Pensions are approaching unsustainable levels for many California cities and more tools are needed to attract and retain employees, according to a League of California Cities report.
Rising pension costs mean the percentage of general fund dollars cities pay to the California Public Employees’ Retirement System will have doubled by fiscal year 2024-25, according to the Retirement System Sustainability Study the league released Thursday.
The average city spent 8.3% of its general fund budget on CalPERS pension costs in fiscal year 2006-07, the study said. That number had grown to 11.2% in the current fiscal year and is expected to jump to nearly 16% on average with some cities spending 21.5% in the next seven years.
“The League commissioned this study to put analysis and hard numbers to the realities that cities up and down the state are experiencing with growing pension costs,” Executive Director Carolyn Coleman said in a statement.
The League hired Bartel Associates, LLC, a California actuarial firm, to analyze anticipated pension contribution rates for cities as a percentage of payroll and determine how those future contribution rates would impact cities’ general funds.
The study came after dozens of city leaders testified in September and November before the California Public Employees’ Retirement System Board about the need for more flexibility at the local level to deal with the rising costs associated with pensions. It doesn’t include data on retiree healthcare benefits, often called other post-employment benefits, or OPEB.
“As the amount cities have to pay into CalPERS each year increases, it puts a great strain on their ability to maintain service delivery levels,” Coleman said. “The pressures are not only mounting, but will force cities to make very tough choices in the near future.”
The impacts of increasing pension costs as a percentage of general spending will affect cities even more than the state government because employee costs for police, fire and other municipal services are a larger proportion of spending for cities, according to the study.
The data will help inform ongoing discussions to ensure public sector retirement system is sustainable and that cities have the resources needed to serve their residents, Coleman said.
The League and its member cities continue to support the retention of secure defined benefit pension plans, the study said, but also believe that reforms are needed to make the system more sustainable.
Cities are faced with the tough choices of asking voters to raise taxes or cutting services.
“Given that police and fire services comprise a large percentage of city General Fund budgets, public safety, including response time, will likely be impacted,” the study said.
The league advised against issuing pension obligation bonds to fill the gap and included an advisory put out by the Government Finance Officers Association a few years ago that warns of the risk inherent in using pension obligation bonds to pay for unfunded pension liabilities.
The use of POBs rests on the assumption that the bond proceeds, when invested with pension assets in higher-yielding asset classes, will be able to achieve a rate of return that is greater than the interest rate owed over the term of the bonds.
If the issuer fails to achieve the targeted rate of return, it is burdened with both the debt service of the taxable bonds and the unfunded pension liability, the report states.