From Arcata on the North Coast to Hemet in the Inland Empire, California cops and firefighters are chipping in more money to pay for their pensions while the cities that employ them struggle to manage fast-rising retirement costs.
The new pension charges – a 12 percent paycheck deduction in Sacramento, an extra 8 percent deduction in Clovis, a pay cut and 12 percent pension contribution in Oroville, for example – reflect a calculus at local governments that workers are better off in the long run putting money into the California Public Employees’ Retirement System today rather than banking on the $350 billion pension fund earning its way out of its recession losses.
They’re also among the few options that local governments have to smooth out hikes in pension costs that many of them anticipate will nearly double their annual spending on CalPERS by 2024. The pension fund’s assets are worth about 70 percent of what it owes to workers and retirees, leaving it short tens of billions of dollars over time.
Local governments cannot rescind benefits they’ve promised to workers or retirees, so their choices are to reach compromises with their unions or find a way to pay down their pension debts faster.
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“We do know in the next couple years the PERS impacts are going to be a heavier lift,” said Kim Sarkovich, Rocklin’s chief financial officer. Public safety employees in her city now contribute at least 12 percent of their wages to CalPERS. “By doing these little things we haven’t had to have draconian cuts or anything dramatic.”
More than 100 California local governments in the past five years persuaded their employees to accept contracts requiring them to pick up a greater share of the cost of funding their pensions, according to records The Bee obtained through the California Public Records Act.
Many of them are in the Sacramento area and in the Bay Area. They range from comparably low-income communities like Oroville to very wealthy ones like Atherton, where the median-household income is greater than $250,000. Firefighters in Paso Robles of San Luis Obispo County are kicking in 15 percent of their paychecks toward CalPERS, according to their contract.
“Had we not agreed to that, who knows what the consequences could have been,” said Robert Padilla, spokesman for the union that represents Sacramento city firefighters. The union agreed to the paycheck deduction in 2012 during the recession that escalated to 12 percent by 2015. “You were asking a lot of members, those were dire times.”
CalPERS bills are climbing for two significant reasons.
First, CalPERS in 2016 acknowledged that it probably would not hit the 7.5 percent annual investment earnings target that it had used for its financial projections, and it lowered its estimate to 7 percent. That led the pension fund to charge more money to the organizations that belong to it to fund their employees’ pensions.
Wilshire Associates, one of CalPERS’ primary financial consultants, projected that the investment return rate could be even lower at 6.2 percent. That outcome could lead cities to make even more painful cuts in years ahead.
Separately, government agencies in CalPERS have to pay down their unfunded liabilities, or the difference between the assets their accounts hold and what they owe to their workers and retirees. They cut checks each year to whittle away at that debt.
Sacramento, for example, has $908 million in unfunded pension liabilities. Its public safety pension plan has 68.4 percent of the assets it would need to pay the benefits it owes, according to CalPERS.
Sales tax hikes
The rising retirement rates and debt payments could compel the city to cut spending on services or employees in coming years.
“The cost increases are so substantial that it will be a choice between lowering city costs to deliver services or lowering costs for employees,” said Sacramento Assistant City Manager Leyne Milstein. “We can pay less people more or pay more people less,” she said.
Sacramento voters next week will consider Measure U, a proposed sales tax increase that could buffer the city from some of those rising personnel expenses. If it fails, Milstein stressed the city would find a way to balance its budget.
Martinez in Contra Costa County is another city where police have accepted a pension cost-sharing agreement but also persuaded leaders to grant them a substantial raise. They started paying into their pension plan during the recession and are now putting 10 percent of their wages into CalPERS.
In June, the Martinez police union struck an agreement that gave officers a 12 percent pay hike. The city agreed to it to slow an exodus of officers who’d left for better-paying jobs in nearby communities.
Martinez voters also are considering a sales tax increase next week. If it fails, the city and the union are expected to go back to the bargaining table.
“The (pay) increase is not sustainable absent new revenue,” Martinez Assistant City Manager Anne Cardwell said.
Some cities want to address their pension shortfalls more aggressively. Palo Alto, where police are contributing 12.5 percent of their wages toward CalPERS, on Monday planned to discuss ways to reduce spending in case CalPERS fails to hit its investment earnings target and raises rates further.
Palo Alto has two pension plans in CalPERS. Its account for public safety employees is worth about 64 percent of what the city owes to workers and retirees; its general employee plan has 66 percent of what it owes to its members.
If trends don’t change, Palo Alto anticipates sending CalPERS 74 cents for every dollar it spends on police and fire wages by 2024, according to an analysis prepared for its city council.
Projections like those have some California local governments pressing for more options, such as empowering city administrations to bargain with unions for adjustments in the generous pension benefits lawmakers gave to public employees during the dot-com boom.
A court fight over air time
Gov. Jerry Brown ended those benefits for new public employees with a law he signed in 2012 that also required new government employees to pay more money toward their pensions. Workers who joined California government before 2013 continue to accrue pension benefits at the dot-com era rates.
“I don’t think anyone is going around here saying you don’t deserve the pension you’ve earned or that you shouldn’t have a defined benefit pension. What we’re saying is given the economic climate and what we see to come, we might not be able to pay those pensions,” said Dane Hutchings, a lobbyist for the League of California Cities. The league earlier this year released a report that warned pension costs were becoming “unsustainable” for some local governments.
Next month, the California Supreme Court is expected to hear a lawsuit that could pave the way for the kind of discussions the League of California Cities wants to see.
It’s a challenge from the union that represents Cal Fire firefighters arguing that Brown’s pension law went too far and eliminated a benefit that had been promised to workers.
If the union wins, California state government would have to again allow employees hired before 2013 to buy “air time” for their pensions. Brown’s law struck that benefit for all state employees regardless of when they were hired.
The lawsuit is considered a test of the California rule, the precedent that forbids government agencies from withdrawing benefits they’ve offered to workers.
Unions point to the new pension cost-sharing agreements to demonstrate that they’re willing to work with their employers to manage the long-term costs of their compensation. Californians for Retirement Security, an umbrella organization that speaks for public employee unions on pensions, cited the concessions in a recent court brief supporting the Cal Fire union.
“This is evidence you can fix the problem,” said Dave Low, executive director of the California School Employees Association and chairman of the pension group. “One of the ways you can fix the problem is employees paying more, which is a much more immediate impact than changing someone’s benefits. If you change someone’s benefits even prospectively, the timeline to get a financial benefit can be decades out.”