The city of St. Helena’s recently adopted budget was an austere one that, like most compromises, left everyone a little unhappy.

Yet it didn’t address one of St. Helena’s most formidable financial challenges: its unfunded employee pension liability.

In June, the council agreed not to pay more than the required annual payment toward its unfunded liability. The Finance Committee recommended paying an extra $500,000 a year starting immediately, but the council was wary of dropping below the minimum General Fund reserve of 30% in case an economic downturn cuts into revenues.

The matter is bound to come up for debate again next year, and it could influence how much money the city tries to raise through one or more revenue measures on the November 2026 ballot.

The unfunded liability stands at $16.2 million and is growing at a clip of about $1 million a year. If the city doesn’t start paying more than its annual minimum payment, the unfunded liability could balloon, causing that annual bill to increase. The last annual payment exceeded $1.1 million.

Since the city is contractually obligated to make those annual payments, the resulting financial burden might affect more discretionary expenses such as city services and staffing levels, said Finance Committee Chair Mark Smithers.

“If we don’t address the liability very soon it will become a financial albatross and have even greater impacts on the city obligation,” Smithers said.

Chris Warner, Finance Committee’s vice chair, called the unfunded liability “a significant long-term threat to the city’s creditworthiness and ability to finance and borrow for all of its services.” S&P already downgraded its outlook for St. Helena in 2024, a sign that creditors are concerned about the city’s long-term liabilities.

How public pensions work

The unfunded liability is the gap between how much the city is obligated to pay for future pensions and the assets available to fund those pensions. Public pensions are managed by the California Public Employees’ Retirement System (CalPERS), the nation’s largest pension fund.

Pensions are funded by three sources: employee contributions, employer contributions, and CalPERS’ investment returns. The employee’s contribution is fixed, so if CalPERS investments underperform, employers have to make up the difference. That leaves cities like St. Helena with the rough equivalent of an adjustable-rate mortgage, with both the interest and the principal subject to fluctuation.

St. Helena’s pension liability is 71.9% funded as of last fiscal year (new valuations will be released in August). The unfunded liability is a complicated function of current and past employee pension obligations, actuarial factors (such as how long a retired employee will survive to collect their pension), and CalPERS’ investment returns.

The city’s unfunded liability has increased from $12.5 million in 2019-2020 to more than $16.2 million today, an increase of about $1 million per year. That’s largely because of CalPERS adopting more conservative projections for its own investment returns.

Local governments must pay a certain amount every year toward their pension liability — St. Helena’s last payment was over $1.1 million. They can also make additional “discretionary payments” to reduce their unfunded liability more quickly.

St. Helena made discretionary payments for a few years — $405,000 in 2021, $360,000 in 2022 — but stopped in 2023 to avoid depleting General Fund reserves.

The sooner the city pays down its unfunded liability, the less debt it will accumulate and the less interest it will owe, said Finance Committee member Garry Rose. He compared the city’s current strategy to racking up credit card debt every month but only paying the required minimum payment.

“If we don’t pay the full amount, we will continue to run a balance that is charged interest at 7% annually,” he said. “Principal and interest both increase.”

How much to pay

Observers agree that St. Helena’s 71.9% funding level is too low, but opinions vary on whether the city should aim for 80%, 90% or even 100% funding.

A consultant recommended setting a goal of 80%. Councilmember Aaron Barak has suggested going as high as 100%, the most fiscally conservative option but the most expensive in the short term. The Finance Committee recommended making discretionary payments of $500,000 a year, which according to CalPERS’ latest projections would get the city to 80% in eight years and 90% in 14 years.

Mayor Paul Dohring told the Star that a funding ratio between 90% and 100% is considered strong, but he could live with 85%.

“If we simply ignore or defer our growing pension liabilities, we risk jeopardizing our other priorities by creating unsustainable financial pressure on St. Helena’s budget and its taxpayers,” Dohring said. “Without intervention, by 2030 St. Helena could face well over $20 million in unfunded CalPERS liabilities.”

There’s also debate over whether the matter is crucial enough to warrant dropping below the minimum 30% General Fund reserve set by council policy.

Reducing the unfunded liability while maintaining a 30% reserve requires “a long-term financial plan that properly projects pension cost increases and provides for additional revenue generation through both economic development and reasonable tax measures,” Dohring said.

Smithers calls the 30% reserve policy “somewhat arbitrary and debatable.” Compared with Napa County’s other local governments, St. Helena has a “stable revenue spread” of sales tax, hotel tax and property tax, which puts the city in a better position to handle unexpected revenue hits such as the COVID-19 pandemic, Smithers said.

“If we never use the reserves, what is the point of having $7-$11 million sitting there?” Smithers said. “If you have significant savings and you have a hole in your roof, you should use some of your savings to fix the roof and have a plan to rebuild your savings.”

Pay now or pay more later?

It’s hard to mount a campaign for a revenue measure — for example, a sales tax — around the need to pay retired employees. It’s easier to point to tangible quality of life improvements that voters are passionate about, like smooth roads and clean water. The term “not sexy” comes up a lot in discussions about pensions.

Yet in financial terms, the unfunded liability is similar to infrastructure improvements. If the city doesn’t pay for it now, it’s going to cost more in the future.

“It becomes an easy thing to push down in the list of priorities and manage down the deficit,” said Finance Committee member Gregg Dawley. “You don’t see it. You don’t smell it. It’s akin to decades of deferred maintenance to critical infrastructure needs, and suddenly, one day, the community suffers the consequences.”

St. Helena started making discretionary payments when Alan Galbraith was mayor and Jennifer Phillips was city manager. Galbraith thinks the council should recommit to those payments without dropping below a 30% reserve.

“City leadership seems incapable of persuading taxpayers to provide new revenue,” he said. “As the city cannot afford not to make the CalPERS minimum payment, the alternative may be (highly unpopular) service cuts. Of course, there is always ‘the hope’ of new revenue sources (e.g., hotels), but there is no way to plan based on their realization.”

Employee salaries

There’s also the politically touchy matter of employee compensation. Higher salaries equate to higher pensions and less money in the General Fund to pay down the unfunded liability. Yet employees and even management say competitive salaries are vital to attracting and retaining qualified employees who can deliver services the community wants.

Smithers said the Finance Committee is “quite frustrated that we were not allowed to engage on compensation and benefits, which makes up 70% of spending.” He wants employees to be compensated in a way that’s “competitive and fair.”

Salaries are influenced by studies that look at what similar local governments are paying their employees to do similar work. Smithers says an independent group should determine which cities and counties are selected as the basis for that comparison.

“A cursory review of a few Napa County cities supports that our employees are more well paid and our benefits are much richer,” Smithers said. “Between organizational changes, and wage and benefits adjustments (which would take a few years to fully implement as you need to work with bargaining groups) savings are around $1 million, maybe more.”

However, City Manager Anil Comelo has pushed for more competitive salaries, noting that key positions remained vacant until the city started offering better pay. This year he negotiated a 3% cost of living adjustment for most employees.

Yet members of the St. Helena Employees Association — the collective bargaining unit that represents 40 non-public safety, non-management employees — weren’t happy with the outcome. The union took the unusual step of issuing a long public letter criticizing management.

The letter noted that management employees got the same 3% cost of living adjustment plus a 2.5% longevity pay increase. It also pointed out that last November the council gave Comelo a 7% raise effective this month.

“While we recognize that executive-level compensation involves different considerations, it is difficult for staff to reconcile these financial decisions with the message that there are limited resources for frontline employee needs,” the letter stated. “This contrast reinforces the perception of inequity and underscores the need for more consistent and equitable investment in all employees, not just top leadership.”

Cause for hope?

It’s not all doom and gloom. The city could find itself in a better financial position if it sells the former City Hall site on Main Street, its Railroad Avenue properties, or both.

If a sale is contingent on the buyer securing entitlements to develop the property, it would take a few years for the city to see any cash from those deals. But once a sale goes through, the city would have more General Fund dollars to allocate to pension liabilities without falling below a 30% reserve.

Pension reform enacted under Gov. Jerry Brown could also spell relief over the next few decades.

The legislation, known as PEPRA, reduced pension formulas for public employees who enrolled after 2012. That put the brakes on pension formulas that had gotten more generous ever since 1999, when the California Legislature gave the California Highway Patrol a pension of 3% of final pay per year of service (up from 2%), available at age 50.

That legislation had a cascade effect on public employee unions throughout the state, which started pushing for higher pensions that were closer to the CHP’s “3% at 50.” St. Helena police officers who enrolled in PERS before PEPRA took effect in 2013 are still entitled to 3% at 50, but officers who enrolled post-PEPRA are entitled to only 2.7% at 57.

To put it in cold-hearted actuarial terms, unfunded liabilities across California should accrue more slowly once public employees who were awarded more generous pensions retire and begin to die.