With pension costs skyrocketing, Modesto investigates ways to keep services running

Modesto expects in a decade it will pay $54.6 million for the pensions of its workers and retirees. That’s nearly 2 1/2 times what it pays now.
Modesto expects in a decade it will pay $54.6 million for the pensions of its workers and retirees. That’s nearly 2 1/2 times what it pays now. The Modesto Bee

Modesto expects in a decade the pension costs for its workers and retirees will hit a high of $54.6 million. That's about double the current cost and unless the city can mitigate that increase, it will have less money to maintain its parks, hire police officers and for other basics.

Most of that cost could be borne by the city’s general fund. The fund, which is now roughly $120 million and about a third of city’s operating budget, primarily pays for public safety. And though police officers and firefighters today make up about 30 percent of the city’s employees, they account for 63 percent of the city’s current pension costs.

City officials discussed Modesto's pension challenges and potential solutions at a meeting last week. Officials heard a presentation from John Bartel, president of Bartel Associates, the actuarial services firm the city hired to help it and its labor groups look at pension costs and ways to mitigate them. The labor groups are helping the city pay the $13,000 it cost to hire the firm.

The options include establishing a supplemental trust fund that would offset some of the steepest pension costs in future years. The city also could make additional one-time payments to the California Public Employees’ Retirement System to lower its pension obligations.

The next step is for the city and its labor groups to work with Bartel Associates to flesh out the options and discuss the findings at a City Council workshop. There was no discussion about asking labor groups to have its members contribute more toward pension costs, which they have done in recent years. The city also has established pension plans with lower benefits in recent years for new employees.

Interim City Manager Joe Lopez said the city and its labor groups are trying now to find ways to offset the pension costs. Still, Modesto faces a substantial problem. A city report states pension costs are expected to peak in its 2028-29 budget at $54.6 million.

Modesto is among the hundreds of local agencies throughout California that belong to CalPERS, and these agencies face steeply rising pension costs as CalPERS requires them to pay significantly more in the coming years to shore up its pension system.

Modesto's unfunded liability for its pensions was $301.8 million as of June 2016, according to the Bartel report. The city's pension plans had $660.3 million in assets but owed $962.1 million to retirees and future retirees. The difference is the unfunded liability.

The report said Modesto also faces rising pension costs because it has more retirees. In 1996 the city had 1,042 employees versus 640 retirees and others receiving pensions. In 2016 the city had 1,121 employees versus 1,403 retirees and others receiving pensions.

The report pointed to another factor: Modesto increased pensions for police officers and firefighters, something cities across the state did after the state increased pension benefits in 2000. Modesto increased pensions for its police officers in 2001 and firefighters in 2002, according to city records. The increases were approved by the City Council.

Modesto went from a 2 percent at 50 pension formula to a 3 percent at 50 formula. The change meant the city's sworn public safety employees would retire with pensions that were 50 percent higher.

For example: a firefighter who retired at 50 after 30 years on the job under the old formula would get a pension equal to 60 percent of his pay (2 percent multiplied by 30 years), but under the new formula that pension would be 90 percent of his pay (3 percent multiplied by 30 years).

When the City Council increased pensions for police officers, city officials said it was necessary for Modesto to stay competitive, especially with Bay Area cities that paid more. That's been the same argument city officials have made for police pay increases in recent years as the city says it has struggled to hire and keep good officers.

Recent data suggests that about two-thirds of the cities and other local governments that have sworn public safety employees and belong to CalPERS offer the 3 at 50 pension, said Joe Nation, a Stanford public policy professor and pension expert.