The Berkeley City Council special session on the $310 million — or higher — unfunded liability on promised employee benefits revealed the difficult choices faced by the city.
A presentation by budget manager Teresa Berkeley-Simmons made the root of the problem clear. The California Public Employee Retirement System (Calpers) assumed annual investment returns of 7.75%. The crash of the Great Recession in 2008 meant that returns in the fiscal year ending June 30, 2009 were negative 24%, producing an annual loss against assumptions of 31.75%. For Berkeley’s city employees, that has produced investment losses of $200 million.
“We can’t grow our way out of this,” Berkeley-Simmons said.
“Even if Calpers gets 7.75% forever now, they have lost $200 million on which we’ll never get 7.75%,” explained City Auditor Ann-Marie Hogan.
City Manager Phil Kamlarz said the money to close the gap has to come from either increased contributions or a reduction in cash available for city services, or some combination of the two. Long term, the gap can be closed by reduced benefits for new employees, but that does little in the short and medium term.
“Rather than cut services, people are asking employees to contribute more,” said Mayor Tom Bates. “That’s the path we have to go down. People will need to start contributing more. It’s unfortunate, but they’re lucky to have a job.”
District 7 Council Member Kriss Worthington cautioned that it was important not to perpetuate falsehoods about public sector workers. “There’s not a dramatic difference between private and public employees,” Worthington said. “We need to smash that myth and get the facts into people’s hands.”
District 5 Council Member Laurie Capitelli said that the scale of the problem meant that there was no quick fix. “We didn’t get into this problem overnight, and we’re not going to get out of it overnight,” he said. “I’d like to set a five-year goal and a ten-year goal. I think our legislature has been guilty of kicking the can down the road, and I don’t want that and I don’t think any of my colleagues want that as our legacy — that we somehow manage through trick or treat to kick the can down the road.”
The immediate opportunity for the city to begin to close the gap comes at the end of the month, when negotiations begin on the police contracts. Some of the largest unfunded liabilities are with the police. Capitelli pointed out that according to Hogan’s figures the police medical benefit is 87% unfunded. According to Hogan, the generally accepted prudent standard is for benefits to be at most 15% unfunded.