Pension costs could erode San Luis Obispo services

The escalating costs of pensions may put San Luis Obispo at risk of reducing services that residents expect, such as paved roads and green grass at city parks.

The city’s pension costs have more than quadrupled from $1.8 million in 2002-03 to $8.3 million today — consuming an increasing share of employee compensation costs that already represent 80 percent of the operating budget. That’s according to a report issued by a budget task force convened by City Manager Katie Lichtig to scrutinize San Luis Obispo’s struggling finances.

Hefty rate increases in pensions are expected to continue over the next five years — costing an additional estimated $3.6 million by 2014-15.

That money will come from the city’s general fund — which pays for services such as road paving, tree trimming and maintaining city’s parks.

In 2002-03, pensions accounted for about 5 percent of the city’s operating budget — which funds things such as day-to-day operations, staffing and supplies.

Today the city’s pension obligation accounts for 16 percent of the city’s operating budget, and in five years it will be an estimated 20 percent.

Looking at it another way, pension costs as a percentage of total staffing costs have grown from 7.5 percent in 2002-03 to 20 percent this year to a projected 25.4 percent in 2014-15.

City staff say there are no standards that dictate what percentage retirement costs should be of the city’s total operating budget.

At the same time that pension costs are rising, the city is facing an annual $2.5 million to $3.4 million deficit over the next five years — squeezing its general fund further.

The rising costs of the California Public Employees’ Retirement System and the effects of the recession have been blamed as the main contributors to what officials call a structural deficit.

“If no changes are made in the city’s revenue or expense strategies, the pension costs will simply consume a great deal of the modest amount of non-staffing expenses currently in the budget,” said Chip Visci, associate vice president of external affairs and government relations at Cal Poly, who served on the task force.

Councilman Andrew Carter noted that if the city can’t reduce personnel costs, it will have to cut elsewhere.

“That can mean fewer employees and fewer services. It can also mean reduced capital improved projects — deferred maintenance, crumbling streets and sidewalks, closed parks and recreation facilities, you name it.”

San Luis Obispo is not alone in its struggles with escalating pension costs. Cities throughout the state are also being further squeezed as they are forced to pay more to CalPERS — the state’s biggest public pension fund — to accommodate that fund’s investments that declined markedly during the economic downturn.

Recent increases in rates were also made following a CalPERS study that determined retirees are living longer.

Services could be cut

San Luis Obispo struggles with the looming increases as it contends with an expected shortfall of $3 million in the city’s roughly $54 million annual general fund for the fiscal year 2011-12. That shortfall is anticipated to grow to $3.4 million in 2013-14 and projected to be $2.7 million annually over the next five years.

“Government does not exist solely to employ people — but at current spending and revenue trajectories, it’s not a stretch to say that before long, the city will spend even more on employment costs and even less on providing services to residents,” Visci said.

The Financial Sustainability Task Force’s report urges the city to develop a process designed to bring government employees’ pay and benefits closer to those in private business.

Key to that is working toward a two-tier pension plan that would reduce the compensation paid to new employees. Such a step is being taken by other communities nationwide — including San Luis Obispo County.

The advantage of such a plan is a lesser cost to the city. However, some speculate that employee morale will suffer and a chasm will be created between existing employees and new ones.

Suggestions made by the task force also include putting binding arbitration for police and firefighters back on the ballot, reducing staff and cutting pay and benefits for city employees.

The report — which will not be formally presented to the City Council — has gained the interest of Councilman Carter. He advocated for it to be shared at a future council meeting but lost by a 3-2 vote, with Mayor Jan Marx, Councilman John Ashbaugh and Councilwoman Kathy Smith voting against him.

Lichtig will use the report to guide her as she prepares to present to the council the next city budget.

Besides cutting staff or services to address the budget shortfalls, the city could negotiate with current employees so that they pay a larger portion of their pension costs, Carter said. However, binding arbitration may make that impossible for many safety (police and fire) employees — and those employees account for about 65 percent of the city’s pension contribution costs.

The task force recommends eliminating binding arbitration from the city charter to ease San Luis Obispo’s ability to negotiate for more affordable compensation plans.

The binding arbitration mandate was approved by voters in 2000 and entitles unions for public safety employees to turn to a third-party arbiter if labor negotiations reach an impasse. The city must then abide by the arbiter’s decision.

That occurred in June 2008 when sworn police officers received a 30 percent raise and increased dispatchers’ and other non-sworn police staff’s pay by 37 percent.

Since that ruling, city leaders have complained that the mandate has stripped them of their budget-making authority and threatened financial ruin for the city. Unions say arbitration is fair because public safety employees can’t go on strike.

Voter approval is needed to remove binding arbitration from the city charter.

The task force urges the City Council create a ballot measure to do that.

The other option is to lay off employees — ultimately meaning fewer city services, Carter said. “In other words, not a pretty picture and no easy way out.”