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City of Alameda Pension Contribution Requirements Likely to Skyrocket in 2011

This week’s jam-packed City Council agenda had many interesting items to cover – probably more than we’ll get to before the next council meeting. But this one is a killer – CalPers sent an actuary down from Sacramento to give Council a course in “PERS 101” because as the Mayor put it, “There really is a fundamental mis-understanding of the system…” Well, the Mayor can speak for herself, because we understand very clearly that the pension contribution hammer is going to come down on the City budget in 2011.

In short, the City makes cash contributions to CalPers to help fund defined-benefit pension plans for City employees. (Employees make contributions too.) CalPers’ investment managers invest that money, in theory to generate returns, to keep the plan funded and paying out benefits. The trouble is, the returns have been a little hard to come by lately. CalPers, like any good investment manager, diversifies investments across different asset classes – equities, bonds, real estate etc. However, as the CalPers actuary noted, diversification fails as a defensive asset protection strategy when ALL asset classes go in the tank, as they have during this recession.

For 2008-’09, the City will contribute about $11.6 million to CalPers for their employer contributions to the plan. For 2009-’10, the figure will be about $12 million, roughly flat. So far so good. But those contribution amounts were based on projections from the investment fund returns a couple of years ago. For 2010-’11 and 2011-’12, the City can expect their contribution amounts to rise because of the massive devaluation in the assets CalPers invests in, including real estate. The portfolio valuation as of June 30, 2009 will set the contribution levels for the next fiscal year, and it’s likely to be ugly. The portfolio in all likelihood will be marked-to-market at a significant loss which will send employer contributions (i.e. the City of Alameda) through the roof. Brace yourselves for more parcel taxes in the coming years.

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