is not a reasonable nor conservative assumption in an era of 0 percent money markets and 2 percent Treasury bonds. If 7.75 percent were a reasonable return assumption, you'd be able to walk into any bank or insurance company and buy an annuity that paid that much. Try it.

Because of the miracle of compound interest, this assumed 7.75 percent return generates hundreds of millions of dollars in assumed investment gains over the next generation. The city is relying on those assumed investment gains to fund its pension promises, and if returns fall short by even a few percent, the cost to the city will be catastrophic.

The city could, if it chose, calculate its annual pension costs under a more conservative return assumption, and start building a reserve fund to fully fund the pensions in the event that the CalPERS 7.75 percent miracle doesn't happen.

If the city council believes that the only way to attract good employees is to offer lavish retirement benefits at 55, that's a position worth considering. What is not worth considering is continuing to underfund these promises, pushing the costs off into the future. If you want to offer these benefits, then pay for them.

Don't tell us the state of the city is sound when you're systematically underfunding the pensions and racking up tens of millions in unfunded liabilities.

Editor's Note: The opinions expressed here are those of the author, and do not necessarily reflect the views or positions of Patch. If you are interested in becoming a blogger for Patch, you can send an email to editor Marlena Medford at marlena.medford@patch.com.