Preparing for Rising Pension Costs: Benicia, CA Case Study

Finance officials are developing plans to use the City’s Section 115 Trust to help manage projected cost increases.

By Chris McIsaac, GovInvest Pension Thought Leader

Officials in Benicia, CA have begun developing a plan to mitigate potential budget impacts of rising annual pension contributions over the next decade.  As part of this effort, the City is working with GovInvest to explore how best to utilize nearly $6 million that has already been set aside for the purpose of managing the impacts of these rising pension obligations.

Benicia, CA—a Bay Area City comprised of approximately 28,000 residents—is one of the many cities in California that provide retirement benefits to public workers by participating in the California Public Employees Retirement System (CALPERS).  Under this arrangement, the City determines the benefit package offered to employees and makes annual required contributions to the fund.  CALPERS then handles all aspects of plan administration, including managing the investments, providing actuarial services, setting plan assumptions and making benefit payments to retirees.

As of fiscal year 2020, Benicia’s share of CALPERS’ unfunded liability was nearly $70 million and annual employer contributions totaled $6.9 million, accounting for around 14% of the City’s $50 million general fund revenues. Over the past two decades, CALPERS employer contribution requirements have grown in order to pay down the plan’s unfunded liability that was caused by several factors including two recessions, benefit enhancements, and changes to actuarial methods and assumptions. For Benicia, annual required contributions doubled in just the past five years and are projected to exceed $14 million by 2031.

Faced with rising contribution requirements and recognizing the City had little direct control over the annual pension cost payable to CALPERS, the Benicia City Council established a Section 115 Trust in 2019.  The Trust administered by Public Agency Retirement Services (PARS) is used to set aside money for future pension contributions. Named after the section of the federal Internal Revenue Code authorizing its use, the Section 115 Trust is separate from CALPERS and has no direct impact on Benicia’s reported pension liability or the size of the annual required contribution.  Rather, it allows the City to build up a fund balance through contributions and investment returns that can be used to help cover the cost of future pension payments to CALPERS.

“Past City leadership had the good foresight to establish a Section 115 Trust, and funded it when they could,” said Benicia Finance Director Bret Prebula. “Now, given the size of the pension challenge, we’re starting the process of developing a more detailed and strategic plan for how the City should manage the $5.9 million trust funds moving forward in order to ensure budget sustainability and service continuity.”

Some of the key considerations for this planning include the size and timing of any additional contributions to the Trust, how to invest the funds, and when to begin withdrawing the proceeds to make pension contributions. Forward looking financial analysis is essential to understanding the interaction between these factors over time, revealing budgetary tradeoffs and ultimately identifying potential solutions that strike a reasonable balance between funding the Trust, making required pension contributions and providing essential government services to residents.

To support this effort, Benicia will be using the GovInvest cloud based financial forecasting software to analyze policy options accurately and present results in an easy-to-follow visual format that simplifies complex information and increases transparency.

“Crafting a thoughtful set of policy options for the Council’s consideration is going to require a significant amount of analysis, much of which just wouldn’t be feasible in Excel,” Prebula said.  “I knew from past experience that using GovInvest for this project will allow me to spend more time advising Council members on how to interpret results and less time updating spreadsheets.”

Benicia’s Trust is less than three years old and remains in the “growth stage” where the main goal is to increase the asset base.  Because of this, now is the right time for developing an official policy around future deposits, investments and withdrawals.  With pension contribution increases on the horizon, this effort to craft a policy that effectively balances pension obligations and other budget priorities will provide City leaders with helpful guidelines for managing the Trust over the long term.  Under the timeline discussed at a Pension Study Session held in late December 2021, the City staff expect to bring a proposal to the Council for consideration in Spring 2022.

About the Author: Chris McIsaac is an experienced public policy consultant specializing in state and local pension, tax and budget policy. Previously, he managed state and local engagements for the Public Sector Retirement Systems Project at the Pew Charitable Trusts in Washington DC, served as an advisor to two Arizona governors, and published research on topics including pensions, tax policy and healthcare for the Arizona Chamber of Commerce Foundation.

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