California's two major public pension systems are underfunded and are asking local governments to pay more. Critics want to reduce benefits, while others say policymakers should allow time for recent changes to take hold. Emily Zentner The Sacramento Bee
California's two major public pension systems are underfunded and are asking local governments to pay more. Critics want to reduce benefits, while others say policymakers should allow time for recent changes to take hold. Emily Zentner The Sacramento Bee

The State Worker

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The State Worker

Pension costs ‘crowding out’ spending on parks, schools and social services, report says

By Adam Ashton

aashton@sacbee.com

October 04, 2017 05:00 AM

UPDATED October 05, 2017 08:40 PM

California governments likely will make do with fewer teachers, parks employees and other public workers while they struggle to absorb fast-rising pension costs in the next few years, a former state lawmaker argues in a study released this week through Stanford University.

Former Democratic Assemblyman Joe Nation projects that many cities, counties and school districts will double their spending on pensions by 2030, “crowding out” their ability to fund public services.

The trend is an acceleration of the swelling pension costs that most California governments have recorded since the dot-com crash in the early 2000s, when pension plans that had been over-funded suddenly had to catch up with investment losses.

“As painful and as steep as these increases have been since 2003, my best estimate is that we are only about half way through these increases,” said Nation, who is now a researcher at the Stanford Institute for Economic Policy Research. “If you’re a public agency and you went from paying $1 million a year to $10 million a year, that’s an enormous increase. You’re likely to go from $10 million to $20 million by the year 2030.”

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The new report assesses pension spending for a sampling of 14 California government agencies, including state government. Nation wrote that state spending on pensions is expected to rise from $8.5 billion this year to $17.3 billion in 2029-30.

Nation found pension costs outpacing growth in projected revenues across the board. That leaves government agencies less room for amenities like parks, social services and, in some cases, the ability to hire new employees to replace retiring workers.

For the city of Sacramento, pension costs are expected to climb to $150 million by the 2022-23 budget year, up from $42.4 million in 2008-09 and $88 million this year.

“Our revenues cannot keep pace with these cost increases,” said Sacramento Finance Director Leyne Milstein. So far, she said, the city has not had to leave vacancies open because of the rising retirement expenses.

Nation’s report adds to a drumbeat of recent complaints from local government leaders about rising pension costs. They’ve been more vocal since the California Public Employees’ Retirement System last year lowered its projected investment return rate, a decision that required its member governments to pay more to fund their workers’ pensions.

Last month, representatives from a dozen cities attended a CalPERS board meeting and complained that rising pension costs are becoming a “gradual strangulation” on public services.

“In three to four years our cash flow is going to be gone,” Oroville Finance Director Ruth Wright told the CalPERS board. “We don’t even know how we are going to operate past four years. We have been saying the bankruptcy word, which is not very popular.”

School districts also are ramping their spending on pensions to make up for shortfalls at the California State Teachers’ Retirement System. Both CalPERS and CalSTRS are underfunded, with each holding about 68 percent of the assets they’d need to pay benefits they owe to current workers and retirees.

Visalia Unified School District, an example in Nation’s study, spent $10.8 million on pensions in 2009-10. It’s projected to spend $46 million in 2029-30.

Nation also looked at two California cities that declared bankruptcy during the recession. In Stockton, pension costs are expected to hit $88 million in 2029, up from $41.5 million today. In Vallejo, they’re on track to reach $52 million in 2029, up from today’s $24.7 million.

Nation’s work was funded partly by the Laura and John Arnold Foundation, a nonprofit organization created by former hedge-fund manager John Arnold. The organization has funded pension-reform efforts around the country.

Dave Low, chairman of the union-supported Californians for Retirement Security, said CalPERS and CalSTRS are slowly digging themselves out of the losses they suffered during the recession. As a result, they’re asking public employers to kick in more money for pensions.

Historically, spending on pensions has fluctuated, bottoming out in the dot-com boom when CalPERS was so well-funded that many employers took a holiday from contributing to their employee pension plans.

Low suggested that local governments struggling with pension costs take their concerns to their unions, where the two sides could negotiate ways to save money until the retirement plans are on better footing.

“You don’t recover from the Great Recession in two or three years. It takes decades,” he said. “We happen to be in the up cycle right now. The question is, because we’re on the up cycle, do we take pensions away?”

Adam Ashton: 916-321-1063, @Adam_Ashton. Sign up for state worker news alerts at sacbee.com/newsletters.