The Benicia City Council unanimously voted to direct staff to begin establishing a pension trust fund for CalPERS benefits and allocate a one-time amount of $1.7 million received from a 2017 property tax appeal settlement from Valero at its Tuesday meeting.

The city provides retirement benefits for employees through its participation in CalPERS, which allows the city to spend roughly $5.5 million per year to fund pension liabilities. However, due to changes in actuarial assumptions made to estimate future liabilities, the city’s annual obligation fund is anticipated to grow to about $14 million per year by 2030-31 and level off that amount into future years. Additionally, the pension system’s costs have risen over the last decade and CalPERS adopted a new amortization policy in February, which writes off gains and losses over 20 years rather than 30.

Prior to the vote, the council heard a presentation from John Bartel of the San Ramon-based actuarial service provider Bartel Associates, who had previously spoken at a Feb. 2017 council meeting. The presentation provided an update on changes to CalPERS actuarial issues that had taken place since his last presentation.

Bartel said the current state of CalPERS was the result of historical and anticipated short-term investment losses, enhanced benefits which have been largely more expensive than anticipated, CalPERS’ contribution policy of not asking people enough on the unfunded liability and paying less than interest on it, and demographics.

“Little cities and towns throughout the state have been around for a long time, have been in CalPERS for a long time, but there are a large number of retirees compared to actives,” he said. “That generates a larger line of living for folks who are not around. It also generates higher asset values and more volatility through a combination of all four of those things.”

To that end, Bartel noted that CalPERS has made a number of changes.

“In my opinion, they have done the right thing,” he said.

Among these changes were moving into a situation where more than interest would be made on unfunded liabilities, making non-investment consumptions more conservative, taking into account the fact that people are living longer, shrinking the discount rate, updating the asset allocation and a new risk mitigation strategy.

Councilmember Tom Campbell asked Bartel if he had taken into account a possible recession in the future. Bartel said he was not an economist but was certain a slowdown would happen.

“I can’t tell you when,” he said. “We believe, in the long run, the average returns we’re using take that into account. They just don’t take that into account in a specific year.”

Bartel also said there was “no question the volatility of CalPERS contribution rates is the single biggest issue that I think the agencies should pay attention to.”

Mayor Elizabeth Patterson asked if there was more or less volatility because of reduced restrictions since changes to the regulation of markets in 2008.

“What (investment advisers) are saying is, ‘Expect more volatility,’” Bartel said. “Expect that when the market gets really high, you run a serious risk of the market dropping noticeably. There’s more volatility in the market, there’s more volatility in the informational conversations, there are lots of things that seem to be creating that volatility.”

Bartel presented three possible options for obtaining money to pay down the unfunded liability and rate stabilization: a pension obligation bond, borrowing from the General Fund, or one-time payments. He said the first option was not considered viable, and the second was a matter of taking from existing reserves. He also discussed a fourth option of having employees pay more. However, he said employers are rarely equitable.

Bartel next discussed what to do with the money once received. The three options discussed were making payments directly to CalPERS, establishing an Internal Service Fund and creating a supplemental 115 pension trust. The second option would set money aside and give the council control over it. However, he said, this would result in a lower expected return. The third option would allow money to be invested more aggressively to bring a higher expected return and target it specifically. Staff recommended the third option in a staff report.

Vice Mayor Steve Young asked what the city could invest in under a pension trust. Bartel said options included longer bonds and short-term quality investments.

Campbell expressed concerns about the way monetary numbers would be steadily increasing over the years, namely $500,000 over 20 years.

“Look at the way the numbers escalate over the years,” he said. “Our budget can’t afford that kind of money going up.”

Bartel said there was no easy option but doing nothing would be problematic.

“I’m sympathetic to the argument that no matter what we do, it’s not affordable,” he said. “All I’m suggesting is that if you do the 115 trust, that gets you a little closer to affordable than if you did nothing.”

In a public comment, resident Bob Livesay said pensions were a very real issue and agreed with Campbell that the city did not have the money to cover the proposed trust funding.

“Putting away half a million dollars with the $1.5 million you already have doesn’t take you very far,” he said. “It will not help on present issues.”

Livesay felt further direction should be provided to the city manager and staff to solve the issue and suggested economic development as an option. Patterson said the council has constantly met with City Manager Lorie Tinfow and Finance Director Cindy Mosser, and they would be using Priority Based Budgeting to help make the “difficult decisions” regarding cuts.

Councilmember Mark Hughes agreed with Livesay but felt there was no silver bullet solution.

“If there was a silver bullet, other cities would find it as well and they haven’t,” he said. “I’m fine with the general direction here. I’m just not sure I’m comfortable with all the numbers.”

“I agree with Councilmember Campbell, but I don’t think doing nothing is an option,” he added.

Ultimately, the council voted 5-0 to approve staff’s recommendation to establish a pension trust and allocate a one-time amount of $1.7 million.

In other matters, the council authorized the replacement of three police vehicles and two police motorcycles. Patterson and Police Chief Erik Upson also read a proclamation honoring Aug. 7 as National Night Out.

The council will meet tomorrow night at 6 in a special meeting to discuss granting a non-exclusive easement on a portion of Oak Road to Amports. The next regular council meeting will be on Tuesday, Aug. 21. All meetings are held in the Council Chamber of City Hall, located at 250 East L St.