Old city hall
One of the main areas Berkeley has liabilities is the maintenance of city facilities. The old City Hall has seismic issues and needs work, for example

Berkeley’s City Council on Tuesday night received the first biennial report on the city’s long-term liabilities. The detailed breakdowns in the report from city budget manager Teresa Berkeley-Simmons make clear that the main areas with significant liabilities are police pensions, maintenance of city facilities, and watershed and storm drain maintenance and improvements.

Speaking about the presentation of the report, Berkeley City Manager Christine Daniel said she hoped the Council would agree that budget reporting was improving generally and that the council members’ feedback would contribute to even more enhancements. She said the genesis of the current report could be traced back to 2005 when staff produced a report on employee benefits, then in 2008 when staff started putting information about unfunded liabilities in the budget document, and finally in the fall of 2011 when presentations were made on the status of capital assets and infrastructure.

Projected cost of future payments to CalPERS by the City of Berkeley. The fastest growth in cost is for the city’s non-safety workers. Click the chart to access an interactive version.
Projected cost of future payments to CalPERS by the City of Berkeley. The fastest growth in cost is for the city’s non-safety workers. Click the chart to access an interactive version.

Working with an outside actuary, the city has aimed to fund 80% of pension liabilities on a 10- or 15-year time horizon. For fire and miscellaneous employees, Berkeley meets that desired standard: fire is funded 85% and miscellaneous 82%. Police pensions, however, are only funded 70%. According to Berkeley-Simmons, to reach the 80% mark within 10 years the city would need to contribute an additional $2.5 million to the Police Safety Plan each year for 10 years. If the goal is to reach 80% funding in 15 years, the annual contribution increase would be $1.7 million.

The report also estimates required capital improvements and maintenance of city facilities over the next five years, including buildings, marina docks and pools (but not major work on parks). Although the five-year estimate is for a required $23 million, the city’s budget only allocates $4 million for the work, creating an unfunded liability of $19 million.

Storm drains and the city’s Clean Stormwater Project represent another big chunk of unfunded liabilities. The city provides $2.3 million a year annually for storm drain work, which is supplemented by $245,000 annually from the University of California. But Berkeley-Simmons’ report calculates the unfunded liability at $37 million over the next five years: $32 million for capital improvements and $5 million for unfunded maintenance.

There are also shortfalls for retiree medical plans (although the most problematical, the Police Supplemental Retirement and Income Plan is now closed), workers compensation (although the report says it is a “good example” of how to address an unfunded liability over time), and the closed Safety Members Pension Fund and another closed SRIP for non-sworn employees.

A “simplistic” calculation on growth in payroll and benefit costs for the city over the next 10 years sees payroll grow from $134.7 million in FY12 to $169.7 in FY22 and benefits from from $76.5 million to $126.5 million over the same period. “Achieving a sustainable balance of both personnel and non-personnel expenditures against reasonable revenue projections will continue to require close attention, especially as the economy begins to recover,” the report notes.

City staff work to unblock a drain in Berkeley in March 2012. Storm drain maintenance is a key area in the city’s unfunded liabilities
City staff work to unblock a drain in Berkeley in March 2012. Storm drain maintenance is a key area in the city’s unfunded liabilities

The report addresses the question of why the city does not target 100% coverage of future liabilities. “The advantage of maintaining 100% funding for all long-term obligations at all times is that the organization will almost always be able to meet its obligations whenever demand is made for payment for each liability,” the report notes in concluding remarks. “The disadvantage is that a far greater portion of the organization’s cash is reserved or tied up, and cannot be used for operations, providing services or meeting other community needs or desires. The City has a history of prudently balancing its approach to future obligations with its response to current economic variables and as the economy begins to emerge from the impacts of this most recent recession, will continue to do so.”

The report has a number of suggestions for closing the various funding gaps. On PERS contributions, the report looks at the city’s savings from 2012 refinancings of some certificates of participation and a bond issue. These produced $5.7 million in present value savings in future debt service payments. In October, the City Council agreed to put the savings in the PERS savings fund, to help meet the growing PERS contribution obligations.

Prepayment of annual PERS obligations, which attracts a 3.8% discount, is also examined in the report. The report concludes that prepayment does not make economic sense because the CalPERS payroll projections and the city’s actual payroll do not match at the moment, and CalPERS provides credits for overpayment, not refunds. The report said city staff will monitor the situation and recommend prepayment when it produces savings.

credit: Kaia Diringer Berkeley Police Station
City budget manager Teresa Berkeley-Simmons said Berkeley Police pensions are only 70% funded. Photo: Kaia Diringer

To meet the shortfalls for infrastructure and capital assets, the report looks at two possibilities: setting aside “excess” property transfer tax and new bonding capacity.

Starting in FY2006, the city has made a policy of setting aside property transfer tax in excess of $10.5 million, which analysis suggested was an appropriate level for recurring PTT, ignoring fluctuations in property booms and busts. The report suggests that PTT over $10.5 million continues to be set aside in the capital improvement fund.

According to the report, the city has considerable new bonding capacity. The city currently has four outstanding general obligation (GO) bonds, not including bonds to be issued for Measure M, which passed last November. Just over $79 million is outstanding on the four GO bonds (Measure G from 1992, Measure S from 1996, Measure I from 2006, and Measure FF from 2008). By FY18 that debt drops to $57.5 million, by FY23 to $39.7 million, and by FY28 to $21 million, just over a quarter of today’s total.

Berkeley-Simmons’s report looks at two scenarios for Berkeley’s growth in assessed value to determine what the city’s bonding capacity could be in future — one possible avenue to deal with today’s unfunded liabilities. With 2% annual growth in assessed values over 30 years, there is $49 million capacity, and with 3% annual growth, $65 million in capacity (the scenarios assume a 6% discount rate, well above today’s low rates).

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Moody’s places Berkeley bonds under review
Unfunded liabilities prompt initiative, Council resolution [05.15.12]
Berkeley faces difficult path to funding pension liabilities [02.16.12]
Berkeley City Manager Phil Kamlarz: The exit interview [11.30.11]
City workers make sacrifices, help alleviate budget crisis [06.16.11]
Layoffs, fee increases proposed for 2012 budget [05.03.11]
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City budget faces $1.8 million mid-year shortfall [02.15.11]
Council faces tough decisions on unfunded liabilities [01.19.11]
Berkeley auditor report shows $310m benefit debt [01.10.11]
Some Berkeley city offices to close two days a month [06.23.10]
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Lance Knobel (Berkeleyside co-founder) has been a journalist for nearly 40 years. Much of his career was in business journalism. He was editor-in-chief of both Management Today, the leading business magazine...