Last year, CPC published a study on California City Pension Burdens. Most of the data for that study came from plan-specific actuarial valuation reports published by CalPERS. These reports show how much local government employers must pay CalPERS in the coming fiscal year and projects contributions for several years into the future.
At the end of 2015, CalPERS published updated valuations, and we at CPC have started to study them. The message buried in these reports is that many California public agencies face sharply increased pension expenses that are likely to crowd out money for other services or even tip them into bankruptcy.
Pension contributions are often expressed as a percentage of covered payroll. Local governments calculate how much they must pay CalPERS by applying this percentage to their employee’s salaries. In the case of four cities, CalPERS now projects that their contribution rates for certain public safety employees will exceed 70% by fiscal year 2022. Those four cities are Costa Mesa, Santa Ana, Torrance and Vallejo.
In our original study, we found that Costa Mesa had the second highest ratio of pension contributions to revenue among all California cities. Based on the trajectory of its public safety contribution rates, the city’s pension burden can be expected to become even heavier in the coming years. CalPERS projects that contributions to the city’s police pension plan will rise from 55.6% of payroll in FY 2017 to 70.9% in FY 2022.
Santa Ana’s relatively high public safety contribution rate appears to be the result of the consolidation of the city’s fire department into the Orange County Fire Department in 2012. The city now has fewer public safety employees – police only – over which to allocate the pension costs of retired safety officers. Relative to city revenue, pension costs are less worrisome than in they are in Costa Mesa. In our 2015 study, the city’s pension contribution to revenue ratio ranked 150th.
Torrance’s contribution rate is projected to reach 70% for its police officers only; the projected 2022 contribution rate for the city’s firefighters is only 59.7%. The city ranked 51st in our pension burden study.
Vallejo is notorious for its Chapter 9 bankruptcy filing in 2008. It was the harbinger of a minor wave of insolvencies that hit American cities during and after the Great Recession. Although bankruptcy should provide a window for filers to adjust their obligations to make them sustainable, Vallejo does not seem to have taken advantage of this opportunity. While bondholders took a haircut, police officers and firefighters retained their platinum benefits. The city’s safety plan contribution rate is now projected to rise from 59.8% in FY 2017 to 74.8% in FY 2022.
CalPERS projected contribution rates could overstate the actual rates that will be imposed in FY 2022. The projections assume a 7.5% annual return on CalPERS portfolio. Given adverse stock market conditions in recent months, we can be almost certain that FY 2016 CalPERS returns will be well below that level. The result will be higher-than-expected contribution rates. On the other hand, CalPERS projections do not include the effects of California’s 2013 Public Employees’ Pension Reform Act (PEPRA). Under PEPRA new hires receive less generous pension benefits. As these new hires replace older officers, the growth in overall contribution rates will be restrained.
We will continue to study the CalPERS reports and share other findings in the coming weeks.