SPECIAL REPORT: Pension costs burden plenty of county budgets, including SLO

This year, San Luis Obispo County will spend five times as much on pensions as it does prosecuting criminals.

The city of Roseville will spend about as much to fund its pension plan as it does on parks and recreation.

And Stanislaus County’s pension costs will be nearly double its $23.5 million general fund budget deficit.

The initial logic of increasing retirement benefits to retain quality employees has been turned on its head: Paying for those benefits is forcing local governments to lay off employees — and cut programs.“The old joke is that General Motors is just a health insurance company that makes cars on the side,” San Luis Obispo County Supervisor Adam Hill said during a pension presentation at a recent county board meeting. “My concern is that the county government is becoming a pension provider that provides government services on the side.”

Yet today’s escalating annual pension payments barely touch the looming shortfall: $28 billion in unfunded liabilities — the difference between what pension systems have and the pension benefits their employees have earned — at the 80 largest city and county governments in California, according to an extensive California McClatchy Newspapers review of pension plan valuation reports.

On top of that, those cities and counties owe about $8 billion in pension-related bond debt — all in a time of shrinking budgets. In many areas, the total pension shortfall is more than the annual payroll; in some it is more than the general fund budget.

Spread that debt evenly, and it comes out to about $4,000 per household in those cities and counties.Already, Californians feel the impact of the rising costs. Local governments are cutting unrelated programs — everything from parks to public safety — to help pay for pension plans. Downsizing likely will continue both because pension contributions often are legal mandates, and, even with a recovering economy, because much damage already has been done.

A very few places are whispering about the nuclear option: bankruptcy. The Bay Area port city of Vallejo already went this route, largely to break its agreements with its employees.

It wasn’t supposed to turn out this way.

When local governments passed enhanced retirement benefits at the turn of the millennium, the stock market was humming. Government leaders could just sit back, watch their employees smile and let the market do the heavy lifting.

‘Five-year pain plan’

San Luis Obispo County’s chief numbers cruncher, Assistant County Administrator Dan Buckshi, fiddled with his PowerPoint presentation a few months ago and warned his listeners that what he was about to show them was only the third year in the county’s “five-year pain plan.”

The county supervisors in front of him chuckled feebly. They were well aware of the pain the county had endured.

They had watched their work force dwindle by nearly 13 percent, from 2,700 in 2002-03 to an expected 2,350 later this year. They’d instituted a hiring freeze, consolidated jobs, encouraged early retirement, scaled back capital projects and amortized losses over 10 years instead of five. They also limited health care access for the poor by cutting community health clinic funding.

And they knew it wasn’t enough. The county still had a 2010-11 projected budget deficit of $19 million and an annual pension bill that ate 11.2 percent of the total budget.

“I wish I had something comforting to say,” county Supervisor Frank Mecham told The Tribune last month. “If you sit there and watch the (stock) market every day, it will drive you to drink.”That pain is being felt all over.

The worst-case scenario for these local governments isn’t more cuts — it’s bankruptcy, a step that most insist is unlikely.

Even places such as Merced County that can cover just 65 percent or 70 percent of their future liabilities are doing amazingly well, given the depth of the recession, according to Dave Low, chairman of Californians for Health Care and Retirement Security, which represents more than a million public employees on pension, health care and labor issues.

“The very worst are still probably in very good condition,” Low said.

Still, a decade ago, few would have predicted that Vallejo would go under. Today, the city remains hung up in court, trying to cancel provisions in its labor agreements that promised future pensions it no longer can afford to pay.

As of its bankruptcy filing in 2008, Vallejo had roughly $88 million in unfunded pension liabilities. Those liabilities equaled about 112 percent of the city’s annual general fund budget.

In local governments, the general fund budget accounts for most unrestricted spending decisions made by its elected governing body. It doesn’t include money that is restricted for specific programs by state or federal laws.

Merced County CEO Larry Combs’ own county is slipping toward that figure: Its pension bonds and unfunded liabilities equal about 85 percent of its annual general fund budget.

San Luis Obispo County’s situation is worse, with pension obligations now equal to roughly 119 percent of its general fund.

How it came to this

In Roseville, 17 former employees earn north of $100,000 in annual pension benefits. In Merced County, it’s 37. In Stanislaus County, it’s 50.

All of them can thank former Gov. Gray Davis.

In 1999, Davis and the state Legislature passed a generous set of pension reforms. Most public safety officers came out on top, eventually receiving 3 percent of their salary per year of service for life, after reaching age 50. The improvements were heavily supported by labor unions, which had contributed large sums to Davis’ election war chest.

Nearly all California cities and counties followed Davis’ lead, often passing clauses that mandated better pay or benefits if a neighboring jurisdiction received them.

While those “me too” enhancements get the most ink, they’re only one factor — and probably not the largest one at that — behind the pension morass facing cities and counties. The other three factors:

It’s a simple calculus: The more money government employees make, the more they’ll get in retirement.

Average pay at all California local governments rose 40 percent from $46,073 in 2000 to $64,284 in 2008 — a much faster rate of growth than inflation, according to the U.S. Census Bureau. To keep up with inflation, those employees would have needed just a 25 percent raise.

Unions pushed heavily for the raises, saying public employees had been ignored during previous, leaner years.

In the city of Sacramento, the average pay of public safety employees grew 50 percent during that time frame, to $82,897, according to the city’s latest valuation report. In Oakland, average pay for police and fire employees has tripled to $114,741 since 2000.

Combined with enhanced retirement plans, the salary jumps caused startling leaps in pension payouts.Using the same cities for comparison, in Sacramento, the average annual benefit to former public safety employees who took a service retirement during the past five years was $64,521, up 58 percent from a decade ago, valuation reports show. In Oakland, the average annual benefit for recently retired public safety employees has more than tripled since 2000 to $83,946 today.

While payroll and benefits packages are largely within the control of city leaders, other influences on pension costs are not.

Roughly three-fourths of benefits are typically paid with returns on investments. Once the recession hit and dragged down the stock market, the burden fell to local governments to pick up the slack.

Local governments generally have counted on about an 8 percent annual return on their investments. Between 2007 and 2008, most instead saw declines of 15 percent or more.

On top of all this, many counties were getting bad advice about the costs of their pension plans — advice that haunts them in today’s budget talks.

Governments hire actuaries to make educated guesses about how much a plan will need to meet its obligation to retirees over two or three decades. Their assumptions are based on everything from when the average employee will retire to how long they will live and how the market will perform.

A recent audit in Stanislaus County found that its former actuarial firm had made mistakes in predicting how many employees would draw pension benefits. The actuary assumed that more employees would opt for retirement cashouts, which are cheaper to fund, instead of monthly benefits. Based largely on those predictions, the county seriously underfunded its plan.

Just as damaging, actuaries told local governments during the boom years that they didn’t need to put any money into the retirement system because the market was performing so well. That wasn’t a mandate; local governments could still sock money away, but few did.

Bonds add to problem

At a glance, the city of Fresno looks to be in far better shape than Fresno County. Its pension plan is fully funded, and its annual contributions to that plan are relatively small.

Dig deeper, though, and some of that advantage is an illusion, conjured up by pension obligation bonds.

Most pension plans are well-funded — they can meet 90 percent of their future obligations — but half of those well-funded plans are saddled with bonds.

They’ve borrowed to buy down debt, offloading the bill to future taxpayers.

Having already deeply cut services and being wary of raising taxes, many local governments hope to pass pension costs on to employees by making them pay a larger share of their pension contributions.The most dramatic version of this approach follows Gov. Arnold Schwarzenegger’s lead and tries to repeal many of the enhanced benefits approved during the Davis regime.

In Merced County, Combs, the county CEO, favors a plan in which new employees would receive a scaled back annual pension equal to 2 percent of their yearly salary multiplied by their years of employment. Merced’s current plan is 3 percent at age 50 for safety workers, and 3 percent at age 60 for others.

Such shifts sound minuscule, but they would make a significant difference. A 55-year-old Merced County sheriff’s deputy with a final annual salary of $75,000 and 30 years of service gets an annual pension of about $68,000 currently, but would get only $45,000 under the new plan.

Regardless, asking employees to pay down a city’s pension obligations is a little like trying to cut down a tree with a knife.

About one-third of the 80 cities and counties examined by The Sacramento Bee now have unfunded liabilities that equal or exceed the size of their annual payroll. So even if governments told their workers, “Sorry, but your entire salary will be diverted to pay off pension debt for the next year,” there would be debt to spare.

That leaves taxpayers. The pension bill facing them likely will balloon in years to come.Currently, 15 percent to 30 percent of local governments’ annual payroll goes into their pension system — a quarter or so for every dollar spent on paychecks.

That adds up. Together, all local governments in the state paid $11 billion into their pension plans during 2008, or about $900 per California household, according to U.S. Census Bureau data. Millions more went toward paying off pension bonds.

Dwight Stenbakken, deputy executive director of the League of California Cities, predicts that contribution rates will expand to about 30 percent or 40 percent of payroll in most places. CalPERS officials partially agree, saying that, because of retirement and market projections, contributions will rise for the next decade.

It’s a hard sell — cutting fat pension checks while cutting government services — that has exhausted many local government leaders.

“We’re trying to maintain credibility with taxpayers,” Stenbakken said, “but, right now, I’m not sure this is defensible.”

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