On Friday, Aug. 17, the City published its Fourth Quarter Financial Report for the now completed 2018 Fiscal Year. While it does not contain final numbers for the 2018 Fiscal Year, it provides a close approximation of those numbers. It is fair to say that the closing numbers are far better than those projected in June 2017. But as we celebrate them, we also must keep in mind proper context – and caution.
Let me focus solely on the General Fund (the numbers for the separately accounted-for water and wastewater enterprises are also good – with revenues more closely on track with prior projections). General Fund revenue for the completed 2018 Fiscal Year is likely to exceed projected revenue by about $1 million. Expenses for the 2018 Fiscal Year are likely to be $850,000 less than budgeted. The result is that the estimated net position of the General Fund (reserves) at the close of the 2018 Fiscal Year is $6,115,663 or about 49 percent of the General Fund budget, nearly double the net position (25 percent) in the projection in the Fiscal Year 2018 budget approved by the Council in June 2017. This is indeed very good news.
But we need context too. At our Council meeting last week (June 12), we heard from Doug Pryor of Bartel Associates LLC, a prominent actuary firm. Pryor reviewed our unfunded Actuarial Accrued Liability. As he said, ideally there should be no accrued pension liability; we should be current or close to current in our funding of employee pension benefits. This is not our case.
Our General Fund pension Actuarial Accrued Liability, as calculated under the current CalPERS discount rate (7.375 percent), is $11.5 million as of June 30, 2016 (the latest date for such calculation under CalPERS rules). Pryor explained that the current CalPERS discount rate is too high (as has also been much observed nationally in the financial press, especially the Wall Street Journal), and that a much more realistic rate is 6.5 percent. This lower discount rate drives up our Actuarial Accrued Liability in the General Fund by $4.2 million to to $15.7 million as of June 30, 2016. As an aside, the same upward swing in PERS costs is falling upon other California governmental entities -- the problem is not unique to St. Helena.
Now, our unfunded PERS liability is a serious and impactful liability, with large consequences for our budgeting and potentially also for service levels, that we cannot evade addressing (as some cities have done, with difficult consequences). Thus, as I see it, while our net position (reserves) in this past fiscal year improved greatly over what the City projected, our PERS liability, when addressed realistically, also even more greatly increased.
As mayor, I focus on our financial position, now and into the future. We cannot operate if we are not financially sustainable. Bottom-line: it seems prudent to use a significant portion of the substantial unbudgeted increase in reserves to reduce our PERS liability. This is appropriate prudent fiscal discipline that I will be urging on the Council.
Finally, a short word about projections: even in the short term they can be quite volatile, as demonstrated by the Fourth Quarter Finance Report. I review with care the assumptions underlying the City’s projections to ensure that I feel that they are as fair as possible. None of us are soothsayers, unfortunately. Our City prepares annually a Long Term Financial Forecast. It is a vital planning document. It remains critical that we update the Forecast annually due to unanticipated deviations in projections of both revenue and expense.
I often say we are St. Helena lucky. Yet, we have a mounting PERS liability. We cannot in good conscience fail to address it during our “lucky” years.
Mayor, City of St. Helena