Newport Beach City officials are advocating for policies aimed at increasing long-term sustainability in the state public employee pension fund, CalPERS, as Newport Beach continues to make significant progress in paying down its debt obligations to the system.
On November 16, the CalPERS Board of Administration decided to maintain the fund’s discount rate, or the expected rate of return of the pension fund investments, at the current 6.8 percent. The discount rate had been lowered from 7.0 percent to 6.8 percent in July through CalPERS’ Funding Risk Mitigation Policy, which automatically lowers the discount rate in years when investment returns are above the assumed rate of return. Prior to the recent discount rate change, Newport Beach had asked CalPERS to lower its discount rate to 6.5 percent or below, a more conservative number that could help further reduce future risk.
“While we are pleased that CalPERS did not raise the discount rate any higher, we were hoping for a lower rate that would better match Newport Beach’s conservative approach,” said Newport Beach Mayor Brad Avery. “A lower discount rate would provide more long-term sustainability for the fund. However, we will continue to aggressively pay down our pension obligations to ease the burden on future City budgets.”
The City’s unfunded liability in the pension system results primarily from a difference between the expected rate of return and the actual rate of return from the CalPERS investment portfolio. If the actual rate is lower than the expected rate, the gap widens, and employers (CalPERS local agencies) are obligated to make up the difference.
Newport Beach expects to eliminate its unfunded liability by 2030, thanks to an aggressive payment schedule. Beginning in 2018, the City Council decided to increase annual payments to $35 million a year, $9 million more than required. This fiscal year, for the second year in a row, the City will contribute $5 million more as an additional, discretionary payment, bringing the total contribution to $40 million.
“Overall, Newport Beach is in a strong position relative to most other cities and public agencies,” said Council member Will O’Neill, chair of the City’s Finance Committee. “We will continue to advocate for policies that will create greater sustainability and long-term stability in the CalPERS system.”