Local officials, particularly those in California’s 400-plus cities, have been complaining loudly in recent years about pension costs, raising the specter of insolvency if they continue their rapid increase.
Last year, the League of California Cities issued a report declaring that “pension costs will dramatically increase to unsustainable levels.”
The California Public Employees Retirement System (CalPERS) confirms that projection in a new report.
The report reveals that mandatory “employer contributions,” including those from the state and school districts, as well as local governments, rose from $12 billion in 2016-17 to $20 billion a year later.
It also warns that the payments will continue to rise well into the next decade as the giant trust fund tries to recover from dramatic investment losses in the Great Recession, adjusts to lower earnings projections and handles a surge of baby boomer generation retirees claiming benefits.
“The greatest risk to the system continues to be the ability of employers to make their required contributions,” the new report declares, adding, “It is difficult to assess just how much strain current contribution levels are putting on employers. However, evidence such as collections activities, requests for extensions to amortization schedules and information regarding termination procedures indicate that some public agencies are under significant strain.”
Hundreds of Local Tax Increase Measures Were Placed on the Ballot Last Year
Pension costs for “safety employees,” police officers and firefighters mostly, are rising especially fast. They now average about 50% of payroll and are projected in the new report to top 55% by the mid-2020s. A few cities are already nearing or reaching 100%.
However, as much as they complain about CalPERS forever dunning them, California’s local officials are largely unwilling to directly ask their voters for more taxes to pay pension bills.
Hundreds of local tax increase measures were placed on the ballot last year and hundreds more are likely to be proposed next year, but almost universally they are billed as improving popular local services, such as “public safety” or parks.
It’s where the concept of “fungibility” kicks in. If a city’s voters can be persuaded to raise their taxes for parks and recreation, for example, it effectively frees up more money to pay its pension bills without acknowledging that motive.
We saw a wonderful example of fungibility last year in Sacramento, where voters were persuaded to raise local sales taxes on the promise of civic improvements by an amount that closely matched increases in the city’s obligations to CalPERS.
We may be seeing another in Oakland next year.
Bait and Switch Is More Politically Expedient
The Oakland City Council is placing a “parcel tax” — a form of property tax — on the March ballot to improve parks, recreational and homeless services and stormwater drainage. The tax, $148 annually per real estate parcel, would generate an estimated $20 million a year.
As it happens, however, the most recent CalPERS report on Oakland’s pension obligations reveals that they will increase from $194 million in 2020-21 to $226 million by 2025-26, which would more than consume the revenue from the parcel tax.
So why don’t city officials just own up and publicly acknowledge that pension costs are driving their budgets into red ink and ask voters for more tax money to cover them?
They — and the unions that finance tax increase campaigns — clearly fear that being candid would backfire. If voters knew they would be paying more taxes to support pension benefits for city workers that are probably much better than they have themselves, they might refuse to go along.
Bait and switch is more politically expedient.
CalMatters is a public interest journalism venture committed to explaining how California’s state Capitol works and why it matters. For more stories by Dan Walters, go to calmatters.org/commentary