Most California cities expect their spending on public employee pensions to climb by at least 50 percent over the next seven years, restricting their ability to fund basic services like public safety and parks, according to a study their lobbying organization released on Thursday.
The report escalates the League of California Cities’ appeal for more flexibility in negotiating pension obligations. Almost all of California’s cities belong to the $360 billion California Public Employees’ Retirement System, and some cities over the past year have raised increasingly loud complaints that fee hikes from the pension fund are “crowding out” other spending priorities.
The new report warns that pension costs are becoming “unsustainable.”
“The impact of pension costs are becoming such a large element of city costs that it is inevitably going to cause the reduction of services somewhere,” said Dan Keen, a retired Vallejo city manager.
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The league developed its study by conducting a survey of its members and hiring an accounting firm to review CalPERS’ financial statements. About 170 cities responded to the survey.
By 2024, cities anticipate that they will spend an average of 15.8 percent of their general fund budgets on pensions, up from an average of 8.3 percent today. About 10 percent of cities anticipate spending more than 21 percent of their general fund budgets on pensions in 2024.
Cities are spending more on pensions because of several changes CalPERS has made to shore up the retirement fund, such as lowering its investment forecast. Because the fund expects to earn less money from its investments, government agencies must kick in more money to pay for their workers’ pensions. CalPERS now expects to average 7 percent earnings on its investments each year, down from its previous projection of 7.5 percent.
CalPERS is doing well in the stock market this year, with its portfolio gaining almost $40 billion since July. But the system is underfunded overall. Its assets are worth about 68 percent of what it owes to retirees and public workers.
The league report paints cities as having few options. It notes that they could raise taxes, create special funds to pay down their pension liabilities ahead of schedule, reduce services or bargain changes in compensation plans with their unions.
Cities don’t have a totally free hand in bargaining, however. For instance, they’re barred from tinkering with cost-of-living adjustments that retirees receive in their pensions.
“These pressures are not only mounting, but will force cities to make very tough choices in the next seven years and beyond,” said League of California Cities Executive Director Carolyn Coleman.
Public employee unions generally want more time for CalPERS to recover from its recession investment losses. A pension law Gov. Jerry Brown signed in 2012 eliminated generous retirement plans that the Legislature offered to public employees during the Dot Com boom, a change that’s intended to gradually bring CalPERS back to full funding because it applies only to workers hired after Jan. 1, 2013.
Brown at a news conference last month predicted the next recession will force even bigger changes on California public pension plans. In a high profile court case, his office is advocating for an end to the legal precedent that prohibits public agencies from reneging on pension promises without offering workers other compensation.
Dave Low, president of the union that represents classified school employees, said local governments are paying more for pensions because CalPERS has responded to criticism by moving to more conservative projections.
“This is a long-term process,” he said. “Pensions are one piece of compensation. When we go to the table, everything is on the table, health care, wages, step increases. They have a lot of control in compensation.”