A new CalPERS report shows average local government police and firefighter pension costs have reached 50 percent of pay — a level former CalPERS chief actuary Ron Seeling warned a decade ago would be in his view “unsustainable.”
The number of police and firefighter or “safety” plans with an annual cost of 70 percent of pay or more is 24 this fiscal year, nearly doubling from 15 last year, and will double again next year to 50 plans.
A few safety plans have reached 100 percent of pay. In other words, for every $1 of base salary, the local government must pay another $1 to the California Public Employees Retirement System.
So if CalPERS costs have gone well beyond what a chief actuary thought a decade ago was “unsustainable”, how high can pension costs go before serious resistance develops and local governments begin to reach the breaking point?
As of now, the answer is probably an unknown. The more than 500 CalPERS safety plans have a wide range of costs (a few less than 15 percent of pay) and are paid for by local governments with a wide range of ability to pay.
Media reports suggest growing pension costs are resulting in some tax increases, staff reductions, and reduced services. But a link to pensions may not be easy to show or bring to public attention, and vital police and firefighter services have broad and deep support.
The annual CalPERS Funding Levels and Risks Review, which contains the cost numbers, makes it clear that the ability of local government employers to pay their annual pension costs is a top concern.
“The greatest risk to the system continues to be the ability of employers to make their required contributions,” said the new report.
“It is difficult to assess just how much strain current contribution levels are putting on employers. However, evidence such as collections activities, requests for extensions to amortization schedules and information regarding termination procedures indicate that some public agencies are under significant strain.”
A League of California Cities study issued early last year said “pension costs will dramatically increase to unsustainable levels.” The average city is projected to spend 15.8 percent of its general fund on CalPERS costs in fiscal 2024-5, up from 8.3 percent in 2006-7.
In CalPERS, pensions for state workers and non-teaching school employees get all or part of their employer funding from the deep-pocketed state. It’s the local governments that can go bankrupt and are most likely to become unable to pay pension costs.
CalPERS calls its 1,579 cities, counties, special districts, and joint powers authorities “public agencies”. Police and firefighter pensions are the most expensive. Pensions for non-sworn “miscellaneous” pensions have lower formulas.
Legislation two decades ago, SB 400 in 1999, which a CalPERS pamphlet erroneously said would not cost “a dime of additional taxpayer money”, gave the California Highway Patrol a generous safety pension formula widely adopted by local governments.
Since CalPERS had huge investment losses during a stock market crash a decade ago, rates paid by many local governments have sharply increased. But the CalPERS overall funding level, 101 percent in 2007, never recovered and was only 71 percent as of last June 30.
CalPERS expects employer rates to stop growing around 2024 as more new employees are hired with lower pensions under former Gov. Brown’s reform. Scott Terando, chief actuary, told a committee last week new hires are 25 to 30 percent of the workforce.
By 2026 the average local safety rate is expected to be 55.2 percent of pay, the average miscellaneous rate 27.9 percent. Of course, that assumes investment earnings will average 7 percent, which critics say is too optimistic.
CalPERS rates are growing because of the phase in of lowering the earnings forecast used to discount pension debt from 7.5 to 7 percent. Whether the discount rate will drop again may be considered next year during a rebalancing of investments done every four years.
Rohnert Park, a city of about 44,000 located north of San Francisco in Sonoma County, is one of the cities with safety rates above 100 percent of pay.
Its safety first tier plan has a rate of 110.9 percent of pay this fiscal year that increases to 118.9 percent next year, pushing the annual cost from $4.2 million to $4.5 million, according to its CalPERS actuarial report.
The Rohnert Park first tier plan had 27 active employees last fiscal year, 108 retirees, 18 transferred, and 11 separated. New hires apparently have been going into two other tiers and the Brown reform plan. City officials did not return calls.
A city of 94,000 in Orange County, Westminster, has a main safety plan with a rate of 91.4 percent of pay that increases to 101.8 percent next year, raising costs from $6.4 million to $7.2 million. The plan has 52 active members, 269 retirees, 41 transferred, and 10 separated.
Sherry Johnson, Westminster finance director, said the city’s pension costs are “not that different” from other cities in the Orange County area. She said Westminster is doing “all we can” by putting money in a trust to help pay future pension costs.
“CalPERS lost a lot of money in the recession,” Johnson said, “and the cities are paying for it.”
An extreme outlier is the town of Paradise, where a year ago the deadliest wildfire in California history took 86 lives and destroyed more than 13,000 homes and over 5,000 other structures.
The Paradise safety first tier plan rate is 208.6 percent of pay this fiscal year and expected to be 284.9 percent of pay next year, boosting costs from $1.2 million to $1.3 million. The plan rate was 90 percent of pay in fiscal 2017-18 and 141.6 percent of pay in 2018-19.
Paradise officials were unavailable for comment. A CalPERS spokeswoman said no special arrangements have been made for Paradise, and the town is current on its payments to the pension fund.
CalPERS encourages local governments to “take charge of their future” by making additional payments to reduce their pension debt. The new report said 203 agencies made $549 million in extra payments last year, up from 153 agencies and $144 million in 2015-16.
A new CalPERS trust fund helps employers invest to pay future pension costs. Actuarial reports have a five-year projection of future rates. A Pension Outlook model allows employers to see how various pay raises, investment earnings, and other changes affect rates.
While there is aid and planning for growing pension costs, little can be done to cut them. Some reformers think hard-pressed local governments should be allowed to cut pensions earned in the future by their employees, while protecting pension amounts already earned.
But state court decisions known as the “California Rule” say the pension offered at hire becomes a vested right that can only be cut if there is a comparable new benefit, erasing any savings. The state Supreme Court may clarify or modify the rule in a pending case.