New bills from the California Public Employees’ Retirement System to local governments went out last month. The numbers are alarming. To replenish its recession-battered pension fund, CalPERS is requiring cities, counties and special districts to pay out millions more in retirement contributions.
The retirement system made two policy changes that have raised costs for its clients. It lowered its expected rate of return on investments, and it changed accounting practices to cover massive recession-era investment losses over a shorter period of time. Both changes were long overdue. But they will cost local governments, and taxpayers, a bundle.
As hard as it was to achieve, last year’s pension overhaul legislation was woefully inadequate. The changes have not given cities, counties and special districts the fiscal relief they need to restore healthy budgets.
As the numbers in the accompanying chart show, most local governments are paying 50 percent more in retirement contributions than they did just five years ago.
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Sacramento is typical. In 2008-09, Sacramento’s pension bill was $51.8 million, or 12.2 percent of the city’s $423 million general fund budget. Even though the city has shed 1,000 employees and reduced its budget to $372.7 million during the last five years, its pension costs have jumped to $55.4 million, or 14.9 percent of the general fund budget.
Besides salaries, pension costs are the single biggest payment the city makes every year. Pension payments exceed the city’s debt service. They exceed the payments the city makes to SMUD to keep the lights burning and to the utility department for garbage, sewer and water services.
To place it in individual employee terms, for the average police officer or firefighter earning $80,000 in base salary in 2006, the city paid $19,000 to cover that employee’s retirement costs.
Today, CalPERS charges the city $22,000 for that same $80,000-a-year officer’s retirement. By 2020, the cost is projected to exceed $33,000 annually. And that’s only if the officer’s base salary remains static at $80,000. No one expects that to happen.
Ronald Bates is city manager for Pico Rivera in Los Angeles County and chairman of the League of California Cities’ pension working group. Even if things remain as they are today, pension costs will increase by another 50 percent for most cities during the next five years, he predicts.
Sacramento Finance Director Leyne Milstein is blunt about the pension squeeze. “Municipal revenues are not growing at a pace that will support these retirement cost increases, and pay for services our residents want and need,” she says. “We need police and fire services. We have to pay our debt obligations. We need to continue to invest in infrastructure.”
Cities also need to invest in those things that build community: parks, libraries, recreation centers, vibrant downtowns and healthy neighborhoods.
San Jose Mayor Chuck Reed, author of a pension reform initiative aimed at the November 2014 ballot, invited labor leaders last week to join him in a search for a solution to the pension crisis. So far, union leaders have scoffed at the idea, claiming the effort is an attack on public employees. In reality, public employees’ jobs and pensions are most at risk if effective reform is not enacted. Just ask the 1,000 former city of Sacramento employees and tens of thousands more across the state who have lost their jobs in recent years.
Reed’s invitation to union leaders to join him in crafting fixes to the pension problem offers labor a golden opportunity to be part of a solution to a pension crisis that grows bigger by the day. They would be foolish to spurn it.