Cities Facing Fiscal Mess Plead With CalPERS as Pensions Consume Budgets

Local California officials warn of a looming disaster.

If you ask the union-controlled California Public Employees' Retirement System about the state's looming pension crisis, you're likely to get this answer: What pension crisis?

But the story was much different at CalPERS' own Finance and Administration Committee meeting held Sept. 19. City officials from across California warned CalPERS board members about the dire fiscal situation their cities face because the pension debt is consuming larger portions of local budgets. The energetic discussion included 18 speakers, many of them local officials who trekked to Sacramento.

"In Hayward, 68 percent of our unfunded pension cost is retiree benefits," said Hayward City Council member Sara Lamnin, who pointed out that "this means the promises of the past weren't paid for, frankly." Hayward's future is really troubling. She said that "over the next three fiscal years, the city of Hayward's revenue is projected to grow 1.4 percent, but our cost for PERS is going to go up 30.5 percent." Lamnin wasn't asking for someone to rescue Hayward. Officials just want to know how bad the damage will be. "We ask you for data," she said.

Oroville Finance Director Ruth Wright said her Butte County city has been forced to cut its workforce by a third and negotiated cuts in police salaries by 10 percent. Oroville expects its cash flow to be gone in three to four years, she said. "We've been saying the 'bankruptcy' word."

These city officials were there to support state Sen. John Moorlach (R-Costa Mesa), who sent a letter to the CalPERS board of administration requesting detailed answers to two seemingly straightforward actuarial questions.

First, Moorlach wanted to know the financial effect of moving employees from "their current tiers to a PEPRA tier on a going-forward basis." That would mean providing them with the slightly-less generous pensions offered after the 2013 reforms went into effect. Moorlach also wanted the pension fund to study the cost savings if cost-of-living adjustments to retirees were temporarily suspended until the fund's liabilities are stabilized. No one is proposing any cuts, but Moorlach was just seeking cost comparison data.

"Cities all across the state of California are gravely concerned about the rising costs of their annual retirement contributions and the growing size of their unfunded actuarial liability," said Bruce Channing, the city manager for Laguna Hills in Orange County, and chairman of the League of California Cities' pension-services committee.

He warned of "severe hardship" and cutbacks in staff in many cities if the problem isn't addressed – and reminded CalPERS officials that "saying we have to invest our way out of this really is not the answer."

The League's Dane Hutchings noted a shocking statistic: "I have members who by all accounts are considered financially healthy cities" but their financial models "suggest that by fiscal year '27-'28 as much as 94 cents of every current dollar of payroll will be allocated to CalPERS contributions." That's without accounting for new hires or raises in the coming decade.

Lodi City Manager Steve Schwabauer said his city's pension costs are expected to double by 2022, which is the equivalent of a fire station and "all of my parks and recreation and all of my library." These are ominous warnings from actual city officials.

Given CalPERS' touting of PEPRA as a key reason that the state is "bending the cost curve" regarding pension liabilities, Moorlach's first request should have been a no-brainer. Why not figure out other PEPRA-related savings possibilities? The second question would make sense, too, if the pension fund were interested in exploring ways to protect cities from potential insolvency rather than simply protecting public employees from any pain.

As expected, CalPERS gave the final say to union officials, who feared that the data would be used to justify lower benefits.

"Yes, it's painful for employers to deal with those rising costs," said Jai Sookprasert, a California School Employees Association lobbyist. "It's doubly more painful for the employees. What part of negotiate, talk to your employees is not clear? … Really, data? This is just data? … Is it data or conjectures?"

So, learning actuarially sound information about what different benefit levels might do to unfunded liabilities is now just a conjecture, at least in the view of some union officials. Apparently, it's better for local officials not to know what different options will mean for their budgets. They should just pay up and quit their complaining.

The CalPERS board fell in line and didn't even vote on the request, meaning that Moorlach's proposal will not be heeded.

In 1999, CalPERS promised that the legislature's proposal that would lead to 50-percent retroactive pension increases for public-safety officials across the state wouldn't cost taxpayers "a dime" because investment returns would make up the difference. The fund was laughably wrong, and their efforts led to the current problems cities across the state are facing.

Now CalPERS and its union allies typically claim that there's no pension crisis and that Democrat Gov. Jerry Brown's modest PEPRA reform will right the ship. Apparently, there's no need to worry about what these hard-pressed city officials are saying. But what will they say 10 to 15 years from now, as pension costs gobble up majorities of local budgets and services will be slashed and burned?

For now, denial is the easiest course. CalPERS had a good year with investment returns of 11.2 percent. Likewise, the Democratic-controlled state Legislature totally ignored the pension liabilities and the arguably even-larger problem surrounding soaring retiree-medical costs during its recently concluded legislative session. But the problems only are going to get worse, and other cities are going to hit the fiscal wall.

"The unions will say it wasn't our fault. We didn't vote for it. You guys voted for it," said Sen. Moorlach in an interview Monday. He was shocked by their audacity. No doubt, they'll also be blaming Wall Street and stingy California taxpayers. But by then the state and cities could be in full crisis mode. Will CalPERS still be in denial if dozens of cities are using about the "b" word?

This column was first published by the California Policy Center.