With high hopes of taming growing retirement costs, Scotts Valley City Council adopted a new pension-funding policy, during its regularly scheduled meeting Dec. 7.
After months of review, elected officials agreed to select a so-called Section 115 Trust, which is designed to generate returns without forking money directly over to the California Public Employees’ Retirement System.
“The fact is that this City has this debt out there of $24 million that CalPERS is charging you a 6.8% interest rate on,” said Mike Meyer of NHA Advisors, explaining why a 115 Trust makes the most sense for Scotts Valley. “You have a bit more control over your investments.”
Coun. Derek Timm thanked former Scotts Valley finance director Jack Dilles, a current councilor, for his work on a subcommittee evaluating potential courses of action.
“One good thing for the public to understand is, just about every city in California (is) in this situation,” Timm said. “We’re all facing this mountain, and if we don’t find ways to calm that, we’re going to find ourselves in three, four, five years…in a pickle.”
NHA Advisors met with the Pension Cost Management Committee three times.
During the Aug. 17 workshop, officials dug into the details of Scotts Valley’s retirement plans, came up with pension cost projections and compared different options to fund them.
The threat of a recession loomed large over the planning, and while committee members estimated Scotts Valley could afford to put around $1.5 million to $2.5 million aside, there seemed to be a big upside in not handing that to CalPERS right away.
So, during its second meeting, the committee dove deeper into the 115 Trust option and looked at the approach other municipalities have been taking.
At the final meeting, the finance folk worked up a proposed policy. That included the following provisions: investing $2 million up-front; saving 3.1% by prepaying in July each year; and a target funded ratio of 85% for pension plans.
Councilmember Dilles noted that a Section 115 trust carries slightly more risk than pursuing a more conservative investment strategy, but also allows Scotts Valley to take advantage of positive market swings.
“We’re going to earn more, which will help us bring down our unfunded liability,” he said. “But still it is a little bit more of a risk.”
Mayor Donna Lind said other League of California Cities members have felt the 115 Trust is a good option.
Dilles said he feels more comfortable now that the policy has come forward.
“It’s been a good process,” he said. “We really need to pay down our pension debt, and we’re taking some very constructive steps to do that.”
The policy was approved unanimously, with Vice Mayor Jim Reed absent.
Council also extended the work of the committee until the end of June, so it can consider Section 115 Trust providers.
Councilmember Randy Johnson, who was adjusting to the new iPads in the chambers, said it was important to be prepared, since there are financial storm clouds on the horizon.
“It’s threatening to the fundamental welfare of cities everywhere,” he said of ballooning retirement costs and why he liked the 115 Trust option. “There are probably no great options, but this one sounds pretty good.”
*An earlier version of this story stated the $2 million payment would be an annual sum. In fact, it will be one-time seed money.