California cities reeling under the strain of rising pension costs haven’t seen anything yet.
–In a six-year period from fiscal year 2019 to 2025, city payments for pensions will increase an estimated 50 percent.
–By the end, cities on average will pay 60 cents for pensions for every dollar of payroll for police and firefighters, and 35 cents on the dollar for other employees.
–Pension costs, which sucked up an average 8 percent of cities’ general fund budgets in 2007, will drain an average 16 percent by 2025.
Those conclusions come from a report the League of California Cities released last week after reviewing data for 451 municipalities that use CalPERS to administer their pensions. That includes most Bay Area cities except San Jose and San Francisco, which have their own retirement systems.
The upshot is that, without tax increases, there will be less money for public services. How much less will vary from city to city. But the threat to fiscal solvency in many cases is severe: Ten percent of municipalities will spend more than 21 percent of general fund dollars on pension costs. Never mind salaries or health care benefits — that’s just pensions.
Yet those numbers understate the problem, and the league, the lobbying arm for California’s cities, until now has sat quietly on the sidelines rather than advocating for meaningful change.
It’s great that cities have finally woken up to the crisis. Unfortunately, they’re the Rip Van Winkle of the pension world, having slept through the past two decades as pension debt mounted. Cities are just now opening their eyes to the new world they live in.
While others, like the non-partisan Little Hoover Commission in 2011, have warned for years that this day would come, cities have exacerbated the problem. They agreed to retirement benefits they couldn’t afford and then encouraged CalPERS, the nation’s largest pension system, to cook the books to hide the magnitude of the shortfall.
They supported CalPERS’ understating of the shortfall by relying on overly aggressive investment forecasts and accounting practices that irresponsibly postpone debt repayment for decades.
CalPERS is only too happy to accommodate because the strategy meets the desires of the labor unions to which many of the retirement board members — and elected city officials — are politically beholden.
As a result, despite a banner year of stock market investments, CalPERS, by its own accounting, currently has at best only about 70 percent of the funds it should to cover pension benefits that workers already earned.
The problem will likely get worse. Most cities have encouraged CalPERS, or sat back silently, as the pension administrator continues to rely on forecasts of 7 percent investment returns even though its chief investment officer predicts 6.1 percent over the next 10 years.
There’s been barely a peep from cities as CalPERS spread repayment of the shortfall over 30 years and backloaded payment amounts — thereby adding to the shortfall.
Like reckless spenders on credit card binges, most cities have made only the minimum payments and then complained for years about it increasing, but done little to control their pension costs.
As a result, payments continue rising, prompting cities to plead for further deferral of their obligations — that is, they beg CalPERS to continue accounting games that hide the magnitude of the problem.
Meanwhile, the debt mounts. More than eight years after the Great Recession, little progress has been made to shore up the pension system before the onset of the next economic downturn.
The question for cities, now coming out of their slumber, is whether they’re finally willing to take meaningful steps. True fiscal sobriety must begin with insisting that CalPERS honestly calculate the size of the problem.
Yes, it will be painful. Yes, some cities will need special payment deferrals to avoid bankruptcy. But hiding the size of the debt is not a solution.
For most cities, the solution will include tough and publicly transparent negotiations with labor unions to reduce pension costs. The decades of overly generous deals reached in secret bargaining have only made the problem worse.
In its report last week, the League of Cities for the first time suggested cities engage in transparent negotiations for more employee contributions to their pensions. The League also seemed to support Gov. Jerry Brown’s push in the state Supreme Court to end the “California Rule,” the legal doctrine that has blocked meaningful changes to public employee pension levels.
The question now is whether the league will walk the talk, or whether this is just lip service.
Cities must decide whether they want to be reformers or enablers.
(c)2018 the Contra Costa Times (Walnut Creek, Calif.)
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