By Tim Reid
LOS ANGELES (Reuters) - Officials in Villa Park are considering pulling the tiny California city from Calpers, saying the monthly costs of the state's giant public pension system are crippling the municipal budget.
But Villa Park fears that pulling out of its contract with the California Public Employees' Retirement System could be prohibitively expensive because of a termination fee that could exceed the city's annual budget.
Calpers, America's biggest public pension fund with assets of $300 billion, last provided the city with a hypothetical termination fee of nearly $3.6 million as of June 2012. The city's annual budget is $3.5 million.
"Getting out of Calpers is like getting out of jail," said Rick Barnett, mayor of Villa Park, population 5,800. The City Council will vote next month on a resolution to begin the process of quitting Calpers.
Many California cities are chafing at the rising contributions demanded by Calpers, which administers benefits for more than 3,000 city, state and local agencies, or nearly 3 million people.
Calpers recently voted to raise rates roughly 50 percent over the next seven years, citing its responsibility to maintain the fiscal soundness of the fund.
Two other California cities, Pacific Grove and Canyon Lake, tried to quit Calpers last year, but both balked when they learned the termination fee.
Michael Sweet, a bankruptcy attorney with Fox Rothschild in San Francisco, called the termination fee "the Calpers handcuffs". For Villa Park and other cities, Sweet added, "the hit that they will take...will be extraordinary."
If a city quits, Calpers continues to administer pension payments for the current and retired workers already on the books at the time of termination.
To do that, Calpers generally asks for an up-front sum to pay for potential future pension costs for all current and retired workers on city rolls.
Canyon Lake, with an annual budget of $3.6 million, was handed a termination bill last year of $1.3 million.
Keith Breskin, Canyon Lake's city manager, said: "It would have been a serious depletion on our reserves, so the city decided not to proceed."
If a city quits, Calpers also places that city's funds in a more conservative risk pool, which lowers the potential return rate on its investments and in turn boosts the termination fee.
In making its calculation for Villa Park, Calpers lowered the long-term projected return rate on the city's investments from 4.82 percent to 2.98 percent.
Calpers says the city contacted officials at the fund in June to review the termination process.
According to city documents, payments to Calpers have risen from 13.8 percent of payroll in 2005 to a projected 30.6 percent this fiscal year.
"We are looking to a get a number from Calpers, and then to get out," Barnett added: "If they give us a huge and horrendous termination number, then we probably can't get out. But at least we then have a true number for our liability."
(Reporting by Tim Reid; Editing by David Gregorio)