Informational Memo: Turning Tax Settlement Funds into Long-Term Budget Savings Introduction
The receipt of $550 million in Chevron tax settlement funds presents an opportunity for the City of Richmond to explore methods to turn short term, time-limited funds into long-term, ongoing budget savings. This would decrease the city’s reliance on Chevron past the 10-year settlement period, while also creating greater flexibility to use the funds for long-term commitments like staffing. One of the primary ways to do this is to pay down debt. The concept is similar to winning the lottery and using the proceeds to pay off your mortgage: it turns a large, one-time sum of money into a long-term reduction in fixed costs plus interest savings. One of the largest sources of debt the city has is its long-term obligations to pensions and retiree medical benefits. A portion of this debt is considered unfunded (often called Unfunded Actuarial Liability or UAL), as it cannot be covered by current assets of the pension and retiree medical plans. The cost of these unfunded liabilities grows over time, similar to interest accruing on debt. This is because an upfront payment can be invested and benefit from compound interest earnings, lowering the overall out of pocket cost. Paying in lower amounts over the long-term doesn’t create the same investment opportunity, increasing the amount that must be paid out of pocket.
CalPERS Pension Liabilities
The City of Richmond’s current unfunded liability for both CalPERS plans is $392 million.
Under the city’s current payment plan, the CalPERS unfunded liability will be fully paid by 2044 at a total cost to the city of $652 million, averaging $32.6 million in payments toward the UAL annually over 20 years. In total, the city will pay over $260 million in interest on its current payment plan. These pension costs are currently included in the city’s budget and financial forecasts and are spread across the city’s payroll.
Date UAL Payment Schedule,
Safety Plan
UAL Payment Schedule,
Miscellaneous Plan
Total Current
Annual UAL
Payments
6/30/2025 21,090,447 12,200,719 $33,291,166
6/30/2026 22,647,713 13,309,561 $35,957,274
6/30/2027 23,933,215 14,202,380 $38,135,595
6/30/2028 26,599,302 16,244,759 $42,844,061
6/30/2029 27,291,295 16,721,922 $44,013,217
6/30/2030 27,908,137 17,135,478 $45,043,615
6/30/2031 27,170,140 16,073,427 $43,243,567
6/30/2032 26,872,003 15,491,811 $42,363,814
6/30/2033 25,320,853 13,963,183 $39,284,036
6/30/2034 24,615,139 13,148,772 $37,763,911
6/30/2035 23,523,865 12,272,332 $35,796,197
6/30/2036 21,657,300 10,829,729 $32,487,029
6/30/2037 20,718,444 10,138,628 $30,857,072
6/30/2038 19,714,163 9,401,865 $29,116,028
6/30/2039 18,990,572 8,869,727 $27,860,299
6/30/2040 18,604,450 7,786,993 $26,391,443
6/30/2041 16,094,711 5,753,702 $21,848,413
6/30/2042 13,230,665 4,201,143 $17,431,808
6/30/2043 19,722,469 6,583,994 $26,306,463
6/30/2044 2,802,814
$2,802,814
Total $428,507,697 $224,330,125 $650,035,008
Decreasing the City’s Payment Plan to 10 Years
CalPERS provides examples of shorter payment plans on an annual basis, including a 10 year payment plan. This plan would cost a total of $535.7 million, or $53 million annually for 10 years with payments ending completely in 2034. This would create a total interest savings of $117 million compared to the current payment plan. Since annual costs of approximately $33 million are already in the city’s budget for the pension UAL, if Chevron settlement funds were used to do an early amortization over the next 10 years, the $33 million in funds currently budgeted for the pension in the annual operating budget could be redirected elsewhere. In total, this would allow the redirection of $650 million in pension payments currently planned for in the city’s forecasts over the next 20 years. There would also be a remaining $14 million in Chevron settlement funds.
Paying Upfront with a Bond
Another option that could be explored is paying the $392 million in unfunded liabilities completely upfront using a bond. This is similar to restructuring debt or using a lower interest rate credit card to pay off a higher interest rate credit card, as interest would be owed on the bond. If interest cost on the bond is lower than the interest savings from paying off the UAL early, the city could experience a higher net financial benefit. However, this can come with substantial risk and is not always a good option depending on the interest rate environment. For example, fully paying off $392 million in unfunded pension liabilities with a 10-year bond at a 2.7% interest rate would cost approximately $498 million total, compared to $650 million under the city’s current payment plan—a total interest savings of $152 million. However, there is no guarantee that the city could secure an interest rate low enough to create a net financial benefit.
Pension Override Funds Could Also Offset Costs
The city currently uses a portion of pension override tax revenues to cover some CalPERS liabilities and its possible these revenues could be used to offset the use of Chevron funds for early UAL payment. In 2023, the City used $19.4 million in pension override funds towards its CalPERS payments. It’s possible that a combination of pension override and Chevron could be used, reducing the amount of Chevron funds needed. This would require an analysis by an attorney of how much in override revenues could legally be used.
OPEB Liabilities
The City of Richmond’s two OPEB plans are approximately 40% funded with a total unfunded liability of $74 million. The bulk of unfunded OPEB liabilities are attributable to the City OPEB plan managed through PARS, which covers most employees and is only 38% funded. Currently, Richmond is making annual payments of approximately $5.5 million towards unfunded liabilities for the two plans, and annual costs are expected to grow to almost $10 million by 2042, when unfunded liabilities will be entirely paid off. The bulk of the city’s OPEB expenditures are unfunded liability payments and significant interest is accruing annually with the city plan alone incurring between $6.3 to $7.2 million in added interest costs each year since 2020.
While the city’s actuarial reports are not publicly available to calculate exact costs, fully payment of the $74 million in OPEB liabilities would allow the city to eliminate these unfunded liability payments through 2042, creating between $5 to $8 million annually in operating budget savings that could be redirected toward other expenditures like staffing improvements.
Other Considerations
- Since OPEB and pension expenditures are spread across the city’s operating budget, savings from fully paying off these liabilities will also likely come from across city funds and not exclusively from the general fund. Funds could be reallocated toward allowable purposes within their respective funds. - Payment of unfunded liabilities would likely lead to a credit upgrade, creating budget savings in other city programs and opportunities to refinance other debt.
Next Steps
- Alternate payment plans models can be requested from CalPERS at any time. A model plan could be requested using Chevron funds, including a calculation of total interest savings and total budget savings that could be redirected. - Early amortization plans for OPEB could be requested from the plan’s actuary.