After years of denial, California’s cities are finally waking up to their pension nightmare. Unfortunately, now the crisis is so dire that there are no painless choices left. To keep up with ballooning pension payments, cities soon will have to raise taxes or cut services, or both.
Loudly sounding the alarm, the League of California Cities reported this month that most members expect pension costs to jump by at least 50 percent by 2024-25. Pension payments – now about 11 percent of general fund budgets on average – will eat up about 16 percent by then. That doesn’t include increases in retiree health care costs and other benefits. In extreme cases, the pension burden could lead to more bankruptcy filings like Stockton’s and San Bernardino’s in 2012.
In response, the league is advising cities to consider local tax measures and to negotiate with labor unions to get employees to pay more into their own pensions. That’s easier said than done, of course, especially since local unions are often powerful, well-funded political players.
In Sacramento, for instance, City Hall is negotiating now with the firefighters union on a new contract. The union bankrolled the campaign for Measure U, the half-cent sales tax that voters approved in 2012 to restore public safety services, and likely will also support an expected campaign to renew the tax in November. Mayor Darrell Steinberg is also floating a possible additional half-cent sales tax to help create a fund for economic development, affordable housing and the arts.
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As former Sacramento Bee columnist Dan Walters wrote for CALMatters, the additional revenue from those sales taxes could be eaten up by the projected increase in the city’s pension costs. The city estimates that pension payments will rise from $67 million in the general fund this year to $129 million in 2022-23.
If voters see the sales taxes as a way to prop up pensions, approval will be an even tougher sell.
For Sacramento and cities across the state, the best hope may be a court ruling that allows them to cut pensions. Gov. Jerry Brown is urging the state Supreme Court to end the “California rule,” which prevents the state and local governments from reducing pension benefits for current workers without additional compensation.
Unions and retirees will fight any attempt to cut benefits tooth and nail. But it’s difficult for many taxpayers to have too much sympathy when they hear about outrages, such as a Los Angeles program that pays older police officers and firefighters almost double their salaries to stay on the job while also allowing them to take lengthy injury leaves.
The pension crisis goes back to then-Gov. Gray Davis and the Legislature, which in 1999 handed out far too generous pensions, particularly to police officers and firefighters. Senate Bill 400 caused a spike in pension costs that the state and local governments have been digging out from ever since.
In 2012, Brown pushed through a reform package that lowered pension formulas and required employees to pay more into their retirement accounts. But most changes only apply to workers hired on or after Jan. 1, 2013, so significant savings won’t kick in for 20 years or more. And unions are suing to overturn parts of the law.
Then in December 2016, the CalPERS board lowered its expected investment return to a more realistic figure – a move that requires higher contributions from cities, phased in through 2024. (Of California’s 482 cities, 451 are part of CalPERS.) That is compounding the higher pension costs that cities have put on themselves through labor contracts.
During the Great Recession, many cities had to slash services to residents. In the next downturn, pension obligations will make balancing budgets even tougher. And local taxpayers will pay for it, one way or another. That’s our nightmare.