* Termination letter sent to biggest U.S. pension fund
* Other cities look for ways to rein in pension debt
By Tim Reid
LOS ANGELES, April 17 The tiny California city
of Canyon Lake has served notice on the state's pension fund
that it wants to quit the plan, at a time when cities across the
state and the United States are looking at ways to rein in
soaring retirement costs.
Canyon Lake in southern California is a city of 11,000
people. But its decision to quit the powerful Calpers -
America's largest public pension fund with $256 billion of
assets under management - could presage much larger problems for
the system as it battles with Wall Street bondholders in the
bankruptcy cases of California's San Bernardino and Stockton.
Canyon Lake, which says it is ready to pay a termination
fee, sent a letter on April 4 to the California Public
Employees' Retirement System (Calpers) stating that it wants to
end its relationship with the pension fund.
A major factor in its decision was a likely move by Calpers
to raise its employer contribution rate by 50 percent in coming
years - a decision the fund's board approved on Wednesday
Calpers confirmed that it had received Canyon Lake's
"required signed resolution of intention to terminate" adding
other cities and counties have ended their contracts with the
fund in the past. No other city or county in California is known
to be taking the step to currently quit the plan.
"The problem here is the uncertainty for Calpers, and that
is how many cities might opt out," said Michael Sweet, a
bankruptcy attorney with Fox Rothschild in San Francisco.
"That is the unknown. The issue here for Calpers is if
Canyon Lake becomes a trend."
Pacific Grove, a California coastal city of 15,000, informed
Calpers earlier this year that it wants to explore ways to
renegotiate its obligations to the fund. Other California cities
are taking legal and financial advice about their obligations to
Canyon Lake said it has looked at Calpers's website, which
states that its unfunded liability to the fund is $661,000.
Richard Rowe, Canyon Lake's interim city manager, said the
city decided it would be cheaper to borrow money to pay off
Calpers rather than continue to pay the fund.
The city only has two full-time employees. Payments to
Calpers for the pair will cost the city about $35,000 in the
next fiscal year beginning July 1, Rowe said. If the city quit
Calpers and turned those jobs into part-time positions with much
lower benefit structures, the city would save about $88,000
annually in pension and health costs, Rowe said.
Servicing a 10-year loan to quit Calpers will cost the city
about $77,000 annually, Rowe said - but it would be one line
item in the city's budget that should not change.
Out of a total city budget of $3.6 million, $2.6 million is
spent on police and fire costs. That is contracted out to
Riverside County and the city has no control over those Calpers
The city wanted to quit Calpers because it looked like
payments to the fund would continue to increase, and Rowe said
it was frustrating that the city had no control over that.
In the last 10 years, the amount paid to Calpers by
California and the cities rose nearly four times to $7.8 million
in fiscal 2012.
According to the city, its employer rates to Calpers have
risen from 12.8 percent to 17.9 percent in the last three years.
Rowe said they have also asked Calpers for an exact termination
fee, amid concerns about a rising unfunded liability figure
calculated by the fund.
"Budgeting is extremely difficult," Rowe said. "We have no
ability to make long-term forecasts because we don't know how
Calpers's long term liabilities are going to be resolved."
Brad Pacheco, a spokesman for Calpers, said the fund had not
performed any termination calculations for Canyon Lake.
Pacheco suggested the city's assumption that its termination
fee was $661,000 might be premature.
"We suspect that they used the hypothetical number from the
recent valuation report in the action with their City Council,"
The assets of a city that terminates from Calpers are "are
put into a more conservative risk pool."