The small, affluent city of Canyon Lake (population 11,000), citing potential rate increases of up to 50%, has formally asked to withdraw from the state’s embattled public employee pension fund.
The Southern California city is the first in the state to make the request now, according to Reuters, although other entities have pulled out in the past. Canyon Lake officials notified the $256-billion California Public Employees’ Retirement System (CalPERS) on April 4 that it is willing to pay a $661,000 termination fee to drop out.
CalPERS, which is locked in a struggle with bondholders and financially-stressed cities, counties and state agencies over pension obligations, agreed last week on rate increases of up to 50% for its members. The CalPERS board said the new rates were necessary to attain 100% funding and avoid a catastrophic shortfall in the future.
CalPERS’ obligations are currently funded at about 70%, up from 61% during the economic downturn five years ago. The pension fund’s assets plummeted $100 billion in 2007 to $160 billion, highlighting CalPERS’ vulnerability to shifting fortunes of the U.S. economy.
The rate increase is bound to be hard on cash-strapped municipalities. San Bernardino, already seeking bankruptcy protection in court, has suspended payments to the pension fund. Stockton, which has entered bankruptcy, has continued its pension payments despite howling from bondholders that CalPERS should be cut off before they take a financial haircut on debt owed them.
Although Canyon Lake officials pegged their buyout costs at $661,000, based on its unfunded liability to the fund, there is no guarantee that the actual cost won’t be higher. The city has just two full-time employees and contracts out for police and fire services.