ARTICLE
Casey Beyer, CEO, Santa Cruz Area Chamber of Commerce Local governments face deficits as pension costs are expected to double according to a recently released study by the League of California Cities. This story is not new but, rather, one that continues to ambush local government coffers when they can least afford it. The rising costs of California’s public employee pensions is a crisis faced not only for cities but counties and school districts across the state. Santa Cruz County’s four cities are projected to see pension cost increases more than 10 percent beyond the statewide average. At present, the city of Santa Cruz pays about $16 million into CalPERS, the state agency that manages benefits for most public employees. According to data compiled by the California Public Policy Center, that payment is projected to double to $32 million by 2025. Watsonville is anticipating a cost increase of about $7 million on top of the $7 million it currently pays, according to assistant city manager Matt Huffaker. This is predictable as the pension programs for public safety employees — police, fire, correctional officers and others — were negotiated in the last century (late 1990s). Other public unions followed with their own pension contracts. In San Diego and San Jose and other California cities, local government leaders in the recent five to seven years passed legislative fixes to curb the growth of pension plans in those cities. In San Jose the voters approved the new pension plan, however, the courts overturned the majority of those changes. In 2015, the new San Jose Mayor, Sam Liccardo, re-negotiated multiple union contracts that will save millions over the next thirty years. As outlined in the current report released Thursday, the League of Cities called the rising CalPERS costs “unsustainable” for many cities, which it said were particularly vulnerable due to the large portion of local government coffers already spent on employees. The Santa Cruz Sentinel article by reporter Nick Barra provides a more detailed review of the pension costs in our county and four cities. There has been mounting concern about pension reform across the state and nation, and discussion of a possible statewide ballot initiative to address the rising cost of pensions. To be certain, our local government leaders are focusing on options to stem the tide. There is no easy one stop solution to settle the rising cost without making tough choices for a community. The report made these observations: 1) Rising pension costs will require cities over the next seven years to nearly double the percentage of their General Fund dollars they pay to CalPERS; 2) For many cities, pension costs will dramatically increase to unsustainable levels; and 3) The impacts of increasing pension costs as a percentage of General Fund spending will affect cities even more than the state. Employee costs, including police and other municipal services, are a larger proportion of spending for cities. The state also faces increasing pension costs. According to Governor Brown’s proposed FY 2018 – 19 budget introduced in January, $3.2 billion of the state’s General Fund will be allocated to pay down CalPERS pension liabilities. This is approximately 2.75 percent of the total $131 billion proposed General Fund budget. According to the report, under current law, there are only two sources to address the growing unfunded liability at CalPERS that cities face: higher than expected investment returns or increased employer contributions. Although CalPERS recently reduced its discount rate to 7 percent, the Fund projects a 6.1 percent return over the next 10 years. It is highly probable that public agencies will be expected to pay more to make up the difference — this is unsustainable. Cities are faced with a series of options: 1) Develop and implement a plan to pay down the city’s Unfunded Actuarial Liability (UAL): Possible methods include shorter amortization periods and pre-payment of cities UAL. This option may only work for cities in a better financial condition. 2) Consider local ballot measures to enhance revenues: Some cities have been successful in passing a measure to increase revenues. Others have been unsuccessful. Given that these are voter approved measures, success varies depending on location. 3) Create a Pension Rate Stabilization Program (PRSP): Establishing and funding a local Section 115 Trust Fund can help offset unanticipated spikes in employer contributions. Initial funds still must be identified. Again, this is an option that may work for cities that are in a better financial condition. 4) Change service delivery methods and levels of certain public services: Many cities have already consolidated and cut local services during the Great Recession and have not been able to restore those service levels. Often, revenue growth from the improved economy has been absorbed by pension costs. The next round of service cuts will be even harder. 5) Use procedures and transparent bargaining to increase employee pension contributions: Many local agencies and their employee organizations have already entered into such agreements. 6) Issue a pension obligation bond (POB): However, financial experts including the Government Finance Officers Association (GFOA) strongly discourage local agencies from issuing POBs. Moreover, this approach only delays and compounds the inevitable financial impacts. The City Councils and County Board of Supervisors will be having these discussions during the next few months as they head into budget hearings. They must address this quickly to get ahead of the curve in order to avoid drastic cuts to city and county programs and services. Let’s keep an eye on this issue and offer creative solutions to help our communities.
Casey Beyer, CEO, Santa Cruz Area Chamber of Commerce
Local governments face deficits as pension costs are expected to double according to a recently released study by the League of California Cities.
This story is not new but, rather, one that continues to ambush local government coffers when they can least afford it. The rising costs of California’s public employee pensions is a crisis faced not only for cities but counties and school districts across the state. Santa Cruz County’s four cities are projected to see pension cost increases more than 10 percent beyond the statewide average.
At present, the city of Santa Cruz pays about $16 million into CalPERS, the state agency that manages benefits for most public employees. According to data compiled by the California Public Policy Center, that payment is projected to double to $32 million by 2025. Watsonville is anticipating a cost increase of about $7 million on top of the $7 million it currently pays, according to assistant city manager Matt Huffaker.
This is predictable as the pension programs for public safety employees — police, fire, correctional officers and others — were negotiated in the last century (late 1990s). Other public unions followed with their own pension contracts.
In San Diego and San Jose and other California cities, local government leaders in the recent five to seven years passed legislative fixes to curb the growth of pension plans in those cities. In San Jose the voters approved the new pension plan, however, the courts overturned the majority of those changes. In 2015, the new San Jose Mayor, Sam Liccardo, re-negotiated multiple union contracts that will save millions over the next thirty years.
As outlined in the current report released Thursday, the League of Cities called the rising CalPERS costs “unsustainable” for many cities, which it said were particularly vulnerable due to the large portion of local government coffers already spent on employees.
The Santa Cruz Sentinel article by reporter Nick Barra provides a more detailed review of the pension costs in our county and four cities.
There has been mounting concern about pension reform across the state and nation, and discussion of a possible statewide ballot initiative to address the rising cost of pensions. To be certain, our local government leaders are focusing on options to stem the tide. There is no easy one stop solution to settle the rising cost without making tough choices for a community. The report made these observations:
1) Rising pension costs will require cities over the next seven years to nearly double the percentage of their General Fund dollars they pay to CalPERS; 2) For many cities, pension costs will dramatically increase to unsustainable levels; and 3) The impacts of increasing pension costs as a percentage of General Fund spending will affect cities even more than the state. Employee costs, including police and other municipal services, are a larger proportion of spending for cities.
The state also faces increasing pension costs. According to Governor Brown’s proposed FY 2018 – 19 budget introduced in January, $3.2 billion of the state’s General Fund will be allocated to pay down CalPERS pension liabilities. This is approximately 2.75 percent of the total $131 billion proposed General Fund budget.
According to the report, under current law, there are only two sources to address the growing unfunded liability at CalPERS that cities face: higher than expected investment returns or increased employer contributions. Although CalPERS recently reduced its discount rate to 7 percent, the Fund projects a 6.1 percent return over the next 10 years. It is highly probable that public agencies will be expected to pay more to make up the difference — this is unsustainable.
Cities are faced with a series of options:
1) Develop and implement a plan to pay down the city’s Unfunded Actuarial Liability (UAL): Possible methods include shorter amortization periods and pre-payment of cities UAL. This option may only work for cities in a better financial condition. 2) Consider local ballot measures to enhance revenues: Some cities have been successful in passing a measure to increase revenues. Others have been unsuccessful. Given that these are voter approved measures, success varies depending on location. 3) Create a Pension Rate Stabilization Program (PRSP): Establishing and funding a local Section 115 Trust Fund can help offset unanticipated spikes in employer contributions. Initial funds still must be identified. Again, this is an option that may work for cities that are in a better financial condition. 4) Change service delivery methods and levels of certain public services: Many cities have already consolidated and cut local services during the Great Recession and have not been able to restore those service levels. Often, revenue growth from the improved economy has been absorbed by pension costs. The next round of service cuts will be even harder. 5) Use procedures and transparent bargaining to increase employee pension contributions: Many local agencies and their employee organizations have already entered into such agreements. 6) Issue a pension obligation bond (POB): However, financial experts including the Government Finance Officers Association (GFOA) strongly discourage local agencies from issuing POBs. Moreover, this approach only delays and compounds the inevitable financial impacts.
The City Councils and County Board of Supervisors will be having these discussions during the next few months as they head into budget hearings. They must address this quickly to get ahead of the curve in order to avoid drastic cuts to city and county programs and services. Let’s keep an eye on this issue and offer creative solutions to help our communities.