The Public Eye

Local governments grapple with increasing pension costs before higher tab comes in 2018

The CalPERS tower rises in downtown Sacramento.
The CalPERS tower rises in downtown Sacramento.

In South Lake Tahoe, roads are crumbling, and the city is struggling to find ways to repair years of damage caused by harsh weather and snowplows. Orangevale residents worry that fire crews won’t arrive quickly enough in an emergency after their local fire station was closed during the recession.

Despite an economic recovery, local government leaders in California say rising pension costs have made it more difficult to restore some programs they cut during the recession.

The Sacramento Metropolitan Fire District, for instance, expects to pay $34 million in retirement costs this year, a 26 percent jump from 10 years ago, accounting for inflation and excluding a big increase in employee contributions.

Metro Fire’s main retirement plan is one of the 10 most expensive plans in the capital region, based on a ratio of annual pension costs to payroll for current employees. Those plans will cost local governments an average of 42 cents for every dollar in current employee salary costs next year, a 25 percent increase over two years ago, The Sacramento Bee found in a review of records for 26 of the largest local governments in Sacramento, El Dorado, Placer and Yolo counties participating in CalPERS.

Local government officials are bracing for even higher costs following a decision in December by the state’s retirement system to forecast lower investment returns, forcing governments and some employees to increase their pension contributions. Officials are still estimating how much the change will cost when it takes effect in July 2018 for local governments, but expect them to exceed the increases of recent years.

Municipal finance expert Michael Coleman said the higher payments will force governments to continue a pattern that started in the recession, cutting services to pay pensions..

“This is going to be significant for many cities and it’s going to mean some tough decisions,” he said. “You may have cities that will make cuts that go way below their standards for services.”

The most expensive pension plans are typically for police and fire employees. Of the 10 plans with the highest rates in the region, eight are for police officers and firefighters, who can retire earlier and with more money than other government employees.

Of pension plans with more than 15 active employees, Folsom’s safety plan is the most expensive in the region, with a rate of 47 cents for every dollar in current payroll costs. The city has lost about 150 employees since the recession, down to 150, and pension costs are one reason for the cuts, said Finance Director Jim Francis.

A Metro Fire safety employee with 30 years of experience can retire at age 50 and make 90 percent of salary for life. The average annual pension for a Metro Fire retiree in the last five years was about $90.000, according to CalPERS.

 

Local governments increased pension benefits after the state did the same for its employees in 1999. Investment returns have not met the projections used to support those increases, forcing CalPERS to raise rates for local and state governments to make sure it has enough money to pay benefits promised to retirees.

The recession created a double whammy for local governments because it lowered property tax revenue, one of their main income sources, at the same time it caused huge losses in the stock market. When investment returns suffer, local governments have to pay CalPERS additional money to ensure the retirement system remains sustainable.

Metro Fire faced the double whammy in 2009, when the agency decided to shutter three fire stations. In 2011, Metro Fire closed a fourth station. From 2006 to 2011, the agency saw a reduction of 176 employees, down to 563.

Increased pension costs were one of the reasons for those cuts, said Amanda Thomas, Metro Fire’s chief financial officer. She did not know if any other cost rose as much as pensions.

Station 33 on Main Avenue in Orangevale remains closed. Residents fear what that will mean should they have a fire or a heart attack.

“I worry about it all the time,” said Curtis Beldi, who lives next door to the station. “How much longer will it take for them to get to me?”

Around the corner, Sandie Mixa has similar concerns. She said neighbors with medical problems got a quick response when the station was open. No one wants to be the first to test Metro Fire’s response now, she said.

In 2015, Metro Fire reopened three of the four closed stations. Eric Bridge, deputy chief for operations, said the station’s relatively low number of calls meant the agency couldn’t justify the cost of reopening. The station responded to about 250 calls in the first six months of 2009 before it was closed.

Of the three reopened stations, only one has been returned to full service, with the other two providing only medical service 12 hours a day and no fire protection. Staffing has risen but is still 12 percent below pre-recession levels. Bridge said Metro Fire is operating at pre-recession service levels, although he said that it has not conducted a study of emergency response times since a consultant concluded in 2009 that the cuts would slow the agency’s responses.

Steve Maviglio, a spokesman for a union coalition that advocates for pensions, acknowledged that costs have risen, but said that almost all public sector workers are contributing higher amounts toward their retirement than before. He added that many government workers did not receive pay raises during the recession in exchange for protecting their retirement benefits.

Pension costs remain a big burden in South Lake Tahoe, said City Manager Nancy Kerry.

When the city took a big hit in revenues during the recession, it searched for ways to cut costs. South Lake Tahoe legally had to continue funding pensions, but services like road maintenance are essentially optional, so South Lake Tahoe deferred needed repairs for years, Kerry said.

Now the roads are in bad shape, especially because snow and snow plows cause greater deterioration, she said. Voters recently rejected a sales tax increase that would have helped pay for road improvements.

Kerry said state law prevents cities from renegotiating past benefit levels. “The reason none of the cities can manage the pension costs is because they can’t negotiate,” she said.

West Sacramento cut about a fourth of its more than 400 employees during the recession of the last decade, and increases in pension costs prevented the city from rehiring many of them when the economy returned, said Phil Wright, assistant city manager.

“Our rates go up every year - up, up, up,” he said. “It’s hard.”

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