Cities Brace for Jump in Pension Costs
Pension costs for cities in Ventura County are soaring to heights not seen in two decades, adding to the woes of local governments already facing the potential loss of millions of dollars in state funding.
The hardest-hit cities are those that beefed up retirement pay during the heady days of pension surpluses created by a booming stock market. Now that the Wall Street bubble has burst, some cities are expecting employer contribution rates to rise as high as 35% of payroll.
“We will try to do the best that we can and still maintain public safety and other services,” said Mayor Ray DiGuilio of Ventura, where council members awarded higher pensions to police two years ago. “We made that decision and we have to live with that decision.”
Ventura will see its pension bill increase from 5% of payroll for the current fiscal year to 19% next year and a projected 31% in 2004-05. That equates to an extra $6 million the city must come up with over two years.
Port Hueneme, Oxnard, Simi Valley and Santa Paula are also anticipating rates to double or even triple to between 25% and 35% of payroll within two years. They also approved higher pensions for police in recent years.
Other municipalities are still seeing employer rates creep up as pension investments shrink. But their rates will remain relatively low, between 5% and 8% of payroll, by 2004.
Even though it did not adopt new benefits, County Government Center, the region’s largest public employer with 8,000 employees, projects a 14% rate for law enforcement pensions within two years.
Costs would have been much higher if county supervisors had agreed to union demands two years ago to raise retirement pay, budget managers say. Supervisors held the line, saying the county could not afford the new benefits, even as one union struck and another threatened to unseat an uncooperative supervisor.
“The good news is that we knew what we were talking about. But that’s also the bad news -- it is unaffordable,” said County Executive Officer Johnny Johnston, who recommended against a benefit increase. “Others can afford it, and God bless them. But you can’t keep buying new stuff when you can’t afford the old stuff.”
Employer rates often fluctuate, analysts say, reflecting the peaks and valleys of the stock market. Because retirement pay is guaranteed, employers are required to pay more during a bear market when poor investment returns leave pension funds with shortages.
Two decades ago, rates also hovered near 30% because of a down stock market, said Darin Hall, spokesman for CalPERS, the nation’s largest public pension system. CalPERS administers pensions for many of the state’s cities, including those in Ventura County.
What is different this time is the recent decision by many local governments to expand retirement pay for law enforcement and other workers. At least half the state’s police agencies, including the California Highway Parol, now offer a 90% pension to an officer who is at least 50 years old and has worked 30 years. The previous standard was 60% pay.
A smaller number of cities also elected to boost pensions for their non-sworn employees. Adding new benefits just as the stock market is swooning creates a “perfect storm” of higher costs that will have to be paid for somehow, one pension analyst said.
“[Some cities] didn’t think about the rainy days ahead,” said Paul Derse, an analyst for Ventura County government. “They were over-funded and gave the excess away.”
California has such a huge pension bill -- estimated at $1.6 billion for the coming year -- that Gov. Gray Davis is proposing for the first time in state history to issue pension obligation bonds to cover the cost.
Anita Gore, spokeswoman for the Department of Finance, said bonds are one option being considered by the state. It may also ask CalPERS to loan the state the money out of its fund and repay it with interest, Gore said.
“We have a $34.6-billion budget shortfall, and this is one way we can offer some relief to the general fund,” she said.
The state’s financial crisis will trickle down to local governments if the governor follows through on a proposal to cut about $4 billion in car tax dollars that flow to cities and counties.
In Ventura County, Oxnard stands alone in approving higher pensions for all employees. But 80% of the new plan’s cost will be borne by employees through payroll deductions, city officials said. Still, the city will pay about $736,000 to cover its side of the cost in the coming year.
Other cities say they don’t intend to extend a new pension package to nonpublic safety employees for now. But several city managers predicted the pressure to adopt something will grow as unions clamor for the same benefits offered by other cities.
“It becomes an issue of recruitment,” said Donna Landeros, Ventura’s city manager. “It’s keeping up with the Joneses when the Joneses are making more money than the city of Ventura.”
