Cities look at tax hikes to pay rising pension costs

El Segundo and Arcadia were among two dozen cities urging the CalPERS board last month to avoid another employer rate increase, the fifth in the last five years, when adjusting its $344 billion investment portfolio this month.

Last week, the two well-funded cities, both with currently balanced budgets and high service levels, considered sales tax increases. Despite cutting costs, the cities now face deficits from a steep rise in CalPERS rates scheduled for the next seven years.

El Segundo’s mayor pro tem, Drew Boyles, told the California Public Employees Retirement System board last month the city’s required pension contribution this year is $11 million or 16 percent of general fund revenue.

In five years, Boyles said, the payment to CalPERS is expected to be $18 million and 25 percent of general fund revenue as the employer rate for safety employees increases from 50 percent of pay to 80 percent of pay.

“These increases are not sustainable and may result in the reduction or elimination of service to our community,” he said, “such as a hiring freeze, furloughs or even potential layoffs, reduction in parks and recreation services, library services, public safety, deferred maintenance on city infrastructure, and reduction to overall infrastructure.”

Steps already taken to “address the immminent financial crisis,” said Boyles, include a pension trust fund, advance payments of pension debt, no pay raises for some employee groups for the last five years, and deferring $2.3 million per year in facility repairs and maintenance.

The El Segundo city council considered a sales tax proposal last week (see video 1:26) for an unusual reason beyond maintaining the “exceptional level of municipal services” expected by residents and the business community.

A 3/4-cent sales tax or 0.75 percent is all that remains available for El Segundo under state law that caps the Los Angeles County sales tax at 10.25 percent. So, the city wants to get the 3/4 cent sales tax before the county takes it.

“It’s like the earthquake,” Mayor Suzanne Fuentes told the council last week. “It’s not a matter of if, it’s when the county puts the next tax item on the ballot. And it will pass, because every county tax ballot issue gets passed.”

Voters approved a 1/4-cent county sales tax increase in March to help the homeless, Measure H, and a 1/2-cent county sales tax in November last year to fund transportation projects, Measure M.

The original El Segundo proposal would ask city voters in April to approve a 3/4-cent sales tax generating $9 million a year that would not take effect until the county approved a new sales tax. If the county measure is rejected, the city tax would be suspended.

As a better defense against a legal challenge, the council told staff to prepare another option for consideration at its next meeting. The city tax would be triggered when the county places a measure on the ballot or on a date several years after the April vote, whichever comes first.

At the request of Boyles, who pointed to a pension debt of more than $100 million, the staff also was told to prepare a proposal to close a $400,000 budget deficit expected to open next October as a growing budget gap begins.

“I want to start with the mindset now because taxing is not going to get us there,” Boyles said. “There is no way we are going to continue to tax our way out of this hole we are in right now.”

Legislation can lift the state sales tax cap for local governments. Gov. Brown signed legislation (SB 703) in October that allows Alameda and Santa Clara counties and the city of Santa Fe Springs to impose limited sales tax increases outside of the state cap.

Five-year projection of Arcadia pension costs

“In every way we are the envy of everybody in the San Gabriel Valley,” the Arcadia city manager, Dominic Lazzaretto told the CalPERS board last month.

He said Arcadia has sales tax revenue from a thriving regional mall, increased property tax revenue from a luxury housing boom, and revenue streams not available to other cities from the Santa Anita Park thoroughbred racetrack.

“And still, in all, I cannot afford the flight path we are on,” Lazzaretto said, urging the board to avoid another employer rate increase. He said the city’s required CalPERS contribution, $11.6 million this year, is expected to increase to $17 million in five years.

Arcadia already has done “right-sizing,” negotiated “takebacks and pensions reforms,” maintained strong reserves that can cover a funding gap for a short time, and may like other cities ask voters to approve a sales tax increase, Lazzaretto said.

Last week, the Arcadia city council was told (see video 1:06) that a survey done by a consultant hired to explore a sales tax found residents are “extremely satisfied” with city services but “looming fiscal challenges are not well understood.”

The city council decided to shelve a tax proposal and extend the contract of the consultant, the Lew Edwards Group, to conduct a campaign to educate the public about the fiscal challenge and explore possible solutions.

“We should not be promoting one thing over another,” said council member April Verlato. “We should not be promoting that we are looking for a tax increase.”

Council members mentioned a state Fair Political Practices Committion probe into county television ads and social media posts appearing to support Measure H. The Howard Jarvis Taxpayers Association complained that campaign law had been violated.

Council member Roger Chandler reminded the council that Measure H used up some of the remaining sales tax allowed in Los Angeles County under the 10.25 cents state cap.

“Any new tax that is passed by the county will go against the city of Arcadia’s tax,” Chandler said. “We still have something left because our city has never used a sales tax to finance anything.”

More than a half dozen cities in Los Angeles County have approved sales taxes that, with the state’s 7.5-cent share and the county taxes, total 10.25 cents: Compton, La Mirada, Long Beach, Lynwood, Pico Rivera, Santa Monica, and South Gate.

Pension costs for cities are rising mainly because the CalPERS board lowered the investment earnings forecast used to discount future pension obligations from an annual average of 7.5 percent to 7 percent.

More money from employers is needed to fill the funding gap created by the lower investment earnings forecast. Rate increases for cities begin next year and are scheduled to continue until 2024.

The sharp drop in the discount rate last December was irregular, prompted by a 10-year forecast of lower investment earnings and the failure of CalPERS funding to recover from huge investment losses a decade ago.

Now as part of a regular four-year process, the CalPERS board is expected to choose one of four investment allocation options next week. One would leave the earnings forecast at 7 percent, requiring no additional change in employer rates.

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at Calpensions.com. Posted 11 Dec 17

16 Responses to “Cities look at tax hikes to pay rising pension costs”

  1. JenniferHu Says:

    Well one way to slow costs is be accountable for all pay, raises and all types of perks/bonuses. These things are often hidden in non union positions/ contracts.

  2. John Moore Says:

    City staff and councils are open to any revenue increase, but are unwilling to take any legal action to control the pension/salary fire. Salary reduction is a legal bargaining tool; failure to utilize it is pure participation in the govt. pension scam.

    Note, there is no discussion of steps to be taken if the Supreme court upholds pension reduction for pension systems like these that are under water and not salvageable(which they admit).

  3. SeeSaw Says:

    Every public entity should put a cap on unused vacation accrual and on the amount of sick leave that can be cashed out at retirement.. I worked for 40 years and cashed out my unused vacation pay and half of my unused sick leave accrual for $23,000–$13,000 after taxes. Of course my entity has a cap on the vacation accrual and on the amount of sick leave that can be cashed out. . I never knew any public retiree who cashed in his/her unused vacation and sick leave for hundreds of thousands of dollars.

  4. larrylittlefield Says:

    “El Segundo and Arcadia were among two dozen cities urging the CalPERS board last month to avoid another employer rate increase, rate fifth in the last five years.”

    They can’t avoid rate increases. They can only defer them at the cost of making them bigger. Which is what happened for 20 years.

    Is two decades of lies enough?

  5. T B Says:

    Move everyone to Social Security

    Here’s my solution:

    https://drive.google.com/file/d/0B90sU3A85q46OE9BZHJFSWEzbGM/view?usp=drivesdk

    Thoughts?

  6. SeeSaw Says:

    T B. Most public employees are now already on SS along with the public pensions and lose a portion of their benefits to the WEP at the time of retirement. Public-kretiree spouses of SS recipients, as I am one, lose the spousal share of SS, that even a non-working millionaire’s spouse gets, to the GPO. I have a great idea for helping middle class people: Repeal the federal WEP and the GPO.

    If you think that the public pension plans in CA are going to pool all their current assets and invest them in the SS system for retiring public workers you must also believe in tooth fairies and unicorns!

  7. T B Says:

    Not sure what percentage is “most” public employees, but if they are receiving Social Security, my concept would be to increase their social security up to the maximum payout in lieu of getting their public pension as well. So instead of getting both, the Public Employee would be guaranteed to earn the same as their pension up to the maximum Social Security payout.

    Regarding the pooling of their current assets, it’s not just California but all public governmental agencies – estimated to be between $3-5 trillion dollars. Since the average employee contribution rate to their own pension fund is around 10%, that means about 90% of the current assets are a result of taxpayer funds and growth. So therefore it is not “their” assets, but rather the public domain’ s money, and I am simply suggesting we repurpose those funds for the greater good with a massive cash infusion helping the solvency of Social Security. If this were to happen, no governmental agency would have to worry any longer about becoming insolvent as a result of pensions.

    Lastly, I am completely realistic that this type of idea would never be considered unless there is a significant Market correction, causing a worldwide recession / depression. Then, maybe unicorns and tooth fairies might be the only ones with answers.

  8. CalPERSon Says:

    TB: I am completely realistic that this type of idea would never be considered

    You got that right. The Feds will never agree to take on a state’s pension liability and the state will never agree to transfer its assets to the Feds.

  9. T B Says:

    What’s the old saying – Never Say Never. And you took my statement out of context when I said my idea would never be considered… unless there is a significant Market correction, causing a worldwide recession / depression. Most experts agree that we are due for a major correction soon, would you agree? Do you know how devastating it would be for unfunded liabilities if there was even a 20% correction!

    Plus you don’t seem to be grasping the concept, because if implemented, as I said ALL of the government agency’s liability for a pension would be dissolved. Social Security would take over and pay for all with the $3-5 trillion-dollar infusion.

  10. Gregory Brittain Says:

    Someone should pay to qualify an initiative to require voter approval of government employee union contracts just as the employees get to vote on the contracts.

    This will change the negotiations with government employee unions dramatically. City council member or mayor to government employee union rep “I would love to agree to your demands, but the voters will never approve.”

  11. SeeSaw Says:

    Ridiculous! We have a Republic system of government. Every registered voter cannot possibly vote on every issue that comes up in the collective bargaining process. How would you ever get a union contract approved or disapproved if there had to be a special election–at a cost several times what any increase would be? Collective bargaining is between the principals–the employers and the employees. The results are ratified one way or another by the representatives you have already chosen with your vote.

  12. acc Says:

    @SeeSaw Collective bargaining has morphed into a compact between the public employee union high priests and the [almost exclusively] Democrat politicians they support. Hence the situation CalPERS is in. Why you assign any credibility to the employer-employee relationship under current circumstances defies understanding.

  13. Tough Love Says:

    Actually Seesaw, what we have is a den of thieves, with the Public Sector Unions and our self-interested, contribution-soliciting, vote-selling, taxpayer-betraying Elected Officials sharing the den…… all to the detriment of Private Sector Taxpayers who are looked at as the “suckers’ in the equation.

  14. SeeSaw Says:

    Oh, what exaggeration! Give me the rank and file workers and their unions any day compared to the politicians who do the bidding of the rich donors–the political game is lopsided–and it is not in the favor of the workers.

  15. S Moderation Honestly Says:

    You nailed it, SeeSaw,

    “The broadest classification of political donors separates them into business, labor, or ideological interests. Whatever slice you look at, business interests dominate, with an overall advantage over organized labor of about 15-to-1.”

    https://www.opensecrets.org/overview/blio.php

    Open secrets, I think, is mainly federal political spending, but how much different is state political spending?

    What cracks me up is those who say, “Yeah, but unions spend most of their money on Democrats, and “business” spends money for both parties.”

    May be… but business spends a LOT more money than the unions on BOTH parties. And some business interests donate to both Rs and Ds in the same election. Commonly known as “hedging your bets” or “buying a seat at the table”.

    “Powerful Public Employee Unions” is an oxymoron. They are playing defense, and not very well.

    SMH

  16. Tough Love Says:

    SMH,

    Public Sector Unions are a CANCER inflicted upon civilized Society.

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