San Diego report links pensions to tax hikes

A taxpayer group found an apparent link between high public employee pension costs and tax hikes in a study of 17 cities in San Diego County.

Four of the five cities with the biggest pension costs asked voters to approve sales tax increases during the last three years.

The San Diego County Taxpayers Association thinks its study of all the city retirement systems in the county administered through CalPERS may be the first regional survey of its kind.

The study found that the cities are spending an average of 10 percent of their general funds on pensions, more than double the 4 percent statewide average reported by a governor’s commission last year. The costs do not reflect big increases expected in several years to make up for stock market-crash losses.

The annual employee contribution set through CalPERS is often paid by the cities. The employer’s payment of the employee’s share, 7 to 9 percent of pay, usually counts as salary, allowing some to retire with pensions nearly equal to their final salary. In a push led by city managers, employees are beginning to pay their share in several cities.

Most of the cities have chosen the most generous CalPERS retirement formulas. Three-quarters of the cities give police and firemen pensions that pay 3 percent of the final salary for each year served at age 50. Half of the cities give miscellaneous workers 3 percent at age 60. No city uses the least generous formula, 2 percent at 60.

The taxpayer group may do a new study on retiree health costs. The governor’s commission said retiree health care promised current state and local governments has not been funded and may cost at least $118 billion over the next 30 years.

“We actually believe it (retiree health care) is likely to have a greater cost than public pensions over the long haul,” said Lani Lutar, president and chief executive officer of the San Diego County Taxpayers Association.

The study does not include the scandal-ridden City of San Diego retirement system, where eight former pension officials face charges, or the San Diego County retirement system.

Both are independent systems not administered through the giant California Public Employees Retirement System, which covers state workers and 2,500 local government agencies.

The taxpayer group cites a link or “correlation” between high pension costs and attempts to raise the sales tax. But there is no claim that pension costs are the only, or even the main, motivation for a tax increase.

“Clearly, the state’s fiscal situation and the economy have also contributed to the tough situation that many cities are in,” Lutar said. “But it’s also a fact that pension costs are rising in these cities and putting much more pressure on the general fund than it was five years ago.”

The study found that three cities that raised their sales tax in recent years are spending large parts of their general funds on pensions: El Cajon 19.8 percent, National City 17.2, and La Mesa 15.1 percent.

Voters in Chula Vista, 11.1 percent, rejected a sales tax increase last spring. The nearly 20 percent of the general fund spent on pensions in El Cajon is the highest ratio. The lowest is Encinitas, 4.66 percent.

When investment earnings soared a decade ago, CalPERS lowered the annual employer pension contribution all the way to zero in some cases. It’s a contribution “holiday” that some now regret as pension costs increase.

“Quite a few city managers have communicated to me that they wish that option had never existed,” said Lutar, “and that CalPERS had advised them to take more prudent action when the economy was strong.”

The tax group said the study found that the employee share set through CalPERS, 7 to 9 percent of pay depending on the formula, is often paid by the city.

Sixteen cities pay part or all of the employee share for their employees. All of the employee share is paid by 11 cities for police and firefighters and by five cities for miscellaneous employees.

If city payment of the employee share were counted as a pension cost rather than salary, the amount of general fund spending attributed to pensions would increase.

In Chula Vista, said the study, the city spent $7.6 million on the employee share in fiscal 2007-08. Listing the amount as a pension cost would increase the reported pension cost, $17.5 million or 11.1 percent of the general fund, to more than $25 million.

When the city payment of the employee share is counted as salary, the study said, some retiring employees can collect pensions that are nearly equal to their final pay.

An example in the study is a worker retiring with 30 years of service and a final salary of $100,000. Under the 3 percent at age 50 formula, the pension would usually be $3,000 for each of the 30 years served for a total of $90,000.

But when the city payment of the employee share of the annual pension contribution is counted as salary, the pension increases to $98,100.

A city manager association in San Diego County, which did its own pension study earlier this year, is recommending, among other things, that employees begin paying their share of pension costs.

Some employees in La Mesa and several other cities will begin paying their share of pension costs under agreements negotiated with labor unions. Vista began having its employees pay their share about five years ago, said Rita Geldert, the Vista city manager.

Last June, the city manager association said legislation that allowed increased benefits for CalPERS members “have proven to be unsustainable and need to be rolled back to more appropriate pre-1999 levels.”

The taxpayer group study said that SB 400 in 1999 authorized new CalPERS formulas for police, firefighters and other “safety workers” that allowed pension increases of about 50 percent.

The study said local governments have four CalPERS options when negotiating retirement benefits with safety unions: 3 percent at age 50, 3 percent at 55, 2 percent at 50 and 2 percent at 55. Three-quarters of the cities have the most generous option, 3 percent at 50.

In 2001, the study said, AB 616 authorized increased benefits for miscellaneous local government CalPERS members by expanding to five options: 3 percent at 60, 2.7 percent at 55, 2.5 percent at 55, 2 percent at 55, and 2 percent at 60.

Half the cities give miscellaneous employees the most generous option, 3 percent at 60. None of the cities uses the least generous option, 2 percent at 60.

The taxpayer group has three recommendations: employees should pay their share of pension costs, new hires should get lower retirement formulas, and pensions should be based on a three-year average of the highest salary rather than the last year.

“Pension costs are drowning our cities in debt and taking money away from vital services because of short-sighted decisions of past politicians,” Lutar said in a news release. “If cities do not trim back these pension benefits, we are likely to see further cuts to services, depletion of reserves and a push for higher taxes.”

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at https://calpensions.com/ Posted 4 Oct 09

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