The Sacramento region’s largest local governments will see pension costs go up by an estimated 14 percent next fiscal year, starting a series of annual increases that many city officials say are “unsustainable” and will force service cuts or tax hikes.
The increases come after CalPERS in December reduced the expected rate of return from investments, forcing local governments and other participants in the state’s retirement plan to pay more to cover the cost of pensions.
In recent months, local governments have found out just how much more they can expect to pay as CalPERS sent them notices of estimated costs. Ten of the largest local governments in the capital region can expect to pay a total of $216 million to CalPERS in fiscal 2018-19, an increase of $27 million over this year. Nearly half of that increase will be borne by one local government – the city of Sacramento.
Responding to widespread concerns from local government officials, CalPERS agreed to spread higher costs over eight years. That means cities will see rate hikes each year that are similar to this year’s, assuming that the fund’s investments make 7 percent annually under the new expected rate of return.
In a report this month, Joe Nation, a researcher at the Stanford Institute for Economic Policy Research, wrote that “employer pension contributions are projected to roughly double between 2017 and 2030, resulting in the further crowd out of traditional government services.”
Leyne Milstein, the city of Sacramento’s finance director, said the city’s pension costs will double in seven years. While city revenues have also increased in recent years, thanks in part to a strong real-estate market, they have not increased as much as pension costs in actual dollars.
“It’s not sustainable,” Milstein said. “These costs are going to make things incredibly challenging.”
Local government officials from across the state, including West Sacramento, told CalPERS board members the same thing last month, again and again saying the costs are not sustainable and that they expect to have to cut services or raise taxes.
“We don’t know how we’re going to operate,” said Oroville’s finance director, Ruth Wright, who suggested that a doubling of pension costs in five years could force the city into the nuclear option. “We’ve been saying the bankruptcy word.”
Steve Maviglio of the labor-backed Californians for Retirement Security said officials have the means to address the increased costs. “If city officials are truly interested in meeting their obligations, they always have that opportunity at the bargaining table or providing more revenue thru measures on the ballot,” he said.
Nation said he supports tax increases to pay for pension obligations, although he adds that it would be extremely difficult to muster political support for such a tax.
In his recent report, Nation questions if the new CalPERS return rate is too optimistic and provides estimates for how much local governments can expect to pay if the fund’s investments don’t meet projections. In 12 years, the city of Sacramento would see pension costs go up $94 million a year under his alternative projection.
Absent higher revenues, the city would have to cut 25 percent of police and fire services, after cutting other less essential services, predicted Nation, a former Democratic state legislator.
Milstein said she won’t estimate when or if the city will have to start cutting employees if the current financial forecast proves correct. In the city’s current budget, officials said, “Given the current revenue forecast, the city alone cannot absorb the increased costs of providing retirement benefits.”
The League of California Cities and officials from several cities wanted CalPERS to consider funding options besides raising employer rates. They spoke last month in favor of a proposal by a Republican state lawmaker to have the retirement fund study the possibility of temporarily suspending cost-of-living adjustments for pensioners and look at moving current workers and retirees into less generous plans that agencies started offering in 2013.
The CalPERS finance and administration committee declined to vote on the proposals, after a majority of committee members made it clear they would not support them.