With the amount of unfunded debt the city of Sacramento faces over the next three decades, you could build a light-rail line to Sacramento International Airport. And when you got there, you could build another terminal.
That's the stark message delivered Tuesday by City Manager John Shirey, whose office laid out the city's nearly $2 billion in unfunded liabilities to a subdued City Council. Those bills include bond and lease payments on public projects, pension contributions and retiree medical benefits some of which have no stable funding source.
It was the first time those mountainous obligations were presented to the City Council as a whole. But with a council that includes two new members and is entering another round of budget discussions, it was a statement that needed to be made to avoid future difficulties, Shirey said.
"I know these numbers are big and can seem scary," he said in an interview. "This is about trying to inform and make people aware that the city does have debts and liabilities, and we are managing them. If we're prudent in our financial dealings, we'll be fine."
Most worrisome, Shirey said, is $440 million in retiree medical benefits that the city has no plan to fund besides annual payments of $11 million from the already battered general fund budget, which funds core city services such as police protection, park maintenance and fire personnel. The total unfunded liability stemming from medical benefits has grown by $60 million in the past five years.
Under agreements reached between the City Council and labor unions more than 20 years ago, most city retirees receive $300 a month for medical costs. Employees who retire from the Fire Department get roughly $750 a month.
The pay-as-you-go formula that funds those benefits is not sustainable, Shirey said. To keep pace with future obligations to the medical benefit, he said annual payments by the city would need to increase by $30 million. Instead, Shirey said he plans to address the threat by seeking concessions from labor groups and creating a more structured funding mechanism for the benefits.
Other local governments across the region and state are dealing with similar situations. Two years ago, cities and counties in the Sacramento area had $1.4 billion in unfunded retiree health benefits, a number that has likely risen since then.
Mike Shires, an associate professor of public policy at Pepperdine University whose expertise is state and local government finance, said the practice of cities carrying unfunded debt for medical benefits is "very widespread" in California.
"Almost no cities set aside money to pre-fund their obligations for health care," he said. "They almost all do it on an ongoing basis, mostly because they're allowed to."
Sacramento's practice of paying retirees a flat rate every month is somewhat rare in California, Shires said. He said cities such as Sacramento came to those kinds of agreements with labor unions and continued to increase benefits when finances were better.
"It was all funded with the general concept that the world was always going to be the same as it was 2005, with rising housing values and rising stock market values," he said. "The last four or five years, reality has set in and cities are getting handed the bill."
Sacramento has taken some steps to ease the burden moving forward. The city's largest labor union Local 39 has already agreed to forgo the benefit for newly hired employees. Middle managers and high-ranking officials not represented by a labor group also have agreed to that change.
Shirey said he would seek to eliminate the benefit for new hires in other labor groups and for existing employees.
He also said he is considering recommending to the City Council that a trust fund be created to support the benefits. That fund would draw not just from city contributions, but returns on investments, much like a pension plan.
Some cities have already formed funds to help pay for benefits.
In Folsom, the city set up a reserve trust fund for retiree health costs in 2007. Roseville did the same in February 2011 and is seeking to limit future increases to health insurance benefits for its employees, said Brian Jacobson, city spokesman.
While Shirey said the unfunded medical benefits were the most worrisome debt facing Sacramento, unfunded obligations also exist in the city's pension plans. That number has nearly tripled, from $161 million in 2004 to $469 million today, according to a report submitted to the City Council by Treasurer Russ Fehr.
The amount of unfunded pension liability is a result of many factors, according to Fehr's report. Returns on investments made by pension plans have fallen short of assumptions for half of the years since 2000; retirees are living longer, requiring cities to make pension payments for greater lengths of time; the city took "rate holidays" in which it did not contribute to its pension plans at full scale for a year at a time; and employee benefits have been enhanced as city contributions remained steady.