California City Pension Burdens

SUMMARY:  This study estimates the burden of pension costs on 459 California municipalities. The primary measure we consider is the ratio of required pension contributions to estimated total revenue for each city.  We also look at contribution rates per employee and at pension funding levels.  We find a wide variation in the impact of pension costs on city finances. While several cities spend more than one-eighth of their revenues on pension contributions, many spend far lower proportions and ten municipalities have no defined benefit pension plans at all.

The most heavily burdened cities are San Rafael, Costa Mesa and San Jose, which have pension cost / revenue ratios estimated at 17.58%, 14.36% and 13.88% respectively. As we discuss in the study, all three of these cities are taking measures to reduce future pension costs, so their rankings are not necessarily a reflection on currently sitting elected officials. Using an alternative measurement of total pension debt (unfunded liability plus pension bonds outstanding) / revenue, the most heavily burdened cities are Oakland, Costa Mesa, and Richmond, which have pension debt / revenue ratios of 203.3%, 182.0%, and 180.9%, respectively.

Prospectively, using data from recently released CalPERS actuarial reports, we project pension costs for most cities through to fiscal year 2020, identifying two cities – Monrovia and Fremont – that may face troubles in the years ahead. Monrovia and Fremont have 2015 pension cost / revenue ratios greater than 10% AND they will both experience dramatic cost growth.  Between 2015 and 2020 and assuming a 7.5% CalPERS return, Monrovia is projected to see a 64.15% cumulative increase in pension costs, while for Fremont, the number is 46.51%. 

The weighted average funding ratio across all 459 cities was just over 75% as of June 30, 2013. Given strong stock market performance since that time, it is likely that the funding situation improved significantly over the last 18 months. Overall, CalPERS reported that its assets increased by 15% between June 30, 2013 and June 30, 2014. Its actuarial liabilities probably rose during this period as well, but likely at a slower rate.

Download Print Version of Study

*   *   *

INTRODUCTION

California cities that participate in defined benefit pension plans are expected to make a total of $5.1 billion in contributions during fiscal 2015, accounting for nearly 7% of their total revenue. As of June 30, 2013, the average funded ratio for these plans was 75%. Underneath these averages, we observe a great diversity of pension cost burdens and funding rates.

Study data by city and by plan may be found here. This Google Spreadsheet model contains multiple tabs including a city summary and plan details.

California City Pension Burdens – City Summaries
(click on image to view GoogleDoc spreadsheet, select tab “city_summary”)

20150205-CPC_Joffe_City-Summary

California City Pension Burdens – Plan Details by City
(click on image to view GoogleDoc spreadsheet, select tab “plan detail”)

20150205-CPC_Joffe_Plan-Detail

*   *   *

The city level data can also be viewed on a map:

California City Pension Burdens – Plan Summary by City
(click on image to view Google Map, then click circles to view individual summaries)

20150205-CPC_Joffe_CA-Map

*   *   *

METHODS

We collected most of the cost and funding data for this study from CalPERS plan-specific actuarial valuations. The vast majority of city pension plans are administered by CalPERS, but several large California cities operate their own plans. In these cases, we gathered data from actuarial valuations and audited financial statements published by the plans themselves, and from the State Controller’s Office retirement plan data set. Large cities that maintain their own plans include Los Angeles, San Diego, San Jose, San Francisco, Fresno, Oakland and Sacramento (some of these cities have both internally administered plans and CalPERS plans). A few cities participate in county pension systems. In these cases, we consulted actuarial reports and financial statements provided by these county plans.

In all cases, we derived revenue estimates from State Controller Office data posted at http://bythenumbers.sco.ca.gov. We used the total of general and functional revenues reported in the controller’s data set.  This provides a larger denominator and thus lower pension/revenue ratios than one might derive from considering only general fund revenue. Dividing pension costs by general fund revenue is inappropriate because public employees may be paid from special governmental funds or enterprise funds controlled by the municipal government. When evaluating total pension costs, it is best to consider total governmental revenue.

Total 2015 revenues were estimated by adding 6.25% to 2014 city revenue data recently published by the State Controller.  According to the SCO data set, the median city’s revenue increased by 6.25% between 2013 and 2014.  We applied this rate of increase to the 2014 data as a proxy for fiscal 2015 actuals, which won’t be available until late this year.  Ideally, the 2015 revenues would be taken from individual municipal budgets, but many cities do not forecast total revenues. Budgets often include only general fund projections.

*   *   *

FINDINGS

In general, pension costs do not represent a near-term threat to municipal solvency, but in many cities, the burden of financing pension benefits is crowding out other spending priorities or adding to pressure for tax increases. A number of cities are spending more than 12% of total revenue on pension contributions.

A city’s pension burden relative to revenues is a product of a number of factors including:  (1) the generosity of plan benefits, (2) the size of the municipal workforce relative to the city’s size and wealth, (3) growth rates and (4) tax rates. Thus, a city may be able to support very generous pension benefits if it has a small workforce, has rapidly growing revenue and/or imposes additional sales taxes.

The study includes data for 459 of the state’s 482 towns and cities. Of the 23 cities not in our list, ten offer retirement plans that do not provide defined benefits. As discussed later, these cities provide employees with defined contribution and/or deferred compensation plans. Most of the remaining 13 are small towns that do not issue audited financial statements or provide retirement plan information on their web sites.

*   *   *

MOST HEAVILY BURDENED CITIES

Cities with the highest pension expenses relative to revenue are listed below:

Rank City or Town County 2015 Pension Contributions 2015 Estimated Revenue Pension Cost / Revenue Ratio
1 San Rafael Marin County 18,422,967 104,823,893 17.58%
2 Costa Mesa Orange County 18,997,065 132,253,907 14.36%
3 San Jose Santa Clara County 253,967,345 1,829,814,350 13.88%
4 San Gabriel Los Angeles County 5,124,429 38,198,183 13.42%
5 Sonora Tuolumne County 892,361 7,108,772 12.55%
6 West Covina Los Angeles County 10,304,114 84,893,591 12.14%
7 El Cerrito Contra Costa County 4,837,781 40,189,354 12.04%
8 Hemet Riverside County 7,083,161 60,907,403 11.63%
9 Montclair San Bernardino County 4,267,343 36,721,464 11.62%
10 Eureka Humboldt County 5,507,187 48,722,417 11.30%
11 Corona Riverside County 20,593,975 183,906,784 11.20%
12 El Cajon San Diego County 11,781,843 105,802,628 11.14%
13 Hermosa Beach Los Angeles County 4,330,474 39,374,676 11.00%
14 Foster City San Mateo County 5,185,144 48,319,867 10.73%
15 Richmond Contra Costa County 24,795,689 234,178,451 10.59%
16 Orange Orange County 17,353,503 164,072,449 10.58%
17 Los Gatos Santa Clara County 4,566,479 43,225,331 10.56%
18 Chico Butte County 10,017,258 94,967,151 10.55%
19 Monrovia Los Angeles County 6,231,567 59,132,054 10.54%
20 Fremont Alameda County 26,777,512 255,758,600 10.47%

Cities with the highest burdens typically have responsibility for both safety and non-safety employee pensions. Cities with relatively low burdens generally do not have a safety plan, perhaps because they rely on the County or another authority for police and fire services.

The city with the highest pension contribution/revenue ratio is San Rafael, which spends more than one-sixth of its revenue on retirement fund contributions.  This burden is partially a legacy of generous retirement benefits. Police officers and firefighters were entitled to pensions equal to 3% of salary per year employed with a retirement age of 55. Miscellaneous employees – those who are not uniformed public safety officers – received 2.7% per year at age 55. While San Rafael’s pension formula for safety employees is not unusual (in fact, some cities provide 3% of salary per year at age 50), the formula for miscellaneous employees is more generous than most California cities. As of June 30, 2013 the city had 220 active and 202 retired employees in the miscellaneous category.

Recent reforms have resulted in less generous benefits for new employees. The city has documented its efforts at pension reform at http://www.cityofsanrafael.org/pensions/.

In 2011, San Rafael lowered the benefit for new miscellaneous employees from 2.7% to 2%. It did not lower the benefit rate for new public safety employees, but reduced their cost of living allowance (COLA) in retirement from 3% to 2%. It also changed the Final Average Pay (FAP) used for to calculate the pension benefit from the last year’s salary to the average of the final three years’ salary. This reform reduces pension spiking, a practice under which employees work substantial overtime in their final year or are awarded extraordinary salary increases to maximize their pension benefits.

In 2013, the city further reduced new employee benefits after the implementation of California’s Public Employees’ Pension Reform Act (PERPA).  New miscellaneous employees must wait until age 62 to receive benefits, which continue to be based on 2% per year times final average pay. For new safety employees, the rate is now 2.7% instead of 3% while the retirement age has risen from 55 to 57.

It is worth emphasizing that these changes apply only to new employees – hired from 2011 onwards. Most employees will be eligible for the more generous, pre-2011 retirement benefits for many years to come, implying that San Rafael’s high pension burden will be a fact of life for some time.

Also contributing to San Rafael’s relatively high annual pension costs is the aggressive approach its plan administrator, the Marin County Employee Retirement Agency (MCERA) is taking toward paying down unfunded liabilities. Most plans, including those administered by CalPERS and other county systems, amortize their unfunded balances over a period of 30 years; MCERA has implemented a 17-year amortization period. More rapidly amortizing UAAL promotes fiscal sustainability, so, at least to this extent, San Rafael’s high pension contributions could be seen as positive.

The second most burdened city is Costa Mesa. Like San Rafael, the city has a legacy of generous benefits. By 2011, police and fire employees were in plans that paid 3% at age 50, while miscellaneous employees received 2.5% at 55. In some cases, existing employees had benefitted from plan enhancements after being hired. For example, in 2010, the fire union negotiated a reduction in retirement age from 55 to 50. This change applied to current employees even though the enhanced benefit had not been funded by previous contributions made by the firefighters or the city.

The City’s Mayor Pro Tem, Jim Righeimer, noted that another factor contributing to Costa Mesa’s high pension burden is its inability to outsource services to the private sector. California cities fall into two legal categories under state law:  chartered and general law. As a general law city, Costa Mesa, operates under many more rules specified under the state’s government code (section 34000).  In Costa Mesa City Employees Assn. v. City of Costa Mesa, 209 Cal. App. 4th 298 (Cal. App. 4th Dist. 2012), the Court of Appeals found that Costa Mesa could not outsource services to private companies, unless these services required specialized training or expertise. The ruling only applies to general law cities; charter cities have the flexibility to reduce future pension costs by outsourcing basic functions like street sweeping and animal control.

Although the city has been unable to outsource miscellaneous positions, it has taken some steps to limit pension costs. The council made some reductions for new employees starting after March 2012, and made further cuts after PERPA took effect in 2013. The benefit formula for new safety employees is 2.7% at 57; new miscellaneous employees receive 2% at 62.

Costa Mesa has also established a Pension Oversight Committee whose work is documented at http://www.costamesaca.gov/index.aspx?page=1603.

The city with the third highest pension burden is San Jose, with fiscal 2015 contributions of over $250 million accounting for almost 14% of total revenue. Public employee retirement costs have been an issue in San Jose for a number of years now, and the city’s experience illustrates the difficulty municipalities encounter when they try to limit these expenditures.

According to a city presentation, total retirement costs for San Jose have quadrupled since fiscal 2003. In that year, San Jose contributed $72 million to pension contributions and retiree health benefits. In the current fiscal year, that cost has risen to over $300 million (including $50 million in health costs).

In 2012, Mayor Chuck Reed placed Measure B on the ballot. Among other changes, the proposal gave currently employed city workers the option of accepting lower pension benefits or substantially increasing their own contributions to retain existing benefits. Most proposed reforms only apply to new employees, because there is a presumption that existing employees have a contractual right to the pension benefit formula available at the time of hire (unless the formula is enhanced as we saw in Costa Mesa’s case). Because the San Jose reform threatened to reduce the benefits of existing employees, it drew substantial union opposition.

Despite this opposition, Measure B passed with a 69% majority. Unions and other opponents then attempted to overturn the measure in court. In December 2013, Superior Court Judge Patricia Lucas ruled that the increased employee contributions were unlawful. But the judge agreed that the city could obtain the same cost savings by reducing employee pay. As of this writing, the city has not attempted to implement such a pay cut.

*   *   *

FUNDING LEVELS

There was less variation in funding levels across cities and differences appeared to be idiosyncratic. The vast majority of plans are administered by CalPERS, which requires all member cities to pay the full Actuarially Required Cost (ARC) it computes each year. CalPERS uses the same calculation procedures for each member. Thus there should not be issues with deliberately skipped or reduced payments, as we see in other states. Cities with large non-CalPERS plans also appear to pay their full ARCs each year.

The weighted average funding ratio across all 459 cities was just over 75% as of June 30, 2013. Given strong stock market performance since that time, it is likely that the funding situation improved significantly over the last 18 months. Overall, CalPERS reported that its assets increased by 15% between June 30, 2013 and June 30, 2014. Its actuarial liabilities probably rose during this period as well, but likely at a slower rate.

*   *   *

CITIES WITHOUT DEFINED BENEFIT PLANS

A review of audited financial statements identified ten California cities that rely exclusively upon defined contribution and deferred compensation plans to provide for their employees retirement needs. Because the city makes its contribution upfront or makes no contribution at all, it cannot have an unfunded actuarially accrued liability. Further, it could be argued that many of these cities do not have a pension burden at all, because matching contributions can be suspended during a fiscal emergency.

The list of cities relying exclusively upon defined contribution and/or deferred compensation plans is as follows:

City County
Danville Contra Costa County
Holtville Imperial County
Huron Fresno County
Lafayette Contra Costa County
McFarland Kern County
Mendota Fresno County
Orinda Contra Costa County
Rio Dell Humboldt County
San Juan Bautista San Benito County
Trinidad Humboldt County

While most of these cities are small, Danville and Lafayette have populations of 43,000 and 25,000 respectively, suggesting that medium sized cities can attract employees without offering defined benefit retirement programs.

Steven Falk, City Manager for Lafayette told us via e-mail:

“… Lafayette’s non-PERS status has little or no apparent impact on the City’s ability to hire and retain lower-skilled and administrative employees, such as caretakers, landscape workers, recreation workers, administrative assistants, etc. The lack of a PERS program, however, does appear to have some impact on the City’s ability to attract and retain higher level professionals with skill sets that are particular to the municipal operation, such as urban planners, civil engineers, transportation planners, community development employees, etc. We have had occasions where candidates have retracted their job applications upon learning that Lafayette does not participate in PERS.”

The city contacts out public safety services to Contra Costa County, so it has not had to test whether it could recruit police officers and firefighters without the benefit of PERS membership.

*   *   *

EMPLOYER CONTRIBUTION RATES

Thus far our analysis has focused on total employer contribution amounts. Historically, CalPERS and other multi-employer plans have quoted contribution rates. The contribution rate is the percentage of current employee payroll that must be contributed to the pension plan. For example, if a public employee has a salary of $100,000 and the employer’s contribution rate is 40%, the city must pay CalPERS $40,000 to keep the covered employee in the defined benefit plan. This rate excludes employee contributions, which are typically withheld from each employee’s salary but have been paid –partially or fully – by municipal employers.

The plans with the highest contribution rates tend to be smaller plans with declining balances. In these cases, contributions are primarily funding pension payments to members that have already retired and there is a small, declining numbers of active employees across which these payments may be allocated. For example, Taft’s First Tier Police plan has a 227.5% contribution rate. As of June 30, 2013, the plan had only one active member and 28 retirees.

Among larger plans, Rialto’s Safety Plan has one of the highest contribution rates:  48.8% in fiscal 2015, with a projected increase to 50.3% in fiscal 2016. The city’s contribution rate appears to be especially high because of a 2008 decision to increase the plan’s benefit formula to 3% at 50. Because the increase applied to existing employees (whose contributions had been based on less generous benefits), the plan has required catch-up contributions to avoid greater underfunding. After the new formula took effect in 2011, the employer contribution rate jumped from 19.3% to 38.3% and has continued to rise.

Another large plan with a relatively high contribution rate is Berkeley’s police plan with a 2015 rate of 46.6% rising to 48.6% in 2016. Police have been eligible for the 3% at 50 benefit formula for several years. A new contract negotiated in 2012 scaled back the formula for new hires to 3% at 55.  This change should slow the increase in contribution rates as more new hires join the force. One aspect of the Berkeley plan that pushes up contribution rates is the provision of a “sick leave credit”. This plan feature allows retirees to add unused sick pay to their length of service at retirement. Each sick day adds 0.004 years to the employee’s service period for purposes of calculating his or her pension benefit rate.  For example, if a police officer retires with 100 sick days and a $100,000 final average pay, she would be entitled to an extra 100 x 0.004 x 3% x $100,000 = $1200 per year.

As one might expect, the most heavily burdened cities also have plans with high contribution rates. San Rafael’s overall contribution rate is 57.7%, Costa Mesa’s fire plan has a 47.5% rate and San Jose’s public safety plan has a 70.8% rate.

*   *   *

MOST HEAVILY INDEBTED CITIES (INCLUDING PENSION OBLIGATION BONDS)

No discussion of California’s city pension burdens would be complete without taking into account Pension Obligation Bonds. This is the practice of borrowing money to make an annual employer contribution to the pension system, on the assumption that the interest rate paid on the bond will be less than the earnings that will accrue to investing the bond proceeds in the pension fund. We have identified 58 cities that had outstanding pension obligation as of June 30, 2013. These cities are listed below along with the face value of POBs they issued. These amounts include principal that has already been repaid.  Also, some cities, including Oakland and Richmond, have issued zero coupon capital appreciation pension obligation bonds that do not pay any interest. The issuance amounts shown below often reflect the maturity value of these zero coupon bonds rather than the proceeds each city received.

City County Amount Issued
Auburn Placer County 4,965,000
Azusa Los Angeles County 7,215,000
Baldwin Park Los Angeles County 12,810,000
Bell Los Angeles County 9,225,000
Benicia Solano County 13,972,596
Berkeley Alameda County 12,415,000
Brisbane San Mateo County 4,745,000
Burlingame San Mateo County 32,975,000
Capitola Santa Cruz County 5,170,000
Carmel-By-The-Sea Monterey County 6,280,000
Claremont Los Angeles County 6,000,000
Colton San Bernardino County 31,149,399
Daly City San Mateo County 36,235,000
Fairfield Solano County 36,865,000
Fresno Fresno County 205,335,000
Hawthorne Los Angeles County 30,700,000
Huntington Park Los Angeles County 23,000,000
Inglewood Los Angeles County 64,986,301
La Verne Los Angeles County 8,380,000
Long Beach Los Angeles County 164,500,000
Marina Monterey County 4,315,000
Merced Merced County 7,355,000
Mill Valley Marin County 6,775,000
Millbrae San Mateo County 11,521,660
Monrovia Los Angeles County 12,750,000
Monterey Park Los Angeles County 17,405,000
Novato Marin County 18,296,066
Oakland Alameda County 757,930,000
Oceanside San Diego County 42,780,000
Oroville Butte County 7,260,000
Pacific Grove Monterey County 19,365,355
Pacifica San Mateo County 20,510,000
Palm Springs Riverside County 19,832,588
Paradise Butte County 10,918,154
Pasadena Los Angeles County 159,380,000
Pinole Contra Costa County 16,800,000
Pittsburg Contra Costa County 39,566,055
Pomona Los Angeles County 42,280,684
Port Hueneme Ventura County 10,679,956
Porterville Tulare County 3,765,000
Redlands San Bernardino County 25,862,392
Richmond Contra Costa County 239,500,729
Riverside Riverside County 150,480,000
Sacramento Sacramento County 183,365,000
San Bruno San Mateo County 13,175,000
San Leandro Alameda County 18,305,000
San Marino Los Angeles County 7,095,000
San Rafael Marin County 4,490,000
San Ramon Contra Costa County 17,650,000
Santa Cruz Santa Cruz County 24,150,000
Santa Rosa Sonoma County 32,715,000
Scotts Valley Santa Cruz County 4,460,000
Seaside Monterey County 6,880,000
Sonoma Sonoma County 2,925,000
South Gate Los Angeles County 24,400,000
Stockton San Joaquin County 125,310,000
Union City Alameda County 22,997,973
Yuba City Sutter County 7,685,000

Finally by combining unfunded actuarially accrued liabilities and outstanding pension obligation bond debt, we find the cities that have the highest overall pension debt burden – based on 2013 total revenue. In the table that follows, we have used 2013 revenues from the State Controller’s Office, except in the case of Oakland which had an anomalous value in the SCO data set. The 2013 POB column reflects our calculation of unpaid principal plus unamortized premia on zero coupon bonds as of June 30, 2013.

California Cities, Ranked by Pension Debt as Percent of Total Revenue – Top 20

Rank City 2013 Total Revenue 2013 UAAL 2013 POB Outstanding Total Pension Debt Debt / Revenue
1 OAKLAND 902,343,411 1,336,731,344 497,326,504 1,834,057,848 203.3%
2 COSTA MESA 120,941,625 220,088,382 220,088,382 182.0%
3 RICHMOND 229,667,716 213,851,021 201,590,579 415,441,600 180.9%
4 WEST COVINA 75,202,992 129,009,677 129,009,677 171.5%
5 SAN RAFAEL 98,069,848 161,297,000 4,490,000 165,787,000 169.0%
6 NEWARK 42,011,267 70,674,444 70,674,444 168.2%
7 PARADISE 16,283,406 13,598,638 11,809,914 25,408,552 156.0%
8 PACIFIC GROVE 24,393,663 24,510,771 12,451,649 36,962,420 151.5%
9 FOSTER CITY 36,608,718 52,461,839 52,461,839 143.3%
10 INGLEWOOD 159,019,773 166,164,169 58,076,302 224,240,471 141.0%
11 MAYWOOD 9,228,259 12,978,485 12,978,485 140.6%
12 EL CAJON 99,209,121 137,565,731 137,565,731 138.7%
13 STOCKTON 362,091,530 370,970,850 125,310,000 496,280,850 137.1%
14 BERKELEY 296,093,704 401,733,284 1,865,000 403,598,284 136.3%
15 PLEASANT HILL 25,049,832 33,041,047 33,041,047 131.9%
16 WHITTIER 66,526,402 86,998,800 86,998,800 130.8%
17 FREMONT 211,801,362 275,568,580 275,568,580 130.1%
18 DOWNEY 100,912,444 130,989,072 130,989,072 129.8%
19 ORANGE 147,030,133 190,178,031 190,178,031 129.3%
20 CONCORD 111,190,625 142,421,844 142,421,844 128.1%

*   *   *

As can be seen on the above table, some cities, such as Richmond, actually have more debt carried in the form of pension obligation bonds than they have in the form of an unfunded pension liability. Omitting consideration of pension bond debt clearly favors a city like Richmond, but in reality their pension contributions are significantly understated unless the pension bond debt is taken into account. Using this ratio also validates the precarious situation Costa Mesa finds themselves in, since even though they have no pension bond debt, their unfunded liability is 66% greater than their entire annual revenue. It is also interesting to see that some of California’s larger cities, including Oakland and Stockton, have relied heavily on the use of pension obligation bonds to finance their annual pension fund contributions.

WHAT THE FUTURE HOLDS

In February, 2014 CalPERS adjusted its actuarial assumptions with the effect of further increasing employer contribution rates.  The rate increase will be phased in over five fiscal years.  When the change is fully implemented, in fiscal 2020-21, CalPERS projects a further increase in safety officer contribution rates of between 5.3% and 9.3%.

In addition to listing contribution rates for the upcoming fiscal year, CalPERS actuarial valuation reports have also provided projected rates for future fiscal years to assist agencies with multi-year financial planning. In theory, this data could be used to compare projected future burdens among cities.

Unfortunately, there are complexities inherent in creating such a comparison and these challenges have been exacerbated by a change in this year’s CalPERS actuarial reporting.  In some cases, the reports provide an employer contribution rate, but, in most others, they list both a normal cost rate and a lump sum Unfunded Actuarial Liability (UAL) payment. This makes comparisons across plans more difficult. Further, non-CalPERS plans often do not provide projected rates at all. Consequently, a systematic comparison of contribution rates across plans and cities is impossible, but we can consider some specific cases.

One city that can expect to face sharply increased pension burdens is Monrovia, a medium-sized community northeast of Los Angeles. Between fiscal 2016 and 2020, the city’s UAL payment is projected to rise from $1.6 million to $2.9 million. During the same period, contribution rates for the city’s miscellaneous plan are projected to rise from 30.9% to 38.8%.

Assuming that CalPERS estimated 2016 covered payroll increases three percent annually, Monrovia’s actuarially required contribution is projected to rise from $6.2 million in fiscal 2015 to $10.2 million in fiscal 2020.  Since the city’s 2015 pension burden already exceeds 10%, the city will be hard pressed to find this additional $4 million.

CalPERS projections assume a 7.5% annual increase in the value of system assets. This assumption – which is closely related to the discount rate applied to unfunded liabilities – is controversial.  However, the system easily exceeded this rate in four of the last five years – benefitting from the bull market in stocks that followed the Great Recession.

Since future portfolio returns are unpredictable, CalPERS provides a sensitivity analysis that shows contribution rates (or UAL payments) under different return scenarios.  The worst scenario reflects a -3.8% annual return between July 1, 2014 and June 30, 2017. Under this scenario and using a 3% covered payroll growth assumption, Monrovia’s fiscal 2020 contribution would rise to almost $12.5 million.

Of course, the city’s pension burden would not grow as much if the market continues to do well.  CalPERS most rosy scenario calls from an 18.9% annualized returns during the same period. If this were to happen, Monrovia’s fiscal 2020 ARC would be $6.4 million – little changed from the fiscal 2015 level.

A larger city facing a sharp increase in an already heavy pension burden is Fremont in Alameda County. The city’s safety plan has a contribution rate of 40.7%.  In fiscal 2016 this will rise to 44.7%, and by fiscal 2020, the rate will reach 55.3% assuming median CalPERS returns. If CalPERS underperforms, the 2020 rate will stabilize at 43.0%; in the event of underperformance the rate will escalate to 65.8%.

The city’s miscellaneous plan has an employer contribution rate of 24.1%.  This is expected to rise to 25.8% in fiscal 2016 and 31.3% in fiscal 2020.  Once again, the range of potential 2020 outcomes is wide: from 23.3% under bull market conditions and 38.1% if the bears prevail.

In absolute dollars and assuming 3% covered payroll growth, Fremont’s pension cost is expected to rise from $26.8 million in fiscal 2015 to $39.2 million in fiscal 2020. Under the bull market scenario, the 2020 cost would be $30.0 million; while it would reach $47.1 million in the bear market case.

*   *   *

CONCLUSION

The impacts of public employee pension costs vary widely across California cities. By offering new employees defined contribution plans or more modest defined benefit formulas, heavily burdened municipalities can gradually reduce the share of their budgets devoted to this legacy cost. Substantial towns including Lafayette and Orinda show that it is possible to fill openings – at least among non-safety employees – without offering defined pension benefits.

There are cautionary lessons as well. As San Jose has learned, it is very difficult to pare back generous pension benefit packages once they have been granted.  And, as Costa Mesa has discovered, sweetening benefits for existing employees is a recipe for trouble.

Given prevailing court rulings to date, there is little municipalities can do to lighten their pension loads in the near term. By projecting pension contributions for the next several fiscal years, CalPERS has provided a way for cities to anticipate and hopefully reserve for the obligations they face shortly beyond the current budget year. We hope that systems outside CalPERS will provide similar multi-year projections in their own actuarial valuation reports.

The CalPERS projections are buried deep inside plan-specific valuation reports available only in PDF form. By extracting the relevant data from these valuation reports and then aggregating them by city, we hope we have provided policymakers and citizens with an accessible tool that they can use to assess and address growing pension costs in their respective communities.

*   *   *

Marc Joffe founded Public Sector Credit Solutions in 2011 to educate policymakers, investors and citizens about government credit risk. PSCS research has been published by the California State Treasurer’s Office, the Mercatus Center and the Macdonald-Laurier Institute among others. Prior to starting PSCS, Marc was a Senior Director at Moody’s Analytics. He has an MBA from New York University and an MPA from San Francisco State University.

Download Print Version of Study

10 replies
  1. john m. moore
    john m. moore says:

    Regarding Pacific Grove, I note that a Revenue sum of $27M was used, but operating revenue is only about $17M. Pension contributions and pension bond payments are paid solely out of operating revenues. Also, Pacific Grove has an annual POB payment of $1.8M in addition to its CaLPERS contribution of about $1.25M.
    Beginning in 2015-16, Pacific Grove will pay and additional sum to CaLPERS of $624,988 per year because of deficits left behind by services contracted out. This payment is calculated by pension liabilities, otherwise cities that contract for services at a time it has a deficit would not pay against the deficit. It is new.

    In summary, including POB and the new payment, Pacific Groves annual payment for pensions is three times the amount used in your report. Also, the unfunded deficit is $27.75M greater because of the POB balance.

    I believe that with the proper adjustments, Pacific Grove is easily Number 1 in pension burden. No other city comes close.

    Reply
    • Marc Joffe
      Marc Joffe says:

      Thanks for your comments, John. The study was just updated to include a list of cities that issued pension obligation bonds. We have also combined POB liabilities and UAAL to calculate total pension debt. When dividing that total by 2013 revenue, we find that Pacific Grove is in the top 10. With respect to our choice of revenue source and scope, I believe it is necessary to use a single definition across all cities to create consistent rankings. Since some cities have pension eligible functions in special funds and proprietary funds, it is most appropriate to use total governmental revenue in the denominator.

      Reply
  2. Andy Frazer
    Andy Frazer says:

    While I agree with the shortcoming of comparing pension costs against General Fund revenue, it may actually be less meaningful to compare pension costs against total revenue. For example, cities that operate their own capital intensive projects (such as water treatment plants or ) will collect much higher revenue than similar sized cities, but they will only employee a smaller incremental number of employees and shoulder a smaller incremental pension cost. That’s probably why Sunnyvale ranked only #101 in your list.

    Reply
  3. TM
    TM says:

    Your spreadsheet fails to subtract out revenues paid to cities which own their own utilities. The City of Santa Clara owns Silicon Valley Power, and the vast majority of revenues the city receives are in the form of utility bills. We pay our city for our electricity, water, garbage collection, recycling, and dump costs, all on our monthly utility bill. There are other cities which own their own utilities too, such as Palo Alto. Right now, your spreadsheet makes cities which own their own utilities look like they are doing much better than they actually are with respect to pension obligations. The percentages reported in your spreadsheet could increase by quite a bit if the revenues are accurately reported without the utility payments included for cities which own their own utilities.

    City general fund monies typically come from local property taxes, sales taxes, hotel taxes, interest, bond proceeds, fees, permits, business licenses, and revenues from other government agencies. Please subtract out utility payments to those cities to see the actual general fund revenues available to pay for pension obligations. Utility payments should not be included with regular general fund revenues because they cannot be used to pay for city services other than utilities and cannot be sources of profit for the city with which to pay other city obligations.

    For example, the Santa Clara city calendar mailed to all residents (you could get a copy from the City of Santa Clara) shows for July 2015 that out of total revenues of $660.5 million, $427.9 million is ‘Charges for Current Service – Enterprise’ (our utilities) and $39.4 million is ‘Charges for Current Service – Other’. Subtract those off of the $660.5 million and you’re left with $193.2 million, a huge difference from what is reported in your spreadsheet and used for your calculations related to pension payments. When you correct your spreadsheet, you will see the percentages for some cities increase substantially. You currently report Santa Clara’s percentage as 4.71%, but if you use only general fund revenues without the utility revenues, you will have $31,944,876 divided by $193.2 million, giving a percentage of about 16%. We just want to know what the correct percentage is for our city. Our local newspaper has sounded the alarm about our looming unfunded pension costs.

    Please make the corrections to your spreadsheets (subtract off the utility payments) so that we can have an accurate representation of how all cities are doing in California using the same basis of comparison (the accurate general fund for each city.)

    To find cities in your spreadsheet which have inaccurate calculations you could also try looking at city population and seeing if some cities seem out of whack with respect to their per capita revenues. Santa Clara has a population of about 120,000 and revenues of $660 million, which would mean very high and unrealistic per capita revenues to the city of $5,500 per person.

    I look forward to seeing your corrected spreadsheet.

    Reply
    • Marc Joffe
      Marc Joffe says:

      Thanks for your comments. The purpose of the contribution/revenue ratio is to show what proportion of funds coming into city coffers must be devoted to pension funding and is intended to be a measure of city financial health. Whether revenues are derived from taxes, utility fees or other sources they usually be used to cover pension costs in some way, shape or form. Even if a revenue source is legally dedicated to a particular purpose, cities can lend and borrow across funds to cover a variety of expenses.

      I encourage you and other readers to supplement the data we have provided and perform their own calculations. The revenue estimates I provided were derived from a State Controller’s Office Excel workbook available in compressed form at https://bythenumbers.sco.ca.gov/download/cn4h-e68s/application/zip. Among other things, this sheet shows 2014 city revenues by type. One type is “Public Utilities Functional Revenue”, which can be seen in Column S of the spreadsheet entitled CI_CONS_REV_EXP_FUND. Most cities (282 of 472 reporting) had public utility revenue so Santa Clara is not unique in this respect.

      Reply
  4. Ann Goodrich
    Ann Goodrich says:

    Looking at city debt compared to revenue is important. But your review is incomplete. City’s pension debt includes pensions and pension obligation bonds as you mentioned. But it also includes additional pension plans like PARS which many agencies have, social security, payments to 401k and 401a plans , employer pick up employee’s pension contributions, and their retiree medical obligations or OPEB obligations. These others add a lot to the agency’s debt obligations. In particular retiree medical obligations which are generally unfunded debt in many agencies exceeds their pension obligations. If you want to truly see which agencies have tremendous debts and no plan to deal with those obligations you should add those to your study.

    Reply
  5. Marc Joffe
    Marc Joffe says:

    Pensions costs for the city of Pleasant Hill include obligations of the Pleasant Hill – Martinez Joint Facilities Agency. Andrew Murray, who works for the City, contacted us and advised that the agency is not part of the Pleasant Hill city government. The agency is actually governed by the City of Martinez. I plan to update the study data so that this agency’s costs are reassigned to Martinez. Many thanks to Mr. Murray for bringing this issue to my attention.

    Reply

Trackbacks & Pingbacks

Leave a Reply

Want to join the discussion?
Feel free to contribute!

Leave a Reply

Your email address will not be published. Required fields are marked *