Why California cities and counties should act scared by pension payments

Sacramento City Manager Howard Chan
Sacramento City Manager Howard Chan

New Sacramento City Manager Howard Chan is putting together his first budget proposal, and you might think with the improving economy, he would be able to hand out cash to this program or that.

Instead, he’s warning department heads not to expect many of their pent-up requests, he’s focused on increasing revenue and cutting expenses, and he’s looking at least five years down the road.

There’s a very good reason: Higher pension costs are on the way because CalPERS lowered its expected investment returns. Sacramento’s additional payments are projected to rise from a manageable $3.2 million in 2018-19 to a frightening $29.4 million in 2022-23.

“It keeps me up at night,” Chan told The Sacramento Bee’s editorial board this week.

If the higher CalPERS contributions aren’t the stuff of nightmares for city and county officials across the state, they should at least be a big worry. The League of California Cities calls the pension issue the biggest obstacle facing every full-service city in the state. It is urging its members to run the numbers and to start taking necessary steps. It says some cities may have to consider hiring freezes and service cuts. Even then, the league warns, some cities might eventually veer dangerously close to bankruptcy.

It’s the legacy of overly generous promises, notably a legislative giveaway to public employee unions by Gov. Gray Davis in 1999, plus the fallout from the December vote by the California Public Employees’ Retirement System board to cut the “discount rate” – its long-term projection of investment returns – from 7.5 percent to 7 percent. It will be phased in, starting in 2018-19.

For Sacramento, the higher pension contributions make up the vast majority of projected deficits that by 2022-23 could rival those during the Great Recession that forced layoffs and major cuts in city services, including public safety and parks.

There’s time to avoid painful budget cuts, but only by belt-tightening now. That’s even more crucial because the City Council went on something of a spending spree last year, before the CalPERS action.

Those budget projections assume that voters renew the Measure U half-cent sales tax, which now brings in more than $40 million a year and is set to expire in March 2019. The numbers also include about $5 million more a year, mostly in property taxes generated in part by the development around Golden 1 Center.

The figures, however, don’t include revenue from city taxes on marijuana production or stores as the legalization of recreational pot is rolled out. They also don’t take into account any federal budget cuts, either from President Donald Trump’s plan to trim domestic spending to beef up the military or from his threats to take funding away from “sanctuary” cities that protect undocumented immigrants.

With all the unknowns – and the certainty of higher pension payments – being frugal is the only responsible course for Sacramento and cities and counties across California.

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