Pension Costs Continue to Surge Despite Fewer Employees

This morning the Sacramento Bee published an editorial that showed the PERS (Public Employees’ Retirement System) costs to local governments across the region.  Writes the Bee: “The numbers are alarming. To replenish its recession-battered pension fund, CalPERS is requiring cities, counties and special districts to pay out millions more in retirement contributions.”

“The retirement system made two policy changes that have raised costs for its clients,” the Bee writes. “It lowered its expected rate of return on investments, and it changed accounting practices to cover massive recession-era investment losses over a shorter period of time. Both changes were long overdue. But they will cost local governments, and taxpayers, a bundle.”

“As hard as it was to achieve, last year’s pension overhaul legislation was woefully inadequate. The changes have not given cities, counties and special districts the fiscal relief they need to restore healthy budgets,” the Bee continues.  “As the numbers in the accompanying chart show, most local governments are paying 50 percent more in retirement contributions than they did just five years ago.”

Davis is one of the smaller cities in the comparison graphic, but the impact of pension costs are just as sharp.  In 2007-08 Davis paid out $4.4 million in pension costs according to the data from CalPERS collected by the Bee. In 2013-14, Davis will pay out $7.4 million.

As the graphic from the June budget workshop shows, Davis’ raw number of employees peaked in 2007-08 at 464 and, in 2008-09, Davis employed 462 to full-time equivalent positions.

By 2013-14, the city shows a fewer number of employees since prior to 1996-97, at 361.  That’s more than 100 employees that have either been let go, or allowed to transfer or retire without replacement, over the last six budgets.

That represents a 21.8% decline in employees but a 68.2% increase in PERS costs over the same period of time.

While the $3 million in increased cost, despite 100 fewer employees, does not cripple the city’s budget, it does strain it, at a time when a budget deficit of $5 million is about to open up in the next few years.

Davis, of course, is not unique.  The Bee notes, “In 2008-09, Sacramento’s pension bill was $51.8 million, or 12.2 percent of the city’s $423 million general fund budget. Even though the city has shed 1,000 employees and reduced its budget to $372.7 million during the last five years, its pension costs have jumped to $55.4 million, or 14.9 percent of the general fund budget.”

Davis’ figure is actually higher, with the $7.4 million representing 18 percent of its $41 million general fund budget.

The Bee writes, “Ronald Bates is city manager for Pico Rivera in Los Angeles County and chairman of the League of California Cities’ pension working group. Even if things remain as they are today, pension costs will increase by another 50 percent for most cities during the next five years, he predicts.”

“Sacramento Finance Director Leyne Milstein is blunt about the pension squeeze,” the Bee writes.

“Municipal revenues are not growing at a pace that will support these retirement cost increases, and pay for services our residents want and need,” she says. “We need police and fire services. We have to pay our debt obligations. We need to continue to invest in infrastructure.”

For Davis, the increased pension costs come at a time when the city needs to invest huge amounts in fixing its long overdue and strained roadway system, has additional costs for water, and is looking to make capital improvements along its two main east-west corridors.

The Bee writes, “San Jose Mayor Chuck Reed, author of a pension reform initiative aimed at the November 2014 ballot, invited labor leaders last week to join him in a search for a solution to the pension crisis. So far, union leaders have scoffed at the idea, claiming the effort is an attack on public employees.

“In reality, public employees’ jobs and pensions are most at risk if effective reform is not enacted. Just ask the 1,000 former city of Sacramento employees and tens of thousands more across the state who have lost their jobs in recent years,” they write.  “Reed’s invitation to union leaders to join him in crafting fixes to the pension problem offers labor a golden opportunity to be part of a solution to a pension crisis that grows bigger by the day. They would be foolish to spurn it.

“The Pension Reform Act of 2014 would amend the California Constitution to give government agencies clear authority to negotiate changes to existing employees’ pension or retiree healthcare benefits on a strictly going-forward basis,” a release stated two weeks ago.  “The measure explicitly protects retirement benefits government employees have already earned, while allowing benefits to be modified for future years of service.

“Many of California’s public employee retirement plans are simply unsustainable and it’s in everyone’s interest to provide the tools to fix the problem now before even tougher actions are necessary,” said Mayor Chuck Reed of San Jose. “During tough economic times, we believe employees would much rather adjust their future expectations than risk seeing their accrued benefits slashed in bankruptcy.”

That system is created by California Supreme Court rulings that have held that benefits not yet earned are nevertheless contractually protected through vested rights.  This initiative would allow state and local government to protect those benefits already earned but alter future benefit packages.

“Federal law allows private pension plans to prospectively change employee retirement benefits. At least 18 states have the flexibility to do so for public employees as well. However, in California, a series of judicial decisions has made it extremely difficult for government employers to make any changes to retirement benefits for existing employees, even if he/she has only been on the job for a single day,” the group said.

Given California’s skyrocketing retirement costs and huge unfunded liabilities for pension and retiree healthcare benefits, numerous independent experts have argued that prospectively modifying current employees’ benefits is the only way to solve the problem, the group believes.

Davis’ situation is compounded by the fact that two of its employee groups continue to hold out from signing a new contract, and that continues to cost the city $114,000 each month.

—David M. Greenwald reporting

Categories: