By Cassandra Reinhart, Special to the Independent
Rising employee pension costs are the driving factor behind a projected $2.5 million budget deficit for Laguna Beach by the year 2022.
According to a five-year financial forecast presented to the City Council, increases in pension costs related to the California Public Employees Retirement System, or CalPERS, are the largest contributor to the projected budget gap, and will add $2.6 million to the budget per year by 2024.
“I think this is going to be the key financial issue facing state, county and local government in California for the next five to seven years,” City Manager John Pietig said in the meeting Monday, March 6.
CalPERS, the nation’s largest public pension fund, recently lowered its rate of return from investments to 7% from 7.5%, sending the city’s costs higher beginning in fiscal year 2018-2019. The city’s financial assessment forecasts general fund expenditures outpacing revenues by fiscal year 2020-2021, causing a projected operating deficit of $1 million that year and $2.5 million the next. Overall general fund revenue is expected to grow 3.1% annually with expenditures increasing 4%.
“If we invest in PERS, we know we are at least going to make 7% over time, but there are some questions about what is going to happen in the next five to 10 years. Are communities going to start going bankrupt?” Pietig asked.
The League of California Cities agrees with Pietig’s skepticism and predicts that unfunded pension liabilities are threatening the delivery of basic public services, compromising general fund budgets and posing long-term fiscal challenges to the state itself. San Bernardino is one of a handful of cities bankrupted by spiraling pension payments.
“The health, safety, and well-being would have been jeopardized absent the city’s filing for bankruptcy protection,” said Monica Lagos, communications manager with the city of San Bernardino. At the time in 2012, the city had no choice but to seek court protection as it lacked enough cash to pay employees and meet obligations. City officials decided not to cut pensions during bankruptcy to avoid an exodus of city employees.
Since the filing, San Bernardino enacted changes to its employee pensions, contracted with the county for fire and emergency medical services, and established a franchise deal for waste collection.
“The city’s bankruptcy case has been a painful but necessary one for the city of San Bernardino,” Lagos said.
The CalPERS system has its share of critics. Just last week California Gov. Jerry Brown predicted the state’s retirement system is likely to lower its investment return target yet again, putting an even tighter squeeze on cities trying to keep up.
University of Southern California public policy assistant professor Michael Thom says pension funding decisions are unfair for taxpayers and are often a result of elected officials trying to appease unions.
“Pension costs are fundamentally changing local government budgets,” Thom said. “Unless the system is changed, some cities, counties, and school districts in California may find that their primary function is no longer providing public services, but finding ways to pay retirement costs.”
During Monday’s discussion, council member Steve Dicterow described a gloomy scenario. “There could be a mass failure statewide. I suspect that over time the pension issue is not only for us, but for everybody going to be the biggest potential time bomb.”
Laguna Beach has 245 active employees, and 362 retired ones in the CalPERS system, and five retirement plans. Employees earn a retirement benefit based on years of service, age at retirement and final compensation. City and employees share the annual cost of service, with employees contributing 8%, 11% and 12% toward their retirement to help offset costs. For every dollar paid out to CalPERS employees, 62 cents are from a return on investments, 25 cents from employer contributions and 13 cents are paid by workers paying into the plan, according to a city report.
“If we pay now we get about double our money back on our debt by the time the thing is paid off,” said resident Tom Halliday, a pension expert who has testified on the topic previously. “But it doesn’t help our cash flow; in fact it hurts our cash flow. You put a dollar into CalPERS, your cashflow goes down by a dollar.”
City Finance Director Gavin Curran proposed several different strategies to deal with the rising CalPERS costs, including phasing in pension increases as soon as possible and using the difference between required payments and future payments or mid-year savings to pay down the $52 million in unfunded liability. The strategy of paying more than the required payment is expected to save the city $21 million over 30 years.
Curran advised against terminating the city’s contract with CalPERS, which would cost $460 million. City Manager John Pietig said lacking the CalPERS pension benefit is a competitive disadvantage to recruit and retain city employees.
The city also cites facing increasing healthcare costs for workers as a contributor to the projected general fund gap.
To cover shortfalls without adding new fees or taxes, Curran pointed out that city officials could issue debt for planned capital improvement projects. Currently, $6 million a year is already allocated for city projects over the next decade. But the $6 million for a new fire station, $9.7 million for Coast Highway sidewalks and $15 million for a new pool are all above and beyond and would add deficits if not debt-financed. Otherwise, those projects will have to wait until cash is available to proceed, Curran said.
“My personal philosophy is not to take debt off the table,” said council member Bob Whalen. “We could suspend all capital projects for the next 10 years and dump everything into pension, and that is a philosophy, but there has to be a balance between the needs of today and costs of tomorrow. Debt financing is cheaper than the cost of the PERS benefit. I don’t know if I could pick capital projects tonight, but it’s a tool we have to have.”
As part of budget planning in May, council members asked staff to return with additional strategies to address the unfunded pension liabilities.
Resident Judie Mancuso urged consultation with auditors of other bankrupt cities. “We need those accounting firms to come in here and take a look at our books, at our forecasting, and say, here is a way that you can prevent ever getting into their shoes.”