Here’s a question from Econ 101: If you combine a bad stock market with longer life expectancies, what do you get?
Unfortunately, the answer is dramatically higher pension costs for local governments. Seal Beach is no exception.
Come July, these two factors will increase the city’s pension costs by about $288,000 and increase the city’s overall “cost of doing business” by more than 1 percent.
The figure of $288,000 was derived by the author from data presented in the draft FY 2011-12 budget document.
It represents the total increased General Fund pension costs for police, lifeguards, firefighters, and miscellaneous employees combined.
Seal Beach sends money to the state pension agency, CalPERS, to invest and to pay benefits to retirees. Like most large financial institutions, CalPERS was not immune to the financial devastation of the “great recession.” Between July 2008 and June 2009, CalPERS lost 25 percent. To help make up for these losses, CalPERS decided to raise contribution rates for local governments starting in July 2011.
Unrelated to the stock market, CalPERS completed a study last year that showed that government workers are living longer, making more money during their last years of work, and retiring earlier. This resulted in the need to raise contribution rates even higher, again starting in July 2011.
The net effect of this double whammy is that the city’s contribution rate for police and lifeguards will increase by 17 percent (from 29.9 cents to 34.8 cents per dollar of salary).
For other “miscellaneous” employees, the city’s contribution rate will increase from by 8 percent (from 15.0 to 16.3 cents per dollar of salary).
To add insult to injury, CalPERS is also asking for a lump-sum payment of almost $58,000 to cover increased pension liability costs for the retired firefighters who used to work directly for the city back in the 1980s, before the city contracted out fire fighting to Orange County.
This request is somewhat ironic, as it comes just three years after the city gave CalPERS over $2 million, supposedly to pay off this liability.
The $2 million came from the proceeds of a “pension obligation bond” issued by the city.
The interest and principle in the coming year on this bond will be almost $500,000.
Speaking of pension obligation bonds, in 2008 the city also issued almost $9 million in a separate bond to help pay down police and lifeguard pension liabilities.
The interest and principle in the coming year on this bond will be about $1 million.
Add it all it all up, and the city will be paying out about $3.4 million next fiscal year for pension costs.
This is over 13 percent of the city’s projected revenue.
What does the future hold? That depends on the economy and the City Council.
The strong recovery of the stock market over the last two years helps a lot.
The CalPERS contribution rates for the fiscal year that starts in July 2012 are projected to increase, but at a more moderate pace of 3-4 percent.
The council can reduce costs by getting pension concessions from the city’s unions.
The miscellaneous employee contracts expire in June 2012, so negotiations will start later this year.
Hopefully, pension provisions will be “on the table.”
However, recent experience demonstrates that getting unions to agree to lower pension provisions is not enough.
The council also has to be willing to implement these provisions despite the potential negative impact on hiring.
For example, last November, the police unions agreed to let the city create a lower pension tier for new hires. However, the city has delayed implementation for fear it would hamper the recruitment of a new police chief to replace retiring Chief Jeff Kirkpatrick.
To date, only a few other cities have implemented pension reforms.
The generosity of our current pension provisions does promote both the recruitment and retention of good employees.
However, until these provisions are modified, each new hire puts incremental pressure on the city’s current and future financial well-being.
With a budget surplus projected to be less than $200,000 for the coming year, now is the time for Seal Beach to be a leader, rather than a follower in pension reform.
Robert L. Goldberg is a Seal Beach resident.