The Compensation Monster Devouring Cities

Steven Malanga in City Journal:

Pensions are an enormous part of the problem. New Haven’s $475 million budget, for instance, is projected to grow by just $4 million this fiscal year, but the city’s pension and health-care costs will rise $12 million, forcing cuts elsewhere. In San Francisco, pensions consume about 14 percent of the budget, and rising retirement bills for city workers accounted for one-third of this year’s $306 million deficit. Pension and health benefits account for 20 percent of the $500 billion that the nation’s nearly 14,000 public school districts spend annually. In a recent National League of Cities survey, nearly 80 percent of municipal finance officers listed rising pension payments as one of their most significant budgetary problems.

Here again, the problem is disproportionately local. Yes, state-sponsored pension funds have accumulated anywhere from $750 billion to $3 trillion in unfunded pension and retiree health-care liabilities, depending on how the calculations are made. A huge portion of those liabilities, however, is actually owed by cities, towns, and school districts. States employ just 5.2 million of the 13 million active workers participating in state-sponsored pension funds; the rest are local employees, often teachers, who work for districts too small to manage their own pensions. Experts agree that pension costs for both states and localities are going to skyrocket. But states currently spend just 4 percent of their budgets on pensions, while many municipalities already spend 15 to 20 percent.

Pensions are certainly at the heart of the budget crisis in Costa Mesa, California, a city of 110,000 residents that made news earlier this year when it decided to contract out more than a dozen city services and send pink slips to 43 percent of its employees. Costa Mesa’s workers, like those in many California municipalities, participate in the statewide CalPERS (California Public Employees’ Retirement System). Ten years ago, the city’s annual pension bill from CalPERS was $5 million. Since then, it has tripled to $15 million–16 percent of the city’s $93 million budget–and Mayor Jim Righeimer has warned that it could reach a staggering $25 million by 2015. Since these bills are for services already delivered, there’s no clear way to cut them; even the radical steps that Costa Mesa has taken will limit only future costs.

What’s happening to Costa Mesa is no exception in the Golden State. Earlier this year, California’s Little Hoover Commission, a government oversight agency, observed: “Barring a miraculous market advance and sustained economic expansion, no government entity–especially at the local level–will be able to absorb the blow [from rising pensions] without severe cuts to services.” Los Angeles’s retiree costs currently make up an already troubling 18 percent of its budget, for instance, but the commission estimated that the percentage would swell to 37 percent by 2015. Retiree costs just for L.A.’s public-safety workers could double to $700 million annually, “enough . . . to fund a second police department in a major city.”

The pension situation is even graver elsewhere in California. Anaheim is already spending 22 percent of its $252 million budget on pensions, and its mayor estimates that pension contributions could increase by 50 percent, or about $27 million, in four years. San Francisco’s comptroller has estimated that his city’s pension bill will rise from $357 million this year to $422 million next year and then to $800 million in just a few years. San Jose’s pension costs for police and firefighters have already quadrupled over the past decade. Without reform, the city estimates that its yearly pension costs, $63 million in 2000, will swell to $650 million in 2015.

Read the whole thing here.

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