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 therefore taxpayers a bundle.
As hard as it was to achieve, last years 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.
Many local governments are paying 50 percent more in retirement contributions than they did just five years ago.
Sacramento is typical. In 2008-09, Sacramentos pension bill was $51.8 million, or 12.2 percent of the citys $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 citys 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 employees retirement costs. Today, CalPERS charges the city $22,000 for that same $80,000-a-year officers retirement. By 2020, the cost is projected to exceed $33,000 annually. And thats only if the officers base salary remains static at $80,000. No one expects that to happen.
This year, the city of Modesto will pay about $16.4 million into CalPERS for the pension obligations to current employees and former employees. Thats $3.4 million more than the city will spend for the operation of the entire parks, recreation and neighborhoods department.
Stocktons pension debt is one of the reasons that city ended up in bankruptcy.
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.
Most cities are seeing their revenue on the rise again, the result of property values and therefore property taxes increasing. With a slow climb in sales-tax income, some officials say that the retirement costs increase will eat up the revenue increase and more. The result: an ongoing financial squeeze, even as the economy improves.
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 former government employees across the state who have lost their jobs in recent years.
Reeds 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.
initiative-referendum-status.htm. Look for The Pension Reform Act of 2014.
The text of the proposed state ballot measure is available on the secretary of state website