The city of Sacramento is saddled with more than $500 million in debt created by the reluctance of past city councils to fully fund benefits granted to employees.
City Manager John Shirey criticized those councils last week, saying their “mistakes” have left the city with rising liabilities in public employee pensions and retiree medical costs.
Many years ago, the City Council authorized the launch of a plan that subsidizes health care for retired city workers. City officials said they aren’t sure when the arrangement started, but said it dates back to the 1970s at least.
When the subsidies began, the city paid the benefits as employees retired, a practice that continues today. But “there was never even one dollar set aside to pay for” future retirees, Shirey said.
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The result: The city is facing a gap of $473 million between what it has on hand for retiree medical benefits and what it will need to fund the benefit for current workers when they retire. And as people live longer, the gap widens; the unfunded liability increased by roughly $92 million over the last six years alone, according to a report by city Treasurer Russ Fehr.
The City Council only started setting money aside to narrow the unfunded gap last year, when it created a trust fund with $2 million. Shirey is recommending that another $2 million be placed into the trust this year.
Shirey called that liability a “red flag” and said the city is negotiating with its unions to end the practice of offering subsidized medical retiree benefits to new hires. So far, most of the unions have agreed to the change. Unions representing city firefighters and plumbers have not.
“When you’re in a big hole, the first thing you do is stop digging,” Shirey said.
The city also has $90 million in unfunded pensions for a retirement plan it stopped offering in 1978. The reason: The City Council took a 14-year break from funding the pension plan, from 1993 to 2007.
Shirey said that had the council set aside just $2 million a year over that break, the city would have up to $8 million of additional money in its general fund today to pay for services. Instead, that money is going to the pension plan.
In his report, Fehr told the City Council that the city’s total debt has surpassed $2 billion. About half of that debt is in the form of repayments being made for infrastructure investment and other projects, he said.
Another large chunk of the debt – $985 million – is for city employee benefits, including pensions and the retiree medical plan, the treasurer said.
Fehr said the city’s liabilities are not out of line with what other local governments carry, but that Sacramento is “more forthright in telling the community and the financial world where we stand.”
In terms of infrastructure debt, the city continues to pay down bonds it has issued in the past for projects such as libraries and the expansion of the Sacramento Convention Center. That debt balance decreased by $34 million over the past year.
But the city also took on $246 million in new debt last year, when it issued bonds to pay for significant upgrades to the city’s sewer and water systems. Previous utility system improvements were backed by the city’s general fund, which pays for most basic services. But the more recent bonds are funded by an increase in water and sewer rates, shielding the general fund from risk.
The city has also kept the general fund shielded from new debt since 2006, issuing no new general fund-backed bonds over that time. However, about half of the bonds the city plans to sell to help finance a new downtown sports arena would be supported by parking revenue that now goes to the general fund.