The deterioration of San Bernardino’s public finances to the point where city officials are willing to declare bankruptcy could be the prologue to another fight over public employee benefits.
Pension costs are not the only source of San Bernardino’s financial ills. The city’s own financial analysis blames weak revenues, deficit spending and accounting errors for a $45million deficit.
Whatever deserves the most blame for cities’ poor financial health, public employees’ pensions have received increased scrutiny as San Bernardino and other local governments in the Inland Empire, Los Angeles area and the rest of California have struggled to stay in the black since the Great Recession.
To some, pensions must be cut to preserve key government services without raising taxes in the midst of a weak a economy.
“You’re going to ask people, if they’re making $20,000, $30,000, $40,000 a year, if they’re going to pay more taxes, which aren’t going to be enough probably? If they’re going to pay more taxes for public employees?” San Bernardino Councilman Fred Shorett asked.
On the other hand, the leaders of employee unions said they should protect existing retirement agreements and respond that politicians are targeting pensions to avoid accepting responsibility for wasteful spending.
“You sit down and you bargain the best you can through that process, and to have us get blamed or accused that we ask too much, we sit down and we assume the
city will not give something they can’t afford,” said Steve Turner, president of San Bernardino’s police union.
Bankruptcy is a rare move for cities, but San Bernardino is not alone in having to deal with the combined pressures of growing retirement costs, shrinking revenues and the public’s unwillingness to pay higher taxes simply to protect existing services.
Elsewhere, California municipalities have taken steps to curtail the generous pension plans that became the norm for California governments in the early 2000s.
That process has generally happened through bargaining, with various degrees of conflict between city managers and employees.
A more recent tactic, though still uncommon, is for officials to bypass negotiations and ask the voters themselves to change pension rules.
That happened in June when San Diego and San Jose voters approved ballot measures to cut retirement benefits. The measures, however, have been challenged in court.
San Bernardino County voters may see at least one pension reform measure on their ballots in November. Supervisors Janice Rutherford and Neil Derry each have proposals to put on the ballot.
Rutherford’s plan includes a provision to require voter approval for any future increases to county employees’ pension benefit formulas.
Derry’s would increase new county employees’ retirement ages and require current and future employees to contribute some of their wages to their pension plans.
His office reports the San Bernardino County Employees Retirement Association fund is short $1.7billion and risks insolvency without immediate changes.
“If you don’t do it early on, by the time you do it later on, it will be too late,” Derry said.
Derry acknowledged that he voted for pension formula increases as a San Bernardino council member, but he said financial estimates at the time indicated the programs were affordable.
Then, the city of San Bernardino risked losing workers to other cities offering better benefits, he said.
Now, local governments are seeing pension costs account for growing portions of their general fund.
San Bernardino County’s retirement costs rose from 3.1percent of expenditures in 1999 to 9.5percent in 2011.
The city of San Bernardino’s retirement costs have risen from 9 percent of general fund expenses fiscal 2006-07 to 13percent in the fiscal year that ended June 30.
Los Angeles’ pension costs account for about 20percent of general fund expenses.
A decade ago, city leaders and employees did not have to face these kinds of pressures.
Most cities handle their employee retirement plans through the California Public Employees Retirement System, or CalPERS.
CalPERS collects a percentage of employers’ and employees’ wages to invest in the state’s retirement fund. Cities sometimes, however, contribute the employees’ share.
The object is for returns to help pay for the cost of thousands of retirees’ benefits without local governments having to pay straight cash.
Not so long ago, this worked so well that people could talk of cities being “superfunded,” meaning that investment returns were so great that a city did not have to spend one single dollar from its treasury to meet pension obligations.
In Pomona, general employees’ pensions were superfunded from 2000 to 2004. Police officers’ pensions were superfunded from 2001 to 2003.
Pomona and many other cities increased maximum pension benefits in this era. Police benefits in 2002 were increased to a “3 at 50” formula, meaning an officer could retire with a pension worth 3percent of his or her highest salary, multiplied by up to 30 years of service, at age 50.
Several other cities and state agencies extended this benefit to police and firefighters during the past decade.
But the superfunded times did not last forever. In 2004, Pomona had to contribute about 18percent of police officers’ salaries to CalPERS. That figure spiked to nearly 44percent of officers’ salaries the following year, and is projected to be at 32percent to 33percent in 2013.
Pomona will also have to contribute 12percent to 13percent of general employees’ salaries to CalPERS next year.
“It’s an increase that affects your ability to fund services,” said Mark Gluba, assistant to Pomona’s city manager.
Gluba, however, did not say pensions are the sole source of continuing troubles that threaten to close the city library. He also said police and other city workers deserve credit for accepting pay concessions during recent lean years.
A key factor in rising pension costs is beyond the control of Pomona and other cities. When CalPERS investment returns are weak, as they have been, cities have to pony up the dollars that investments fail to bring in to the system.
The $234billion CalPERS fund delivered a scant 1percent return on investments for the fiscal year that ended June 30. That’s far below the projected 7.5percent return.
CalPERS chief investment officer Joseph Dear has said recent years’ returns have been the worst in a generation. Over the past five years, CalPERS earned just 0.1percent despite earning 7.73percent over the past two decades.
Like many cities, Pomona has adjusted to a tougher financial environment by adopting a two-tiered retirement system. That means new hires will not receive the same benefit package as employees who worked for the city before the new system was adopted.
Long Beach police and firefighters have also agreed to pay the full 9percent share of their CalPERS contributions, up from a previous 2percent.
Police concessions in Long Beach are projected to save at least $69million by 2022. Firefighter concessions will save about $36million in the same period, city officials say.
West Covina is another city where safety and other employees have begun to pay the full share of their retirement plans as CalPERS increases the employers’ share. Employees’ contributions have helped reduce West Covina’s financial problems, but retirement costs will remain an issue, City Finance Director Thomas Bachman said.
“As pension rates are projected to continue to rise in the future, especially public safety costs, they will continue to have an impact on our ability to provide services,” he said.
San Bernardino has also switched to a two-tiered system, but that is more of a long-term plan than something that may immediately help the city emerge from bankruptcy.
“You do one or the other. You either cut services or you cut benefits and compensation,” said San Bernardino Mayor Pat Morris, a former Superior Court judge who himself earned a pension for his work on the bench.
Morris said pension plans need to be reformed to raise retirement ages to assume that most people will work until the age of 65 and that police and firefighters will be able to work as late as 60.