California Taxpayers Expected To Nearly Double Public Pension Contributions Over Next 5 Years

The California Policy Center (CPC) has just updated it’s annual study on pension contributions required from local California municipalities and, to our complete ‘shock’, the conclusions are brutal for Cali taxpayers.  Among other things, the study found that California taxpayers will be forced to double their contributions to CalPERS over just the next 5 years alone from $5.3 billion in 2017/2018 tax year to $9.8 billion in 2022/2023.

• In Fiscal Year 2017-2018, California local governments will make over $13 billion in pension contributions to CalPERS, county pension plans and single employer plans.
• Local government pension contributions to CalPERS will total $5.3 billion in Fiscal 2017-2018 and are projected to rise to $9.8 billion in Fiscal 2022-2023 – an increase of 84%.
• In Fiscal Year 2015-2016, at least 26 California cities and counties devoted over 10% of their total revenue to pension contributions. San Rafael, San Jose and Santa Barbara County shouldered the highest pension burdens – exceeding 13% of revenue.
• Major local governments that have recently surpassed the 10% pension contribution to total revenue threshold include Contra Costa County, Berkeley and Newport Beach.

Meanwhile, 20 California cities were found to already spend more than 10% of their annual revenue on pension contributions, with San Rafael at closer to 20%.  And, given that it’s highly unlikely these towns are willing to cut 10% of their budgets over the next 5 years, we can only assume that taxpayers are about to get slammed with massive tax hikes.

Unfortunately, as our readers are undoubtedly aware, the reality is even far more bleak than the numbers above would suggest because they use CalPERS’ 7% discount rate to calculate underfunded levels.  But, as we pointed out back in December (see “CalPERS Board Votes To Maintain Ponzi Scheme With Only 50bps Reduction Of Discount Rate“), even CalPERS’ finance committee chair admitted that 7% is too high and the decision to not move it lower was politically motivated to allow “municipalities and other government agencies some breathing room before they absorb the impact.”

In its August 2016 actuarial reports, CalPERS included projections of future contribution rates through Fiscal Year 2022-2023. We used these documents to determine total contribution amounts and then recalculated the totals to reflect the impact of CalPERS’ recent decision to change the rate at which it discounts future liabilities from 7.5% to 7%. Although CalPERS did not update its projections, it provided employers with a circular containing guidance on how to adjust

the August 2016 amounts. We used this guidance in our own calculations.

So what’s to blame for these skyrocketing pension costs?  Well, as CPC points out, in Newport Beach at least part of the problem is attributed to a gaggle of lifegaurd “captains” raking in over $100,000 per year which serves as the basis for calculating their massive pensions.

The city of Newport Beach contributes to CalPERS. Its net pension liability in 2016 was $264 million, and its plans were only about 68% funded. Pension contributions grew from $20 million in 2014-2015 to $31 million in 2015-2016, and are projected to reach $52 million in 2022-2023. One reason for the increase is that the city is accelerating its repayment of the unfunded liability. The new funding schedule is expected to save the city $129 million over 30 years.

One unusual contributor to Newport Beach’s pension burden is its team of lifeguards. While many of the city’s beach lifeguards receive relatively modest compensation, the city employed 10 Lifeguard Captains and Battalion Chiefs in 2015, all of whom received more than $100,000 in wages. Lifeguards hired before 2011 were eligible for the 3%-at-50 pension formula. That year, the city council voted to lower the benefit for newly hired lifeguards to 2%-at-50, but due to the California Rule, already employed lifeguards were unaffected. Lifeguards hired after the implementation of PEPRA are on the 2.7% at 57 pension formula.

In February, the Daily Pilot reported that the city was shelving several projects due to increasing pension costs. The projects in jeopardy include a new library and fire station in Corona del Mar, a new restaurant for the Newport Pier and new junior lifeguard headquarters.

In conclusion, CPC offered this sobering reality check to California taxpayers:

Despite the strong economy and a buoyant stock market, pension cost burdens faced by California local governments have continued to grow – with many now devoting more than 10% of revenue to retirement contributions. With the Great Recession now eight years behind us, the risk of a new downturn is increasing. The result would be a further spike in pension burdens on local governments. Unless the state enables more aggressive pension reforms than those allowed under the 2013 PEPRA legislation, several California cities and counties will find themselves forced to slash other spending. The less fortunate will simply be unable to pay the bills they receive from CalPERS or their local retirement system.