by Gray Mollenkamp | Special to the Courier

The failure of a German lender 14 years ago played a role in enabling Claremont to infuse more money into its unfunded pension liabilities through a strategic repurchase of pension obligation bonds.

While cities across the state struggle with gaping budget deficits, Claremont is taking steps to manage its pension obligations.

California’s unfunded pension liabilities totaled $250 billion in the fiscal year ending June 30, 2023, the highest in the United States. In effect, California owes more to retirees in benefits than it currently has available.

Claremont’s ability to move money toward the liabilities dates to 2006. In that year, bonds issued in Claremont landed in the office of Hypo Real Estate, a Munich, Germany bank. Following the 2008 global financial crisis, HRE was taken over by FMS Wertmanagement, a debt management entity tasked with managing its assets.

Now, Claremont is unwinding that bond deal to pay down its own debt.

The Claremont City Council initially issued pension obligation bonds totaling $6.1 million in 2006 as part of a funding effort to the California Public Employees’ Retirement System, known as CalPERS. With an outstanding balance of $2.03 million in 2023, the City Council was approached by FMS to repurchase the bonds, maturing June 1, 2027, at a 10% discount, leading to a net bond value of $1.83 million. That early repayment saved the city $157,000.

“We had originally anticipated the debt service payment, which was around $600,000 a year roughly, to continue to pay down that $2.03 million obligation,” said Jeremy Starkey, Claremont’s finance director. “And so what we did was schedule that $600,000 in our budget as additional discretionary payments to the unfunded pension liability.” Discretionary payments were previously $250,000 in prior years, City Manager Adam Pirrie told the Courier in 2022.

Costs related to Claremont’s contribution to CalPERS make up a heavy portion of the city’s budget. For the 2024-25 fiscal year, which ends June 30, 2025, employer contribution rates represent 42.36% of the payroll for miscellaneous employees. That figure ranges from 74.6% to 61.1% for city employees, Starkey said. These amounts are expected to remain the same heading into the 2025-26 fiscal year.

CalPERS is the nation’s largest public pension fund, managing assets for 75% of municipalities across California. But now, it’s in the red, largely the result of “over-optimistic pension fund forecasts and overly generous taxpayer-guaranteed pension promises,” the San Francisco Chronicle reported in May. CalPERS is only able to fund 72% of the benefits it owes, as of the 2023 fiscal year.

The decision to repurchase the 2006 pension obligation bonds has been favorable among Claremont residents, according to Starkey. “It’s continuing to address the city’s long-term debt and keep that debt from growing in the markets,” he said.

Despite statewide underfunding, Claremont expects to make its CalPERS-related payments without problems. “The rate of returns that CalPERS gets obviously can either hurt us or help us,” Starkey said. “And so making these additional discretionary payments kind of counters or continues to add additional benefit to those liabilities when the opportunity is available.”

Gray Mollenkamp is a junior at Claremont McKenna College majoring in international relations and legal studies. He is a member of the CMS Men’s Soccer Team and has served as a press operations analyst for CONMEBOL’s Copa América 2024.