City officials received a sobering assessment last week about Modesto’s pension costs, which are projected to nearly double in eight years.
Acting City Manager Joe Lopez delivered the appraisal Monday during a hearing for the city’s proposed $373 million operating budget for its 2017-18 budget year, which starts July 1. And he told officials that the California Public Employees’ Retirement System is not sustainable in its current form.
“Ultimately there is going to have to be a substantial change made to the way the pension system is run,” Lopez told the City Council’s Effective Government Committee, which held budget hearings last week.
“It’s going to be a multi-tier approach,” Lopez continued. “It’s going to involve CalPERS, it’s going to involve the cities, it’s going to involve labor groups, and it’s actually going to involve the retirees to take a more holistic view of how the pension system is actually operating. We can’t continue to rely, CalPERS can’t continue to rely, on revenue (from cities and its other public sector members to meet its pension obligations).
“There is going to have to be substantial changes to the actual benefit packages if these are ever going to be sustainable.”
Lopez is a member of the League of California Cities pension task force and as a member he is hearing that many cities are facing bankruptcy over rising pension costs. “I’m pretty sure we can stave that off,” he said, because of the changes Modesto has made to its budget and because the city has met other challenges.
Modesto also has $15.8 million in reserves in what is called its general fund, and a council that is committed to increasing those reserves. The general fund makes up about a third of the operating budget.
But the projected pension increases are grim.
The city now pays about 40 cents in pension costs for every $1 in salary for a police officer or firefighter. The city projects that within eight years it will be paying nearly 72 cents in pension costs for every $1 in salary. “For every one police officer,” Lopez said, “three-quarters of the next police officer is a pension payment. That is a very scary place to be.”
Modesto now pays about 17 cents in pension payments for every $1 in salary for a civilian employee. That is projected to increase to nearly 30 cents within eight years.
Cities and other public sector agencies across California will be paying CalPERS substantially more after its board voted in December to reduce what CalPERS expects to earn on its investments, from 7.5 percent to 7 percent. Lower investment earnings mean larger contributions from the roughly 3,000 agencies that belong to CalPERS.
Lopez has said public agencies also are paying more because of other changes enacted by CalPERS in recent years, including increasing the life expectancy for retirees and accelerating the time period to fully fund the pension plan. Modesto expects to pay CalPERS $21.3 million this year and is projecting that its CalPERS payment will be $38.1 million in eight years.
Modesto and other local governments will start feeling the brunt of the increased pension costs in their 2018-19 budgets, which start July 2018.
Lopez thanked Modesto’s employees and their labor associations for working with the city in recent years on such reforms as agreeing to have employees pay the full share of their pension contributions (which Lopez said has saved Modesto millions of dollars) and agreeing to changes that are substantially reducing the city’s retiree medical liability costs.
Modesto’s civilian employees pay 7 percent of their pay toward their pensions. Lopez said police officers and firefighters pay 9 percent but eventually will pay 12 percent.
He said the city is starting to prepare for the rising pension costs now, but gave few details except that the city is looking at setting up a trust if it can come up with the money to fund it. He said in an interview that the trust would lower the city’s pension costs but would not solve its pension problem.
And there is a lot uncertainty. For instance, if CalPERS cannot meet its 7 percent return on its investments (and many observers think it cannot) then it could further reduce what it expects to earn on its investments. That could mean even higher pension payments for cities and other local governments.
“I think your presentation sucked the life out of everyone here,” Councilman Bill Zoslocki told Lopez.
“Sorry to be a Debbie Downer on that one,” Lopez said. “But I wanted to make sure we painted a realistic picture of the challenge ahead of us.”
“We can’t live without real numbers,” Zoslocki replied.
Kevin Valine: 209-578-2316
Modesto’s projected annual pension costs
Budget year – Total cost
2016-17 – $21.3 million
2017-18 – $23 million
2018-19 – $27.9 million
2019-20 – $31.5 million
2020-21 – $35.2 million
2021-22 – $36 million
2022-23 – $37.8 million
2023-24 – $37.5 million
2024-25 – $38.1 million
A budget year is July 1 through June 30. Roughly 70 percent of the pension costs will be borne by the city’s general fund, which primarily pays for police and fire services.
Source: City of Modesto