April 2003

Table of Contents

Cal-Tax Home

Email Editor

Cal-Tax Special Report 

Pension Crisis Swamps Cities and Counties

This report was researched and written by Bob Taylor, journalist who covered the Capitol and who also served a number of years as an employee of the state (the Lottery Commission) and for then-Senator Richard Rainey and Senator Ross Johnson. He recently retired after serving as a press secretary in the Bill Simon gubernatorial campaign. Cal-Tax Communications Director Ron Roach assisted in the preparation of this report.

A turn-of-the-century bonanza for California public employees has become a fiscal nightmare for cities and counties attempting to dig themselves out of record budget deficits.

Virtually every local government in the state is being squeezed by pension bills that have come due during a period of fiscal crisis made worse by a severe economic downturn.

Shortsighted state legislators – spurred by public employee unions – in 1999-approved legislation (SB 400, Ortiz) that dramatically changed public retirement formulas. At the time, the financial world looked rosy, the economy was booming, budgets were bulging and everyone wanted in on the gravy train.

While SB 400 eventually would be signed by Governor Gray Davis, his administration noted that should the bill fail, there would have been an additional $300 million or so in the next year that could be given to schools, health and welfare and other programs. Few were sounding alarms then, but the California Taxpayers’ Association (Cal-Tax) sent up a warning flag that went unheeded.

Cal-Tax President Larry McCarthy, in a September 1999 letter to the governor, urged a veto of SB 400, saying it would cost taxpayers $380 million a year. At the time, Mr. McCarthy pointed out that if the California Public Employees Retirement System (CalPERS) actuarial surpluses declined “public employers would be forced to divert tax dollars from essential public programs to pay for these enhanced employee benefits.” Moreover, he cautioned that if the stock market should reverse course from the halcyon days of the 1990s, “CalPERS cannot be expected to realize the investment returns of recent years…retirement contributions would then go up, at taxpayers’ expense.”

The bill nevertheless sailed through the Legislature with barely a whimper of protest in the closing hours of the 1999 session, and without the normal detailed analysis of the fiscal implications. The essential piece of independent scrutiny came nearly three months later from the Legislative Analyst’s Office, which pegged the cost of SB 400’s retirement package at over $400 million a year starting in 2001-02. Why the analysis of this important piece of legislation came after the fact has never been adequately explained.

“The bill was a jam job, with important elements added with only a couple of days to go in the session. It would have been awkward, but it would have passed anyway, because of the apparent – and I repeat, apparent – budget surplus,” said one veteran observer.

The surprising windfall of SB 400 gave most employees benefits based on 2 percent of compensation for each year of service at age 55 instead of age 60. Moreover, safety (police and fire) employees made out even better, scoring a formula based on a range increasing to 2.5 percent at 55 to 3 percent at age 50. Needless to say, it wasn’t long before employees rushed for the retirement exits. Unfortunately for public administrators, the increased retirement benefits – and their ballooning costs – would take effect during the most severe economic decline in recent times, and during a period when state and local governments are taking serious hits from budget cutbacks from the state.

It is instructive to examine the environment during the 1999 economic boom period. At that time, greed was the unspoken watchword as employee unions demanded a share of bulging government treasuries fattened by increased dividends from a wildly successful investment period. And it has been suggested by some observers that CalPERS administrators – who also would benefit from the retirement boom – became advocates for a piece of the action. They worked in concert with employee unions crafting the legislation, and then urged its passage.

However, CalPERS alone cannot be blamed for today’s painful reality. Local government officials themselves would have to share in culpability. Many of those officials gazed the horizon and saw that they too would be beneficiaries from the retirement largesse. Human nature and self-interest during the flush times leading to the 1999 legislation created a greased track for SB 400.

In the view of Steve Keil, legislative coordinator of the California State Association of Counties (CSAC), “There was an element of greed” and personal advantage for everyone affected by the CalPERS system – state and local employees included. “Some folks seized on the situation for personal greed, including some top-level managers who were in a position to influence the outcome.”

One of the leading experts on public retirement issues is Tom Branan, owner of the Public Retirement Journal and a former legislative consultant on pension issues. He wrote in the February 2003 issue of CPER (California Public Employee Relations Journal), that the problems started with SB 400 and continued through with AB 616 (Calderon). He cited a “fantasy world” created by CalPERS’ two-year estimates of pension fund surpluses. Even though everyone could see what the stock market was doing midway through the estimate period, many chose to think wishfully.

And, Mr. Branan wrote, there was a “strong wish by many in management to have the new benefits adopted before they themselves retire.”

Which brings us to the present. Who can blame public employees for taking early retirements? Who wouldn’t retire after 30 years or less on the job when they can take home 90 percent of their salary in the golden years? Look at the city of Sacramento, for example, where 40 police officers are retiring this year. Sacramento County, which at this writing had not adopted the most generous formula that might double the normal 400-a-year retirement number during the next year, could opt for a less-expensive formula.

And now that the stock market has tanked and the state is facing the largest budget deficit in history, local governments are facing the perfect storm of increased retirement bills and declining revenues. Examples of the fiscal horror story are everywhere in California, from the smallest city to the largest county. While a few counties administer independent pension programs, 36 counties, including 20 of the largest, are contractors to the CalPERS system.

Mariposa County’s pension costs will climb from $500,000 a year to $2.5 million next year, and its safety employee salary costs will rise from 9 percent of gross salary to 29 percent. Long Beach is financing 200 retirements from 2002 compared to the usual 70-80 retirements during a typical year.

The city of San Diego learned that its pension fund deficit is at least $720 million, prompting the City Council to put off full payments to the pension fund until 2009, when the city’s annual pension bill will be $214 million. And, as was recently reported in the Los Angeles Times, some cities in Ventura County expect employer contribution rates to rise as high as 35 percent of payroll.

The Sacramento Bee’s Daniel Weintraub, in an April 7, 2002 column, observed: “This is a fiscal time bomb that could explode on future generations … the rush to retirements is going to lead to higher salaries as well, as agencies are forced to compete for employees to replace those who leave.” For many local governments, the time bomb already has exploded.

One might expect an object lesson is being painfully learned and that legislators, at least, would pull in their wings and leave bad enough alone. Not so. The current legislative session has seen a number of bills in the hopper that would make matters worse.

The Orange County Register, in a March 21 story, reported that two Orange County state legislators have proposed boosting police and fire employee benefits even more. Senator Joe Dunn, D-Santa Ana, and Assembly Member Lou Correa, D-Anaheim, are co-authoring SB 100, which would increase the pension cap for safety personnel to 100 percent from 90 percent of their final salary. The apparent logic is that these workers would have to be on the job longer to reach the benefit cap.  Nevertheless, like the earlier legislation, this change also would cost more.

The Register, in a March 24 editorial, asked whether the SB 100 authors have noticed the state and local government budget crises: “Retirement costs are causing local governments more financial trouble – so far – than the state budget crisis.”

Some local governments already are registering their opposition to SB 100. Garden Grove Mayor Bruce Broadwater, for example, whose city is facing retirement costs increasing to $3.8 million in 2003-04 from $2.3 million this year, is urging a defeat of SB 100.

However, despite concerns of Mayor Broadwater and others, the League of California Cities dropped its opposition to SB 100, taking a neutral position. The league apparently bowed to pressures from the potent law enforcement lobby. Cities also are counting on law enforcement support for a potential ballot measure to make it easier to raise taxes. (See “Police reaching for even higher pension benefits,” an April 15, 2003 Sacramento Bee column by Daniel Weintraub.)

Contra Costa County owes $319 million in pension debt, which is expected to grow to $822 million in five years without a turn-around in the stock market, the Contra Costa Times has reported (April 1). Meanwhile, the county’s budget is underfunded by an estimated $50 million for the coming year, forcing program cuts, and consideration of selling $340 million in 20-year bonds to help deal with the spiraling retirement costs.

CSAC’s Keil, who has tracked this issue closely, noted, “There will be nothing but bad news compounding itself for a number of years. It’s very difficult to put this toothpaste back into the tube.” He said any solutions to the problem are very long term and may include experimenting again with multiple tiers of retirement, a concept tried in the 1980s and 1990s, but scrubbed by the state in the late 1990s.

The Public Retirement Journal’s Branan suggested in his CPER article that pension obligation bonds may be a solution for some, or that several systems might join up for such 20-year bonds. The state also has a pension obligation bond proposal among the governor’s plan to help balance the state budget by relieving the general fund of near-term employer (taxpayer) pension costs.

Mr. Branan wrote that the “barbarians really are at the gate.” He added that some local governments may be forced to reduce services just to pay for their employees’ pensions.

Cal-Tax’s McCarthy concluded: “This clearly is a time for an extended cooling off period. While it is too late to reverse pension benefits, which are legally mandated by contract, it is necessary for responsible lawmakers to examine the impact of good intentions gone awry and to at least place a cap or moratorium on additional  legislation to further enhance public pensions that were considered generous, particularly when compared to the private sector, BEFORE SB 400.

“Sadly, these pension contracts mean that priority will be given to using tax dollars to pay these benefits before engaging in the work of educating children in school, keeping our streets safe, building highways or providing for health care for the poor.”