There’s a quiet crisis under way, and the sooner we recognize it the better. The state’s public employee retirement system, which includes most city workers, is not going to be able to cover all its pension obligations. As more workers retire, member cities will have to raise taxes or cut services – or both – to pay the difference.
The League of California Cities reported this month that most member cities expect pension costs to jump by at least 50 percent by 2024-25. Pension payments – now about 11 percent of most city general fund budgets – will eat up about 16 percent by then. That doesn’t include higher retiree healthcare costs. We could see some cities going bankrupt, as Stockton and San Bernardino did in 2012.
Modesto expects pension costs to peak in 2028-29 at $54.6 million. Fortunately, the city is already considering various options. Unfortunately, there are no good ones.
The league is telling cities to consider local sales tax measures and to negotiate with labor unions to force current employees to pay more into pension plans. Modesto is considering a special fund or a one-time payment to CalPERS.
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Others are counting on a court ruling to reduce pension costs for those still working. Gov. Jerry Brown wants the state Supreme Court to end the “California rule,” which prevents state and local governments from reducing pension benefits for current workers without compensating them in other ways.
Unions and management retirees will fight any attempt to cut benefits. And it will be difficult to tell people who have based retirement plans on the “certainty” of a pension that they might have to wait. But it’s also difficult to ask taxpayers to be sympathetic after learning that CalPERS pays more than 30 retirees in excess of $300,000 a year, with two topping $500,000 each year, according to Transparentccalifornia.com.
Yes, it’s easy to blame public-employee unions. In 1999, they convinced Gov. Gray Davis and the legislature that retirement benefits for public safety employees could be expanded – and retirement age reduced – at no cost. How? By counting on rising pension fund investment returns to cover it all. Right behind the unions came the professional associations made up of managers, demanding (and getting) the same unrealistic deals.
Despite a return 11.2 percent last year, returns were often much lower – like the 0.6 in 2016. Far more frequently, investment returns failed to meet CalPERS’ outsized expectations, leaving a hole on balance sheets. Local governments are required to fill those funding holes for their employees.
Jerry Brown saw it coming in 2012 and enacted reforms that lowered pension formulas and required employees to pay more into their retirement accounts. But the changes apply only to those hired after Dec. 31, 2012, so real savings won’t kick in for another 20 years – and only if a union-backed lawsuit doesn’t kill them.
It also helps that in 2016 CalPERS lowered its expected return rates to more realistic figures. But that doesn’t help the 451 California cities that are looking up from the bottom of those pension holes.
Bolting CalPERS won’t work. The city of Loyalton tried in 2013, but was assessed a $1.6 million exit fee – more than its annual budget.
Many counties are at least a little better off. Stanislaus, Merced and San Joaquin are among 20 whose retirement programs are not tied to CalPERS.
The worst is yet to come. As the federal government goes deeper into debt, a downturn is inevitable. When that happens, what will cities do? They’ll cut. Deeply.