The San Mateo County grand jury report screamed out in its title: “Soaring City Pension Costs – Time for Hard Choices.”
And yesterday, the Wall Street Journal’s headline broadened the grim picture: “The Pension Hole for U.S. Cities and States is the Size of Japan’s Economy.” The figure? $5 trillion.
It’s the reason why even economically booming Peninsula cities are finding it difficult to pay their bills. In Redwood City, where the downtown is bringing in $7 million more in tax dollars to city coffers than five years ago, all city departments were forced to shave $3.7 million from their budgets in fiscal year 2018-2019 to keep the city in the black. That’s in large part due to rising annual pension payments projected to increase by $10 million in five years in the city, and by more after that.
With the aim of maintaining services, Redwood City is pursuing a half-cent sales tax measure and a cannabis tax measure for the November ballot. The city also recently increased developer fees and negotiated pension changes for current and future employees.
Despite such moves, a lot more revenue will be needed in the coming years to pay the rising pension costs. The grand jury report decries a lack of longterm planning by many cities in the county in regards to public pensions.
“Public pension costs are already eating into city budgets and represent a serious threat to public services in San Mateo County’s cities,” according to the grand jury report.
In fiscal year 2016-17, the county’s 20 cities spent a combined $102 million on their pension plans, an average of about 13.6-percent of their general fund expenditures, the report said.
“As heavy a financial burden as this is, the cities’ pension costs are projected to double by FYI 2024-2025 if new actuarial assumptions made by CalPERS – the administrator of the cities’ pension plans – prove to be correct,” according to the report.
Some experts argue CalPERS’ assumptions “are unduly optimistic” and that costs could be even greater.
So where do these heavy pension costs come from, anyway?
Essentially, employees working for cities are provided a pension plan as part of their compensation package. The plans are administered by CalPERS, the California Public Employees’ Retirement System.
According to the League of California Cities, the “most prominent source” of skyrocketing pension costs stems from legislation in 1999 (SB 400) and 2001 (AB 616) that led to enhanced pension benefit formulas for state and local employees.
Those pension plans are paid for by employers that contract with CalPERS, workers receiving benefits under CalPERS, and earnings from CalPERS investments. CalPERs’ return on investments, which is expected to pay for the majority of retiree pensions, suffered great losses – nearly $100 billion — during the Great Recession.
The state has not fully recovered from the losses, and in addition CalPERS’ outside advisors “expect returns over the next decade will also be below anticipated returns,” according to the League of California Cities’ report.
When there’s lower-than-expected investment returns, cities and their employees have to make up the difference with larger payments into the pension fund.
In February, CalPERS’ board voted to shorten the amortization period for certain sources of unfunded liability from 30 years to 20 years, likely to cause even higher contributions by cities.
In its report, the San Mateo County grand jury identified several ways cities can pay steeply rising pension costs, with one being cuts to public services, reductions to employee salaries and benefits and layoffs. Another way is to negotiate with bargaining units to increase the employee share of pension costs, and a third strategy is to increase revenues through taxes.
A fourth way is having cities use “existing resources, if any, to pay down unfunded liabilities early,” saving on costs in the longterm, according to the grand jury report.
The grand jury recommended that cities develop longterm financial plans to deal with the rising pension costs. It also recommended that cities schedule public hearings about the issue and publish information about pension obligations on their websites for all to see.