The debate increases daily over whether government agencies at all levels can continue to provide generous defined benefit pension plans to their employees. More and more local elected officials are beginning to face the reality that these plans are simply financially unsustainable, while in many cases — sadly — also trying to figure out how to vote for fiscal integrity without upsetting labor groups.
There’s nothing that drives the debate moreso than facts. The San Diego County Taxpayers Association has issued what clearly stands as a significant 52-page report on the impacts of pension systems in the region, a first ever analysis of 17 city governments in San Diego County that participate in the California Public Employee Retirement System.
The report draws a conclusion. Increased taxes are the direct result of high pension costs in some cities.
The media embargo was lifted on the report at 10 p.m. tonight. It’s 10 p.m. at the FlashReport. So, here is the press release, with the report attached below.
City Pension Costs Linked to Higher Taxes
Contact: Lani Lutar 619-234-6423 – (Mobile) 619-838-9065
San Diego, CA October 7, 2009 – High employee pension costs are helping push some cities to raise taxes, according to a new study by the San Diego County Taxpayers Association.
On average, an amount equal to ten percent of city general funds in San Diego County is consumed by pension costs alone. Four of the five cities with the highest pension burdens have sought sales tax increases in the past three years. El Cajon and National City are tied for the highest tax rates in San Diego County and have the highest pension costs. La Mesa, with the third highest pension burden, raised sales taxes in 2008 and now has the second highest tax rate in the County. Voters in Chula Vista, with the fifth highest pension burden, rejected efforts by its city council to raise sales taxes earlier this year following a campaign by SDCTA to alert voters about runaway spending in that city.
Only Escondido, with the fourth highest ratio of its general fund dedicated to pension payments, has resisted pressure to raise taxes. Instead, the city pursued cost-cutting measures during the last round of labor negotiations, rather than ask residents to increase their tax burden.
Encinitas has the lowest pension costs at 4.66 percent of its general fund and El Cajon the greatest burden at 19.84 percent.
First Ever Study of Pension Impacts in Region
The findings come from a report issued today by the San Diego County Taxpayers Association (SDCTA). It analyzes 17 city governments in San Diego County that participate in the California Public Employee Retirement System (CalPERS). Future reports will analyze the City and County of San Diego, whose independently administered plans are not part of CalPERS.
“This is the first time any group in San Diego County has taken such a detailed look at the region’s municipal pensions. As near as we can tell, it is the first such comprehensive study in the state,” said SDCTA president and chief executive officer Lani Lutar.
Local governments are increasingly struggling with pension costs. Cities are required to make pension payments for current employees. They are also required to pay for “unfunded liabilities”
to make up for shortfalls in their pension funds.
Pension costs have become a growing concern as they consume a larger share of city budgets and are more difficult for cities to fund in an era of declining revenues.
“City pension costs are skyrocketing as the chickens come home to roost,” Lutar said. “Pension costs are drowning our cities in debt and taking money away from vital services because of short-sighted decisions of past politicians. 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,” Lutar said.
Variety of Pension Plans and Wide Range of Taxpayer Costs
In 11 cities, taxpayers pay the total pension bill for their public safety employees. In five cities, non-safety employees contribute nothing toward their pensions. In only three cities– Del Mar, La Mesa, and Vista – non-safety employees pay their full share of pension costs.
“There can be no definition of a ‘fair’ pension plan that makes taxpayers pay the entire cost with employees contributing nothing. That doesn’t happen with Social Security or with private pensions, and it shouldn’t happen for city employees either,” Lutar said.
CalPERS offers a variety of pension plans for cities to select from with costs related to the generosity of the chosen plan. No city uses the least expensive formula.
As one typical example, the report shows that a city administrator with 30 years of service earning $75,000 at the peak of her career would receive an annual pension of $72,900 plus yearly cost of living increases. An equivalent benefit for an employee in the private sector retiring at age 60 would require an individual to have an IRA, 401k or other pension account worth more than $1.8 million.
“We don’t oppose the idea of pensions for city employees, but it’s not fair to make taxpayers fund pensions that are so generous that they are putting cities at the brink of insolvency,” Lutar said. “The City of Vallejo, north of San Francisco, has been forced into bankruptcy by their labor costs. The same could happen here if cities don’t get their benefit costs under control,” Lutar added.
SDCTA Recommendations to Reform Pensions
SDCTA has been involved in pension reform for years. On June 19th, SDCTA’s board of directors approved pension reform recommendations specific to CalPERS.
“It is imperative that local governments take steps to address unsustainable pension costs now to avoid financial ruin and to maintain good financial health,” Lutar added.
SDCTA’s report recommends the following reforms:
-Cities should require employees to pay a normal share of pension costs as soon as possible.
-Retirement benefit formulas should be reduced for new hires.
-Pensions should be calculated based on an average of the highest paid 36 months of salary, not the highest paid 12 months to ensure the most conservative pension payout.
The entire report and the compiled data can be viewed online or downloaded at www.sdcta.org.
San Diego County Taxpayers Association is a non-profit, non-partisan organization dedicated to promoting accountable, cost-effective and efficient government and opposing unnecessary taxes and fees.
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