Pacific Grove, CA Carmel Refinancing CalPers Debtby Richard Kuehn on 08/04/12
I've written many times on my blog about the myriad problems at our state workers pension fund, California Public Employees' Retirement System (CalPERS), which is severely underfunded. The Carmel Pine Cone broke the news this week that the City of Carmel plans to take over the indebtedness to CalPERS and issue municipal bonds to finance the city's retirement obligations. The debt has been with the city since 2003 when CalPERS imposed assessments on small cities like Carmel because it was underfunded. However, the interest rate being paid by Carmel and other cities is ridiculously high given the low rates in the current economic environment. CalPers is charging 7.5% on the debt currently (it was 7.75% last month) and the debt can probably be refinanced at 3-4% at a fixed rate. That's good news for the City of Carmel, which could save about $250K in interest costs on the $6.1 mil. debt. But it's bad news for CalPERS, which recently announced it has just 63% enough cash to fund future pension liabilities after losing $69 billion in the 2008 downturn, about a quarter of its funds. Because of the European crisis and subpar performance by outside fund managers, it earned a rate of return of just 1% for its fiscal year ending June 30, and that's inclusive of the interest it's getting from cities like Carmel that were close to 8%. The State of California and cities will need to contribute $233 billion to the retirement system to make up for the shortfall in the investment strategy. If more cities like Carmel start refinancing their CalPERS debt, the State of California will have to ask cash strapped cities to cough up even more money to meet its growing shortfall.